Greetings, and welcome to the Atkore International Second Quarter Fiscal 2019 Earnings Conference Call. At this time, all participants will be in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Keith Whisenand, Vice President Investor Relations for Atkore International. Thank you. You may now begin.

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 risks and uncertainties such that actual results may differ materially. Please refer to our 10-Q and today's press release, which identifies 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.

Thanks, Keith, and good morning, everyone. I'm pleased to report that Atkore delivered strong financial results for the second quarter that exceeded our prior guidance with Adjusted EBITDA up 18%. Looking at the high rates 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 & 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 move closer to our goal in the low 2x range. Finally, Atkore maintained its momentum around innovation. Two products were recently named 2018 Product of the Year category winners in the Electrical Construction & Maintenance Magazine. Our Super Kwik-Couple Raintight Conduit and our BriteRail conduit support systems. We also introduced six new products during the quarter, bringing the total to 9 new products year-to-date. 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.

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 was driven by higher average selling prices as well as focused 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. Electrical Raceway volume was up approximately 2% and volumes for MP&S was down 10% primarily from budget timing year-over-year. To total Atkore, the net acquisition impact added just under 1% to the top line in the quarter. We incurred year-over-year input cost increases of $40 million. Through initiatives, we successfully increased our average selling prices $28 million resulting in the net $40 million favorable EBITDA impact. We've broken out these 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 various 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 million, down versus the second quarter of 2018 due to the prior year gain on the sale of Flexhead of $27 million. Adjusted EPS was $0.83, up 32% from the second quarter 2018 reflecting an 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 focused products and almost 20% adjusted EBITDA growth. The Mechanical Products & Solutions segment delivered additional pricing and mix improvements, which drove 4% reported EBITDA growth or 10% after adjusting for the prior year sale of Flexhead. The MP&S adjusted EBITDA margins now back to 15%, up 110 basis points from Q2 2018 and 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% on 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 months adjusted EBITDA, was 2.8 times. As we've communicated in the past, our long-term goal is to move this metric back to below 2 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 required debt payment is now March of 2020. Bill, back to you for our guidance update.

Thanks, David. 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 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, nonresidential construction market with a strong pipeline of projects. We expect our strategic initiatives will continue to drive favorable results and long-term success. This could not 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.

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

Good morning. This is Eitan Buchbinder on for Andy.

Good morning, Eitan.

Good morning. It looks like you had an inflection in the Electrical Raceway volume, Dodge [now] in non-res building construction start to begin the calender 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 lower, for longer interest rates contracted into your outlook for the back half of the year?

Yes. We're still -- Bill here, still predicting as we just called out the 2% to 4% growth as we are for -- which will 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 it though, 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 3, 4 days in San Francisco at a national electrical distributor event where every customer was there. And they were still bullish, and they have good record backlogs. So that's why we're guiding in the 2% to 4% range, which we think for the year is reasonable.

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

Yes. Obviously -- I'll give in and if David wants to add, probably a slight tailwind. And the reason for that, I think we're doing well with pricing and we'll continue to do well with pricing, just value-added proposition, the products were selling in general. But as we did last year, we had the challenge of -- 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, and we're now going up again. 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.

Thank you.

The next question is from the line of Deane Dray with RBC. Please proceed with your question.

Thank you. Good morning, everyone.

Morning.

Hey, guys. Nice quarter. If you could just give 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?

Yes. Sure. I'll start. On weather, overall, Deane, I didn't think -- we didn't call out a major impact. We do feel like, when you look at our separate product lines, the one price 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 weather. 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 2 or 3 quarters. Yes...

Got it. And Bill, go ahead. Yes.

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

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 in 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.

Yes. So two of the markets that we're seeing probably deemed the most growth in our 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's a high correlation with where we're seeing it and obviously where Dodge is also reporting out. 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 tractor [ph] if you were talking to a Wesco go or something.

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

No, I don't -- it's the following things. I don't think so. The material commodities we can all track, copper bounces around, steel has been 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 weather that David answered PVC, we didn't call out volume impacts because of weather, but there were 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 we see here at Atkore plant.

That’s very helpful. Thank you.

Thank you.

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

Hi, good morning.

Good morning, John.

So I know that 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 can 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.

Yes. I'll send you a check later for that question. 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 out two new products that won kind of magazine articles, customer's 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 sales people that will focus on additional voice of customer to extra salespeople who are investing in this year to help pull the products through our distribution to our engineering customers and contractors, it's clicking along exactly. Actually, we said stretched objectives and we're ahead of those stretched objectives. So...

John, this is David. It's also critically important because it gives our reps something else to get the distribution. It also gives our salespeople more to talk about Atkore and the events we have with our product basket. And so these products are critically important for us moving forward.

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?

As you know, part of a -- the second quarter is always our weakest by far quarter of the year. When you look at 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 built 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 are paid out in the first half of this year. We do expect that to normalize here over the second half of the year as those reserves get build 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 5 points here and there given on the year, working capital and what have you, to pay on commodities, we still feel strongly that that's where we anticipate this year to be.

Great. Appreciate the color. Thank you.

Thanks, John.

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

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

Yes. I'll start. I think people were -- I think where we are, and you look back 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...

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

Got it. Okay. Second question on overall demand moderation, it's more specific to MP&S. I mean volume seems to be impacted by product delays. You've mentioned this quarter or last quarter, too, volumes were a little light. But 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, now we have a handle on how 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.

Yes. Deepa, I'll start. I don't think with a lot of rate transparency, in other words, everybody has the same data on the economy, and 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 backlog to 6 or 9 months of visibility. Again, the economy itself, I don't 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 architecture are taking orders that they haven't fully like designed, kind of winging, estimating the project costs and then finishing the design. So literally from the architect on out, projects are getting delayed. And then one thing we didn't call out in 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 looks at the results, look at the profit, and that's what gives us confidence to actually be raising our earnings.

Yes. Remember, Deepa, last - in Q1, MP&S was around 10% and 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 given where the volume, the mix of products and where we are with projects, we think MP&S has had a very solid Q2.

Okay. So it looks you're not implying that demand moderation was driven by higher prices. Am I right on this?

No.

No. I think we're doing a great job. I have to complement 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 estimated to grow in that 2% to 4%, for example, in 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 in cable tray, our prefab and I can name a couple of 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, the shareholders, are seeing those results. And quite frankly, our customers are seeing the value-add that we're bringing also.

And Deepa, just one additional thing. Remember in our Electrical Raceway, our 3 big product categories of steel 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 there telling you that prices are off say volume right. We know because we're able to have that third-party verification of where our shares are.

Got it. That's very helpful color. I appreciate it. But my final question is inventory in the channel. Can you comment on if that's rightsized or a little out of balance at this time?

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

Thanks. I’ll pass it on.

Thanks, Deepa.

Thanks, Deepa.

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

Good morning, everyone.

Good morning.

Good morning.

I was hoping maybe we could start just talking about -- on the margins, you'd mentioned a productivity increase. And I'm wondering what it was that drove that, would 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?

Yes. Peter, you broke up for one word at the very beginning. I got though the price increase, I just missed the beginning in premise of the question. I'm sorry, sir.

I apologize. I was asking about productivity and what drove the productivity gains on the quarter, and when we should see more.

Yes. The productivity, of course, firing to keep delivering and more as we go forward both in the second half and into 2020. Just to focus, so there's not one thing, there's not one automation. A year ago, we did close 1 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, Pentair background companies. So it's just driving the day-to-day, making the value stream maps. From there, driving what Kaizens you want to go and then making sure there are sustainable improvements. I was on a call right before I left for this sales convention out in the West Coast with our best practice suite [ph], 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 sustainable results. But David and I is -- we're also encouraged organization [ph] 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 investments. So we're doing both. David?

So a lot of that $40 million of CapEx we're spending, we certainly target 1/3 of that, if not more, towards 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 uptime on our mills, all these sort of things you can imagine is what's the basis for that productivity gain.

That's great. Thank you. And then maybe since you touched on capital deployment. With leverage moving back down towards, but still some ways above the 2 times target, how are you thinking about M&A capacity and your pipeline from here? And when deals do present themselves? Are you leaning more towards 1 segment or the other? How are you thinking about that from here?

All right. So I'll answer the second question first. We publicly said that our focus will mainly be on Electrical Raceway, that doesn't mean we don't look at other opportunities, but our focus will be not to leverage our opportunity with our channel kind of our core business in Electrical Raceway. Our pipeline is still solid. I think we've talked before a lot of times our targets are smaller privately held companies. And we are very disciplined when it comes to pricing, probably even more so now kind of where we are in the proceed cycle, whichever way you want to think, whether it's mid-cycle or what have you, we're being disciplined there. And we also want to make sure that we have solid synergies, not just like sales synergies, which we somewhat discount, but hardcore synergies where we can add value. So that pipeline, I would say, generally speaking, is still solid. It tends to be more, I think, right now singles rather than doubles. So smaller kind of opportunities. But we are going to focus on reducing our debt unless we have those couple targets where we really want to add to our basket. And I would say that, in general, we're pretty much balanced from where we expected to be at this point. One thing I will say is that 2.8 we would like to move that down to 2.5 or lower towards that 2 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.

That’s helpful. Thanks very much, guys.

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

Okay. Thank you. Before we conclude, let me summarize the 4 key takeaways. First, we delivered good organic revenue growth driven by strategic focus on the right product mix. Second, adjusted EBITDA and adjusted EPS are up again double-digit 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 and the Atkore business system enable us to maintain focus on key objectives and deliver upon our commitments to our customers, our shareholders, and achieve the goals that we have set out for the remainder of 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.

Thank you. You may now disconnect your lines at this time. Thank you for your participation.