Greetings and welcome to the Simpson Manufacturing Third Quarter 2017 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, Ms. Kim Orlando. Thank you. You may begin.

Good morning ladies and gentlemen, and welcome to Simpson Manufacturing Company's third quarter 2017 earnings conference call. On this call, the Company may discuss forward-looking statements such as future plans and events. Forward-looking statements, like any prediction of future events, are subject to factors, which may vary and actual results may differ materially from these statements. Some of these factors and cautionary statements are discussed in the company's public filings and reports, which are available on the SEC's or the company's corporate web site. Please note that the company's earnings press was issued today at approximately 4:05 PM Eastern Time. The earnings release and a supplemental slide presentation are available on the company's web site, at www.simpsonmfg.com. Today's call is being web cast and a replay will also be available on the company's web site. Now I would like to turn the conference over to Karen Colonias, Simpson's President and Chief Executive Officer.

Thanks Kim and good afternoon everyone. We had a solid third quarter, with consolidated net sales of 13.6% year-over-year to $262.5 million, partially due to our recent acquisitions, driving growth in Europe, as well as increased sales volumes and average net sales unit prices in North America. As a reminder, based on our internal correlation assessment of our SKUs in relation to single and multifamily houses, we believe U.S. housing starts are a leading indicator for roughly 60% of our business. We continue to believe U.S. housing starts should improve at mid-single digit rate annually over the next few years, which is a positive indicator for our business. In regard to the recent hurricanes and fires, we are thankful that none of our locations in the affected areas were negatively impacted by these disasters. Our thoughts and prayers remain with our employees, who have suffered personal losses and with all the victims of these tragic events. We will be ready to support these communities, as they rebuild. Now I'd like to turn toward our primary focus for today's call. Following my prepared remarks, our CFO, Brian Magstadt, will walk you through our third quarter 2017 financials in greater detail. Please note, that a supplemental slide presentation accompanying today's call has been posted on the Investor Relations section of our web site at simpsonmfg.com. Today, we will focus on a discussion of both our near and long term objectives, which I will refer to as our 2020 plan, as outlined in today's earnings press release. We believe our execution on these objectives will create substantial value for all shareholders of Simpson Manufacturing Company. Throughout the past decade, our company has undergone a lot of change, including leadership transition and the passing of our founder, Barclay Simpson. One thing that has not…

Thank you, Karen, and good afternoon everyone. I am pleased to discuss our third quarter financial results with you today. Our consolidated net sales for the third quarter of 2017 were $262.5 million, up 14% compared to $231 million in the third quarter of 2016. Net sales in the third quarter included, $15.7 million from our recent acquisitions and were further driven by strong sales to contracted distributors, dealer distributors, home centers and lumber dealers, primarily due to increased home construction activity and average unit sale prices. Within the North Americas segment, net sales increased 8% year-over-year to $213.3 million, primarily due to increased sales volume and unit prices. In Europe, net sales increased 50% to $47.1 million, largely as a result of the recent European acquisitions of MS Dêcoupe and Gbo, as well as positive impacts from foreign currency translations. Wood construction products, including connectors, truss plates, fastening systems, fasteners and shear walls, represented almost 86% of total net sales in the third quarter; up slightly from 84% in the third quarter of 2016. Concrete construction products, including adhesives, chemicals, mechanical anchors, powder actuated tools and reinforcing fiber materials represented 14% of total net sales in the third quarter of 2017 compared to 16% in the prior year quarter. Our consolidated gross profit increased 6% to $119.9 million from $113.5 million in the third quarter of 2016, resulting in a consolidated gross profit margin of 46%, compared to 49% in the prior year period. Despite this year-over-year decline due both to the impact of our recent acquisitions and increased overhead costs, our ability to achieve an industry leading gross profit margin is directly attributed to our value added service offerings and uniquely engineered and tested product solutions. On a per segment basis, our gross profit margin in North America…

[Operator Instructions]. Our first question comes from Daniel Moore of CJS Securities. Please proceed with your question.

Good afternoon Karen. Good afternoon Brian.

Hey Dan.

Lot of ground covered. So apologize for a couple of really quick housekeeping questions. The 2020 goals that you outlined, are they inclusive -- they are inclusive of your incremental investment and trust, is that correct? And are you contemplating those goals being a run rate kind of exiting 2020? Or is that what we should think about actual reported results? And a follow-up, if I may?

So yes, they are inclusive of our truss [ph] run rate, and they should be thought of as a -- continuing, as we look through our 2020 run rate.

Appreciate it. And the top line goals, 8% organic growth you outlined, implied mid-single digit growth in housing, the opportunity at Home Depot of $30 million, the incremental penetration at concrete, any other sort of lynchpins to those? What sort of pricing expectations are embedded? What type of growth in Europe and any others, that we should think about? They are a little bit more aggressive than what we have achieved over the last few years, so just trying to triangulate that?

So it's all organic growth. There is no acquisitions in that revenue number. As you pointed out, growth rates from single digit, mid-single digit housing starts, we do have this opportunity with the Home Depot to finish placing our mechanical anchors that just started in 2017, and will continue through 2018. So some substantial opportunities there. As we mentioned, we are really focusing on fixed areas of the concrete business, rather than having sort of a very scattered approach in the past. Really focusing on those fixed areas, will help us get some market share improvements. And then also from a topline standpoint, we see the opportunities for our truss business growing.

Last one and I will jump back in queue. Just talk about the leverage, as far as your margin goals to that top line growth? In other words, with for whatever reason, the market [indiscernible] organic growth were 2% to 3% top line. What would that do to your 21%, 22% pre-tax margin goals? Thank you.

Yeah. Well that would obviously reduce those pre-tax margin goals. Again, this plan is really looking at today's economic conditions, and the improvement that we can put in place on the areas where we see we have -- again, some opportunities to gain market share and improve our bottom line.

Appreciate the color. Thanks again.

Thanks Dan.

Our next question comes from Steve Chercover with D.A. Davidson. Please proceed with your question.

Thanks. Good afternoon everyone.

Hey Steve.

I guess we are delighted to hear the 2020 strategy, so just interested, what prompted the new urgency? Was it the shareholder engagement?

I will say Steve that, we have really been -- over the past couple of years, been very active on our shareholder engagement, and really not only with the portfolio managers, but certainly the governance teams. We have listened very intently about some of the things that they were looking for and some changes that we needed to put in place, and I think certainly, you have seen some of those from the governance standpoint, and this is really our opportunity to show the investors, that we are listening, and that we want to give you some more clarity in our strategy and our goals going forward.

Cool. Well, we will look forward to the datapoints of progress. So quick question on Gbo; it looks like after getting rid of Poland and Romania, you are getting Norway and Sweden for free, so what revenues in those two markets remain?

Steve, it's Brian. So the Poland and Romania piece, it was about $12 million of the total, that we had for the year, which was -- bear with me a second.

I think it was $35 million.

Right, there you go. Thank you. Just wanted to make sure [indiscernible] the right number. So it was about a third of the total there.

So your cashback, you still have -- I am hoping the more lucrative element of the business, is that a fair way to say it? Are the margins better in the remaining markets?

Yeah. I think if you look Steve, the fasteners that were produced in Poland and Romania were specific to the metal building industry, which is not a market that we were interested in pursuing. So by divesting that, it really allows us to focus the fastener market that we have, both in Sweden and in Norway, which is more of structural screws and being able to have those structural screws complement our wood connectors. Again, putting that complete product offering of connectors and fasteners in the Nordic market, as well as moving the fasteners into the Western European market. So it really fine tunes on our strategy on what we are doing with both those product lines.

Okay, great. Now, you have got some pretty ambitious growth objectives. I am assuming that eliminating 30% of your SKUs doesn't mean that you are necessarily walking away from businesses, you just have to point your customers that the alternative that can satisfy their needs, that's the way to look at it?

Right. I mean, they certainly never want to walk away from business. But what we want to do is, look at that product mix, and certainly, we have some products that have just sort of aged out, and so they need to be deleted from our system. But as I mentioned, there is about a third of the products, where we will transition customers, and that's because we have got a better, more cost effective, more easy to install product for the end user. And so that takes a little white in the transition. But certainly not any plans to walk away from business opportunity.

But you have always been able to do custom work. So if someone says, listen, here is the reason why I need the ABC connector, can you hook me up? You will still be able to, I guess, fabricate it?

Yeah. Let me clarify. We will still be able to turn customer specials in a 24-hour turnaround time. These are more manufactured products from a volume standpoint, these aren't one-off type of products. So just again, as we have transitioned into different types of construction, more efficiency on how we manufacture our products to different models in itself, it's converting those. But yes, we will absolutely still have our special facility, because that's a great distinction on how we can service our customers, where maybe our competitors can't meet those needs. So it has nothing to do with not still making custom specials, we will still meet the needs of our customers.

Okay. Last question for me, is with respect to the repo, it sounds like your -- well, if I speak English, you are going to be aggressive in the near term. Does that mean you are willing to run with a significantly lower cash balance going forward?

Hey Steve, it's Brian. So we want to make sure that, we got the appropriate amount of cash for the seasonality of our business. But to the extent that, we have got some improved operating cash flows, we want to be able to use that for the return of capital. And looking at what those exact amounts are over how quickly we are still internally working those -- that is -- the goal is to work that cash balance down to a lower level than today.

All right. Thank you.

Welcome.

Thank you.

Your next question comes from Josh Chan of Robert W. Baird. Please proceed with your question.

Hi. Good afternoon Karen and Brian. Thanks for all the color around the 2020 plan. As you think about the different areas that you are working on for 2020, SG&A, inventory, previously, those were pointed to as areas where you can drive additional growth or you can service customers better. So just curious, in terms of your thinking, what changed and also kind of your confidence in the ability to still have product development and have customer service capability?

Yeah. So let's maybe take the SG&A piece of that first. I think, as you look at what we have mentioned, we have had a much clearer focus on what we are doing in the concrete space. So I think, the reduction we are having in SG&A there, is actually because we have been able to increase our focus on these fixed market spaces, and those are key, because we have got the complete product offering needed for those space. We have an excellent sales force ready to meet those customer needs. And so, we were able to take some SG&A costs out, really because we have fine tuned our focus in that concrete space. And very similarly in Europe, with this Gunnebo acquisition giving us a complete fastener line, it has really allowed us to take the connector and fastener strategy as a combined product offering, and have that as the complete focus there, as we are working through in Europe. So I think the elements that we have been able to reduce in SG&A, is really because we have focused the strategy in those couple of spaces. From the inventory turns standpoint, I think as I mentioned to you Josh, we have been working on some lean initiatives for quite a while, and so, we are able to meet a customer's needs without having to have so much inventory, and that's some work that we have been doing over the past couple of years, and we are really even pushing that further. So we still plan to be able to make these inventory changes, and be able to beat some higher turn numbers, and still meet our 24-hour turnaround and our customer's expectations. As I mentioned to you, I think we have about a 95% to 98%, from the time you offered to being delivered in the next day, and that's certainly a KPI that we will continue in our focus. Certainly, we believe that, not only the specials that we make, but the breadth of line and the ability to provide customers the product in a very timely manner, engineering support, all of those are key elements, that help us with that gross margin and that operating income margin, and we don't want to lose it, but we think we can fine tune to be even better.

All right. That sounds good. Also on the share buyback side, given that you are maybe deemphasizing acquisition a bit, is there a possibility that buybacks can be over 50% of operating cash flow, than if you don't spend that much money in acquisition, is that the way you are thinking about it?

I think that, as we are going in and looking at the balance sheet and deemphasizing away from some of the categories of acquisitions that Karen noted, to the extent that there is capital to deploy there via buybacks and dividends, we would go that route. But we are still maintaining that 50% target of cash flow from operations. But as you noted, it might be -- there could be opportunities to do that -- to do a little bit more there.

All right. And then last one for me, I think Karen, you mentioned the importance of software. So could you update us, in terms of where your software stands relative to competitors, and maybe with the -- as a result of your investments, when -- where do you think that will take you?

Yeah. So as we talk about software, I think we have been talking about this -- sort of the buzzword of the BIM solutions, which is building, information, modeling. And software in the building materials is really starting to cover various aspects of the builder's business, from doing a complete take-off to doing a complete engineered design from architectural look to auction management, what we are doing from a trust design. So software is becoming a more all encompassing part of the building industry. I would say, as normal in the construction industry, we are a little bit behind, where people are with the use of software. But it's certainly becoming a much-much larger part of our business. So it's not just about providing connector anymore, it's about providing software that makes -- whether it's a lumber yard from a takeout standpoint, or a truss manufacturer for their design, we have got elements, CG Visions, we acquired them last year. That's a small company. They help us with take-off, they help us with auctions management, and they tie into some of those elements that the builders are looking for, and of course, we are looking at our truss software, as we have that to be a design element. So today, I'd say from a standpoint with Simpson, we are behind in some of the efforts that we need from our software, and we are working very quickly to catch-up. But it has become very apparent over the past few years, that software in combinations with the actual product is what's needed to help meet, not only the large builder needs, but the engineering communities needs, as well as the lumber yards.

Okay, great. Thank you for the color and best of luck with regards to the plan.

Great. Thanks Josh.

Ladies and gentlemen, we have reached the end of our question-and-answer session. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.