Atkore Inc. (ATKR) Q1 2018 Earnings Report, Transcript and Summary

Greetings and welcome to Atkore International First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [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, Investor Relations. Please go ahead.

Thank you and good morning, everyone. With me today to discuss first quarter 2018 results are John Williamson, President and CEO and Jim Mallak, 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 future financial performance of the company. Such statements involve risks and uncertainties such that actual results may differ materially. Please refer to our 8-K 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. Finally, when we refer to the information relating to a quarter or a year during this call, we are referring to the corresponding fiscal period. Any reference to a year is a full fiscal year, which runs October through September. With that, I will turn it over to John.

Thanks, Keith. Good morning, everyone. We are pleased with how the year has started and the results we delivered in Q1. Our reported numbers are showing momentum from our 2017 actions with year-over-year adjusted EBITDA up 17% and adjusted EPS up 64% as reported and about 20% before the impact of federal tax reform. Importantly, we delivered high single-digit organic volume growth growing faster than the market. Jim will walk you through the first quarter results in detail, but first I want to review our recent announcements highlighting Atkore’s continued evolution, including the stock repurchase transaction we closed last week and the transition in our Board of Directors. Atkore has made significant progress in our evolution. We purchased Tyco’s remaining interest in the company in April of 2014. We leveraged the business about 6x EBITDA. I am pleased to say that we completed Q1 of 2018 at about 2x leverage. Whichever metric you used, free cash flow, cash flow conversion or cash flow yield, Atkore has been a strong cash performer. Our strategy has been to continue meeting the needs of our customers, while deploying that strong cash flow generation to accretive acquisitions of businesses with products adjacent to our existing portfolio and sold through the same channels. As we have communicated consistently, we have an acquisition capital allocation target of $100 million to $150 million per year and in 2017 we exceeded that target by deploying $186 million in solid bolt-on M&A. Most recently, we took advantage of an attractive stock price, favorable debt market and our strong balance sheet to invest in ourselves by repurchasing just over $17 million of Atkore’s shares from Clayton, Dubilier & Rice our largest shareholder. That transaction closed on February 2 and the shares will be retired. The financing was accomplished with very favorable rates and terms and with no change to our credit rating. In fact in part as part of obtaining financing for the repurchase of shares, we are able to reduce the interest rate on our existing term loan debt in the process. The Atkore management team and Board of Directors believe this transaction to be clearly accretive for Atkore and our shareholders. We remain committed to our M&A capital allocation goal of $100 million to $150 million per year with acquisitions that add to our Electrical Raceway portfolio bringing above average margins and positively impact our EBITDA. In concert with this repurchase of shares and as part of the natural evolution of unwinding their ownership in Atkore, two directors from CD&R have submitted their resignation from Atkore’s board. We have begun the process of replacing them with two new independent board members. Atkore’s strategic direction and mission to be the customers first choice remains the same. As you will hear in more detail from Jim Mallak, we are seeing favorable momentum around her Electrical Raceway efforts with both revenue and volume up year-over-year. We are pleased with the progress in the businesses we acquired in 2017 and organic growth initiatives we have in place as they strengthened our Electrical Raceway position in the marketplace. The integration of all of the acquisitions remains on track and in fact ahead of our models. As always we keep the keen eye out for and face head on areas of our business that are performing below expectation. In Q1 our Mechanical Products & Solutions segment underperformed due to raw material and logistics costs rising faster than we could pass those costs to the market, coupled with an unfavorable mix of product sales. Typically our MP&S group requires longer periods of time to pass through raw material price increases. We are seeing signs of improvement and expect to see the effects of our pass through pricing in Q2 and the rest of 2018. Overall, we had a strong quarter. We grew above market in volume and revenue. Adjusted EBITDA and EPS are up double digits over last year and we delivered strong cash flow. We are successfully integrating our acquisitions and we deployed capital to repurchase shares in efficient and accretive manner. With that, I will turn the call over to Jim who will walk us through our financials in more detail and provide additional insights into the quarter.

Thanks John and good morning to everyone. Moving to our consolidated first quarter results on Slide 4 and 5, net sales were $415 million, up 15% organically after normalizing for acquisitions and foreign exchange. The impact of increasing average selling prices from passing through material cost increases and mix favorably impacted net sales by 6% year-over-year. Net volume excluding acquisitions was up 9% reflecting the momentum from our organic initiatives and strengthening in the markets we serve. Both segments delivered mid to high single-digit volume growth. However, we are still experiencing timing delays and the general softness in the large datacenter space in MP&S and continue to expect that to recover over time. The acquisitions completed in 2017 added 8% to the top line. Looking at the impacts of our key input costs on our P&L in the quarter, steel was up 9% year-over-year versus the first quarter of 2017 and up 6% sequentially. Copper was up 24% versus the first quarter of 2017 and up 6% sequentially. And PVC resin was up 8% versus the first quarter of 2017 and up 7% sequentially. During the quarter, we incurred material input cost increases of just under $20 million year-over-year and we successfully pass through the most of that to the marketplace in total dollars. Product mix and the type of customer for instance distribution versus OEM customers are factors that could impact the time that it takes to pass through those cost increases to the market. Net sales and cost of goods sold increased in equal amounts due to the pass through of raw material costs, unfavorably impacting the resulting margin percentages. Excluding the mathematical impact, adjusted EBITDA margin was up slightly year-over-year. Gross profit was $97 million for the first quarter, up 6% or $5 million compared to the same period in 2017, driven primarily by volume and productivity savings in manufacturing, freight and warehousing. Those favorable impacts were partially offset on the gross profit line by the non-cash lower of cost or market adjustment to inventory, which negatively impacted gross margin by $12 million year-over-year. Adjusted EBITDA which we believe is a better measure of the profitability of our ongoing business was $58.5 million and up almost $9 million versus last year. The 2017 acquisitions account for $5 million of the increase in adjusted EBITDA and organic volume added $8 million. These increases were partially offset by the small headwinds from raw material cost increases slightly greater than the price and mix increases in the quarter. Investments in the business, freight and cost increases and labor inflation offset partially by productivity. As I mentioned, the price versus raw material inflation gap in the quarter is due to a combination of product mix and timing of pass-through of those costs. However, as we have done in the past, we do expect to pass-through these costs over time. Our net income on a GAAP basis was $27 million, up $10 million or 57% versus the first quarter of 2017 and adjusted EPS was $0.46, up 64% from the first quarter of 2017. Adjusted EPS would have been $0.34 or 21% higher year-over-year if our tax rate would have been at the pre-tax reform guidance of 35%. Moving to our Electrical Raceway segment on Slide 6 reported net sales increased by 31% to $317 million, the 2017 acquisitions all of which are reported in Electrical Raceway increased segment net sales in the quarter by $25 million or 10%. Organic volumes were strong in our conduit and armored cable products driving total volume up about 10% versus last year. Higher average selling prices driven by passing through of material cost changes to customers had a favorable impact to revenue of about $22 million or 9%. Adjusted EBITDA was $56 million, up $14 million or 33% compared to last year. The acquisitions account for $5 million of the increase with volume in price and mix driving the majority of the remainder. Reported adjusted EBITDA margin increased by 30 basis points, with pricing execution, accretive acquisition margins, and favorable mix lifting margins versus 2017. Moving on to our Mechanical Products & Solutions segment on Slide 7, reported net sales in the quarter, were up 3% to $99 million. Volumes increased by 6% reflecting a straightening industrial market, but unfavorable product mix, net of price was a headwind to revenue by 3%. Adjusted EBITDA of $11 million declined by 32% as compared to the same period last year, driven by raw material inflation combined with an unfavorable mix of products and higher freight costs, which all were partially offset by strong productivity savings. These unfavorable inputs resulted in a reduction in adjusted EBITDA margin of 560 basis points versus prior year. We expect a stronger second quarter from MP&S in dollars and margin both on a sequential and year-over-year basis. Turning to our balance sheet and cash flow on Slide 8, the balance of cash and cash equivalents at the end of the quarter was $40 million. We spent a total of $8.2 million in CapEx in the quarter, net cash flow from operating activities was $49 million and net debt decreased to $492 million. Our leverage, which we define as net debt to the trailing 12-month adjusted EBITDA was 2.1 times or about 2 times on a pro forma basis calculated with the trailing 12-month impact of our 2017 acquisitions in adjusted EBITDA. The continued strength in our cash flow and cash flow conversion help support our efforts to obtain the additional financing needed for the share repurchase which John has mentioned closed on February 2. We borrowed an additional $425 million to repurchase 17.2 million shares from CD&R and payoff $42 million of the outstanding balances on our revolver. Given the strength of Atkore’s performance, the debt markets were very receptive to this financing transaction. We were able to secure favorable terms and our credit ratings remain unchanged. We were able to reduce the interest rate on both the incremental $425 million and the pre-existing $490 million of first lien term loan from LIBOR plus 300 basis points to LIBOR plus 275 basis points after this transaction. Our pro forma leverage is 3.5 times after this transaction. As John mentioned earlier, this is still a strong balance sheet with significant liquidity to deploy $100 million to $150 million per year for acquisitions. Moving to Slide 9 based on our current understanding that we think U.S. federal tax reform will be favorable to Atkore going forward. We expect our 2018 effective tax rate will now be between 22% and 23%, down approximately 12% from our tax guidance prior to the tax reform. Since we have a fiscal September 30 year end, we will only benefit from lower 21% federal rate in our second, third and fourth quarters of 2018. The main impact of the new tax law to our first quarter results due to non-cash reevaluation of our deferred tax liabilities at the full year tax rate. This one-time reevaluation drove our first quarter effective tax rate down to 9% and we expect quarters two, three and four to be at 26%, absent any discrete items. Now, I will turn the call back to John for our guidance in his final comments and perspective.

Thanks, Jim. Moving to our guidance for 2018 on Slide 10, we are updating our view on volume based on our performance in Q1. The effective tax rate based on our current understanding of the federal tax reform impact and our share count and interest forecast for the impact of our share repurchase transaction. All other items remain unchanged from our prior guidance. Our Q1 volume performance was evidenced. Our markets are improving. Market activity does look better than last year, but we will take a wait-and-see view on the market’s trajectory as there are potential headwinds to the activity we saw in Q1. First, some of the Q1 activity was driven by the hurricane recovery efforts, which will not repeat. Although that impact is difficult to quantify, we think it was worth at least $5 million in adjusted EBITDA in Q1. Second, Q1 volume was partially driven by non-recurring buying activity, which included a lower margin mix of product. With all of that in mind, we expect the construction markets will show modest growth in 2018 and our industrial markets will be up at least in line with GDP. We are updating our full year guidance as follows. For the Electrical Raceway segment, we expect volume up in the low to mid single-digit range and adjusted EBITDA to be in the range of $215 million to $225 million. For our MP&S segment, we expect volume also to be up in the low to mid single-digit range and adjusted EBITDA to be between $60 million and $65 million. In total, we continue to expect 2018 adjusted EBITDA in the range of $245 million to $260 million. After the stock we purchased in federal tax reform, we estimate our adjusted EPS range to be between $1.95 and $2.15. This range continues to incorporate a preliminary estimate for the amortization of intangibles for the acquisition of Flexicon and Calpipe. Amortization amounts will solidify in Q2 with the final purchase accounting. Interest expense will be approximately $40 million and our fully diluted share count will be 54 million shares. Based on our current understanding of the tax reform, our tax rate should be about 23% all-in, CapEx is expected to be about $30 million for the year. And finally turning to the second quarter 2018 guidance, this is the first time we have given you a range for Q2. We expect our consolidated adjusted EBITDA to be between $58 million and $62 million and EPS between $0.42 and $0.48. In summary, I am proud of Atkore’s accomplishments in the first quarter. We saw growth from organic initiatives successfully pass-through material cost increases and continue to drive additional savings with our productivity initiatives just to name a few highlights. Our disciplined financial management enabled us to reinvest in Atkore through a significant stock repurchase, while at the same time favorably re-pricing our existing term loan. Our employees make all of this possible. As Atkore evolves as an independent company, their unwavering dedication to improving the business and taking care of customers continues to build our capability, strengthen our portfolio and drive value for shareholders. We are pleased that these results are also being recognized externally in the marketplace. Brock, please open the line up for questions.

Thank you, sir. [Operator Instructions] Our first question today comes from Andrew Kaplowitz of Citigroup. Please go ahead.

Hey. Good morning guys. This is Seth Girsky on for Andy, how are you doing today?

Good Seth.

So growth of 9% was pretty strong and you talked about some of it being from the hurricane that even excluding the hurricane it looks like you guys are seeing a pretty nice step up in volume growth, so can you talk about your expectations excluding the hurricane impact and then do you think it’s possible to see a little bit more of a pickup from hurricane related restoration work in Q2?

Well, addressing the hurricane, I think we are trying to build the hurricane recovery into the long-term projections, but just to comment on that is that the hurricane recovery is continuing. We believe that we will – as we see do take a long amount of time for it to be fully realized. So we think that that’s accretive to the growth rate. I think we are reluctant to try to guess what that’s where we are going to be. We were encouraged with the volume in Q1. I think we are being cautious about extrapolating that over the rest of the year and I think we are being appropriately prudent in looking at the rest of the year maybe planning for a lower growth rate and being ready for a higher growth rate. We think there is some upside, but we will remind everybody that over the last couple of years the volume has been characterized by fits and starts. And I think we are just going to watch that pretty critically as the year unfolds.

That makes sense. And then turning to price-costs you guys looked like you did a pretty good job of getting price to offset material costs in the quarter, but you called out commodity timing a little bit and we have seen steel prices continue to rise throughout the quarter and into 2018, so can you talk about your expectations for price-costs in the near-term for Atkore?

Yes. Most importantly I think it’s the effect of our Mechanical Products & Solutions business. The – there is two product groups, they are our mechanical pipe business and our metal framing business that are essentially made of steel, so it’s a challenge as steel has really grown fast or that the prices has gone up fast, it’s a challenge, but our team is completely on it. For metal framing we have the opportunity to pass it through a little bit quicker just the way pricing is handled. For our mechanical where we are dealing with a higher percentage of OEMs and a higher percentage of longer term purchase orders that have an indexing function on pricing that typically takes longer for it to pass through on the up or the downside. We believe we are able to pass through commodity costs and we have shown that over the last couple of years with the normal effect of timing. I think we will see the pass through of steel picking up a little bit in Mechanical Products & Solutions in Q2 just as a function of the indexing on the purchase orders, but it remains something that’s a challenge every day for us. I would like to just point out that copper has been moving up pretty strongly as well, that’s a big – it’s infused in our armored cable business as part of our Electrical Raceway business. And that’s something we have typically done pretty well in moving that up, but it’s something that we highlight as well and something that’s every day a challenge to make sure we pass that through.

Got it, that’s helpful. Thanks a lot guys.

The next question comes from Chris Belfiore of UBS. Please go ahead.

Good morning.

Hi Chris.

So I just want to just kind of touch on the markets in general, I mean could you just provide some color where you are seeing the strength or weakness across just the general construction market?

Yes. I think it’s really consistent with what we have been talking about just as its residential has been really strong, within the non-res segments, I think we have been seeing pretty good rebound in a number of verticals. I think, institutional has been on the plus side of things, while commercial has been a little bit down, multifamily which is going to be apartments, condos has been on the downside after a number of years of being very much on the plus side. So, I think that’s where we are seeing manufacturing showing a little bit of improvement. This would be investment in factories as in the U.S. people had held back on investment as exports went down with the exchange rate pressures and oil and gas rippled through the manufacturing and processing industries constrained spend. So we see that rebounding a little bit as well.

Okay. And then just kind of like dovetailing off of that, you mentioned some potential for upside during the year. Are you carrying anything from your customers around increased CapEx spending given lower tax rates or any benefits from a potential infrastructure build effective pass-through, I mean is there any kind of buzz from your customer base?

Yes, a little bit in that last comment I made on the verticals with manufacturing and processing. As oil and gas was challenged and exporting was challenged, people did cutback on their investment in factories and processing plants. And I think just a rebound just a pent-up demand there has been favorable. In all honesty, it’s hard for us to sort through what our customers are saying with regards to what they are going to do with tax benefit. Most people don’t see the same magnitude of tax benefits we are seeing, but quite a few people do. It’s just hard for us to really – it’s really hard for us to kind of put that – to layer that over our market expectations for 2018. So, I think we just kind of consider it another positive and see it just more as a positive as opposed to something we could quantify.

Okay.

And I think also on those if they are going to be putting in additional programs or anything by the time they engineer them and get them all panned out, it’s going to push it out quarters before we actually see it. So, we got to give it time for them to plan and get things on the drive and work first, because I don’t think they have those there right now.

Okay. And then if I could just kind of a clarification thing, but in MP&S you guys talked about increased freight costs, could you just provide a little color on why that was more of an impact in MP&S and versus like Electrical Raceway is it just like the mix of business or the customer base?

Yes, we can. Freight has gone up obviously for all of our businesses. And so it’s a big issue. It’s something we are working hard to pass through the market. But in MP&S just a couple of things, we had little bit of a favorable impact of some freight allocations last year that’s making – in making the comparison a little bit more unfavorable this year, but fundamentally, it goes back to the same issues that we talked about with steel, where we have longer term purchase orders in Mechanical Products & Solutions. It takes longer for us to pass through freight and raw material costs just because of the purchase orders there are in place are just longer term in nature compared to Electrical Raceway. Pretty much, it’s just timing.

Great. Thanks a lot.

The next question comes from John Inch of Deutsche Bank. Please go ahead.

Thank you. Good morning, everyone.

Hi, John.

Hi, John.

Hi, guys. So just to pickup actually on that freight theme in MP&S, my understanding is freight costs actually in industry. So U.S. economy we are actually positioned to increase significantly in the next 6 months. So I am curious given Jim you talked about the lag there, I mean how does that play out? Have you already tried to be proactive with respect to these rising costs or do we expect margins to still come under a little bit of pressure in that segment until you can do your patch up?

Yes. A quick comment on freight, we have actually really strong logistics team here that we put in place over the last 3 years. And we are really happy with the contributions they have made to our business. We are looking at fuel being up 4% over the over the year and rate being up 4%, so we have been very proactive at interfacing with our business leaders to make sure we are doing the communications with customers and that we are working that into our pricing protocols. So we feel strong about that. But John it will in Mechanical Products & Solutions that will take longer to pass through any kind of cost increase, but we believe we have been proactive about it. We have been talking to customers on it. We have been pushing pretty hard on it. And we do have the mechanisms we think to improve on that pass through way. So it is going to be a challenge, but I think we are in front of it.

Okay. So do you think freight is up 4% for your fiscal ‘18, is that…?

It’s going to be up. Yes. It will be up high single-digits actually.

That’s fine. Can I ask you so core growth was up 9, what do you estimate your industries that you serve did?

Just below that 7.5 to 8.

Okay. Anything noteworthy on that front like in words how did you, is there any spot in particularly where you thought you were taking some share?

Yes. I think one thing we are really happy about is in our Electrical Raceway business, we can talk about this for a while where we used to run those businesses as individual separate businesses historically at Atkore. We have been operating under Bill Waltz our Group President of Electrical Raceway as one Raceway segment going out to the customers and just a great example of in our Chino, California facility people are talking about truckload that went out with seven different Atkore products on it. It saved customers’ administrative and logistics costs and got us business that arguably we wouldn’t have gotten if we weren’t able to do that all-in-one suite, 1 invoice, 1 truck, 1 phone call. So I think it would be more around that type of thing leveraging our Raceway portfolio.

Okay. The release on January 22 you say that your long-term, so the tax rate basically be ETR beyond fiscal ‘18 you expect to be 25% to 27%, I was a little confused by that I mean you are basically U.S. company, why is your long-term tax rate going to be 26% why isn’t 21%?

Well, when you bring in the state tax and those also have to go in there. The reason you see it going down and then back up 18 to 19 is because our fiscal year is begins in October. We get three quarters of the new rate. We also get some deduction that we are under the old code that were grandfathered for 1 year on those and so we kind of straddled the fence between the two different rates, but really when you get to 19, our long-term rate has state tax rates help in bring it up also.

What’s an example of deduction that you no longer get?

Like the 199 manufacturing credit we will get that for 2018, but we won’t get that in 2019.

Yes. It’s the domestic manufacturing credit, almost 3% impact.

Okay, alright. So just lastly for me I mean it is obviously rising inflation or that’s only been the number one concern here, you guys called out some wage pressures, what is the scope of the labor inflation that you are facing today and John how do you – how are you going to deal with that, because it’s one thing to pass along cost increases based on the draws or freight cost, but if your own cost pressures are due to labor are under pressure, how do you manage that or can you step the productivity or just how should we think about it?

Yes. Well, it’s a great question. I don’t think we called out labor pressure in the script, but let’s address it. We are seeing like just basically salary overall in the 2.5% generalized range. This is how we – this is a – we incorporate this into our pricing mechanism, just something that we first thing we tried to do is offset it with productivity and we have in our pipeline $10 million to $15 million of productivity on an annualized basis. Not all those happen in a year and you will get the full effect of that, but I think we have a decent track record of passing through productivity that generally offsets inflation and then it has to be incorporated into the pass-through as well. I wouldn’t say our labor situation either at a direct labor or even at a salary employee level is anything different than generally being experienced and anything different than we have been prepared to handle. One thing that John maybe what you are referring to is our compensation for our incentive plan, depending on how the incentive plan for salaried employees pays out every year, there can be a favorable or unfavorable comparison at 100% to what we actually paid out. And I think that’s probably what you are referring to in terms of compensation.

Yes, signaling me that is what I was saying. So, you are not giving any kind of bonus are you for just had a curiosity to be workers because of tax reform?

No, that’s not – it’s – I would say we haven’t made a final we are not, but there is nothing planned at this point.

Got it. Thanks very much. I appreciate it.

Okay, John.

[Operator Instructions] Our next question comes from Deane Dray of RBC Capital Markets. Please go ahead.

Thank you. Good morning, everyone.

Good morning, Deane.

Hey, I really like seeing the orderly sell down of the CDR ownership position here and the creativity and issuing stock by our issuing bonds buying back stock, one of things that surprised me is you got really favorable terms on the debt in a period of higher rate. So, what’s driving it was LIBOR plus 300, now it’s labor plus 275, how did that end up more favorable?

Yes, when we went out to the marketplace on the new churn, we wanted to make a fungible, so it was just an amendment add on to the existing term. There was very good response in demand for it. We were heavily oversubscribed. And with that oversubscription, we were able to be able to get favorable pricing on the existing term and the new money. So, we had both new money and existing term note holders extremely interested in the credit and I just think we are hitting the market at the right time and being good – we have demonstrated we can manage our balance sheet and we are very – everyone was very favorable to jump on board.

And I would just add to that over the 7 years, going on 8 years that CD&R has been a major stakeholder in this business. We have established quite a bit of credibility with the ratings agencies, with the banks, with investors and I think it’s the credibility as much as everything else. Along with that credibility is the transparency that we try to maintain with everyone and Jim and Chuck Cohrs, our Treasurer and Keith Whisenand who is very much involved with this and done a very good job of just establishing credibility as well out there. So, I think it’s all of that.

That’s real good to see. And I think you called out balance sheet capacity for M&A of $100 million and $150 million, is that right and what’s the total capacity on the debt side, is there still demand for the Atkore name as a credit and what kind of terms could you be issuing here further in the market?

Yes, let me handle the second one and I will let John handle your first one. I think given the response to the refinancing as I said it was significantly oversubscribed. So, there is a demand out there with respect to credit. We still have good liquidity. Our entire ABL is dry with this refinancing. So, we have the liquidity available to us now on our balance sheet going forward.

Yes. And I think with regards to M&A, I think the way we look at what’s possible – or the part of the possible constraints on M&A would be capital availability opportunities or targets in the market and also the ability of the leadership team to integrate it and we really believe that capital is not a constraint and the ability of our leadership team to manage it and integrate it is not a constraint. We have a very strong pipeline that is in excess of our stated deployment goals of $100 million to $150 million. As always, those are things that they happen or they don’t and you don’t always control the timing of them, but we feel pretty confident in that capital availability is not an issue at all. We are at 3.5x EBITDA in term of debt. If there was something that was just the absolute right M&A and accretive, we would be open minded to extending that if there are clear path to paying that down. So, I think we are in really good shape on that front.

Yes. Just as a follow-up there free cash flow conversion by our estimates this quarter was strong at 135%, what’s your expectation for the year, I don’t see it in the outlook you are not calling out a specific free cash flow conversion, what’s your expectation?

Yes, we normally don’t guide on that, but if we were going to be north of $100 million a little bit and probably similar to what we have been in prior years.

North of $100 million cash, are you talking about free cash flow or are you talking about conversion?

Free cash flow.

Got it.

Yes, then conversion is going to be north of $100 million which is something that we really – that’s something we pay attention to and probably in the $120 million range as a percentage.

That’s good to see. Thank you.

Yes.

Your next question is from Rich Kwas of Wells Fargo Securities. Please go ahead.

Hi, good morning everyone.

Good morning, Rich.

How are you doing? Jim, just a follow-up on that, so includes the conversion rate in the dollar amount for free cash flow that includes the benefits from tax, cash flow benefit?

Correct, correct.

Okay, what’s the assumption for – okay, go ahead, sorry.

Now that’s going to be offset, don’t – we are going to have increased interest in there too.

Right. And then on price recovery, what’s with the lags and whatnot, what should we assume for the year for ‘18 are you going to be able to fully offset or is there going to be some dilution with regard to that?

Yes, Rich, obviously something that we have spoken with everyone about a lot and always a challenge that the hardest thing about answering that question is we really don’t know what commodities are going to do. If steel flattens out kind of peaks out where it is right now and we think it’s going to go up a little bit in the April and then start coming down then we would be able to recover all that in the year. If hypothetically or theoretically if steel and copper continue to rise all the way through the fiscal year, there would be – we wouldn’t pass it all through in the year, because that 60 to 90-day lag that we typically talk about. So, we believe that if you look at steel and we have a projection on steel that we feel more confident than we do about our projection on copper, we think we will pass it all the way through in the year, but a big part of that is the profile of your volatility over the time period and then you superimpose those typical lags on top of that and you could have a quarter or you could even have a fiscal year that’s advantaged or disadvantaged by timing.

Alright, that’s helpful color, John. So, just the going assumption right now is that steel goes up through April and then you will be able to get recovery for the full year?

That is the going assumption.

Okay. And do you have an assumption for copper at this point?

Yes, usually with copper with what we do, it’s driven by much more global dynamics than steel which is kind of Midwest, U.S. steel. What we basically do is we assume some inflation and we assume it flattening out. In general, I think it is built in October numbers. We are showing headwind of about $5 million in the year for commodity pass through, most of that’s probably going to be around copper I would say.

Okay, alright. And then as we think about the OE piece within mechanical, what percentage of sales does that make up, I mean it sounds like it’s meaningful enough here that it affects mix in pass through?

Yes. It’s meaningful. I think it’s in the ballpark of about 50-50.

Okay, 50-50, alright. And then just a clarification with regards to the adjusted EPS guidance, Jim does that include the one-time benefit is $4 million or $5 million for the deferred tax liability rebound?

It does.

Yes, it does.

So that’s – okay, so that’s non-recurring, so we got – it’s really on…?

It’s non-recurring. Let’s take look at our ETR for the first quarter we are going to be down around 9% due to that deferred revaluation.

Great, okay, alright. Thanks.

Thanks Rich.

The next question is from Patrick Baumann of JPMorgan. Please go ahead.

Hey guys, good morning. I am on for Steve Tusa, just had one quick question and I am not sure if you just missed at the beginning, just wanted to ask about it, the volume growth expectations for the year look like you have some stronger expectations now, I know you had a very strong volume quarter in the first quarter and I am just curious how that flows through to the EBITDA, because the EBITDA guidance was unchanged, so I am just curious what are the offsets to the what looks like higher volume growth expectations down for 2018? Thanks.

Okay. Thanks. Good question. Fundamentally, the volume is strong, but mix was a little unfavorable in Q1. I think we are taking the wait and see position on volume over the rest of the year. We do feel that volume does couple great things for us, number one just uses our fixed cost better, allows us to pass through pricing a little bit quicker, which is valuable for us and then just the higher sales. One point I want to – I want to really emphasize here is that without the effects of arising commodity and rising revenue based on us passing through the commodity, our margins for the first quarter would have been – in the Electrical Raceway would have been 19% and would’ve been higher in Mechanical Products & Solutions. So the one thing I always want to make sure we emphasize is that the margin percentage will be – will have pressure in a rising commodity situation just based on the math of the denominator and the numerator the cost and the sales going up at the same rate. So I think to summarize volume nice strong volume in Q1 and unfavorable mix. Part of that was some we believe distributors buying lower margin products to attain some rebates at the end of the year partially, but that mix brought down the fall through on that volume. We still are optimistic about volume through – going through the rest of the year taking a little bit of a wait and see before putting it through to the P&L. And as you think about margins there is going to be a natural compression of margin percentage in a rising commodity environment even when the economic earnings, the EBITDA number itself is staying the same or improving.

Got it. That makes sense. So when I think about those year-over-year components you gave last quarter around 2018, adjusted EBITDA growth projections, have any of those moved around at all. I think you said acquisitions really add $20 million year-over-year, net productivity was $6 million, you had like for $4.5 million of spread contraction, $4 million of investments and then you have volume dropping through it, but against high single-digit millions. Have any of those components changed at all or is that kind of still the framework around the year-over-year EBITDA bridge?

Yes, Pat, I think it’s a really good framework. I think what probably will happen you will see volume go up a little bit. We might be challenged a little bit with spread depending on what the commodity profile over the year is, but the rest of it is in place. We are feeling good about our productivity, might be some upsides on that to offset some of the inflation crushers, but I think it’s still a pretty good model.

Okay, great. Thanks a lot, guys. Congrats.

Yes, thanks Pat.

[Operator Instructions]

Alright. In absence of more questions, we will summarize. First of all, thank you for your interest in Atkore. We are really – we are proud of the business we have and we are excited about the first quarter and like what we believe it means for the rest of this year. We are being cautious on volume, but there is a lot of really strong performance showing through and what we have been able to do with growth, with productivity and how we have deployed our balance sheet. We look forward to updating you on our progress in the next quarter. Thank you very much.

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.