Greetings and welcome to the Simpson Manufacturing Company Fourth Quarter and Full Year 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, Kim Orlando, Addo Investor Relations. Thank you. You may begin.

Good afternoon, ladies and gentlemen and welcome to Simpson Manufacturing Company’s fourth quarter and full year 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 website. Please note that the company’s earnings press release was issued today at approximately 4:15 p.m. Eastern Time. The earnings press release is available on the company’s website, at www.simpsonmfg.com. Today’s call is being webcast and a replay will also be available on the company’s website. 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. 2017 was a highly productive year for our company as we laid the foundation to position Simpson for long-term sustainable and increasingly profitable growth. Consolidated full year net sales of $977 million were up 14% from $860.7 million in 2016 primarily due to increases in both sales volumes and average unit prices in North America and Europe coupled with contributions from our recently acquired businesses. On our last conference call, we unveiled our 2020 plan in order to maximize operating efficiencies and drive long-term shareholder value. As you may recall, our 2020 plan is centered on three key operational objectives, which included focus on organic growth, rationalizing our cost structure to improve companywide profitability and improving working capital management and overall balance sheet discipline. We believe these objectives will substantially enhance our return of invested capital as well as provide additional capital to return to our shareholders. Further, these objectives reflect our dedication to do what is right for our people, customers, shareholders and community. Our Founder, Barclay Simpson instilled these values into our corporate culture over 60 years ago and we will continue to operate under these principles as we grow and execute on our stated goals in the 2020 plan. Now, turning to our key objectives. We remain on track to achieve an organic compound annual growth rate of approximately 8% for our consolidated net sales through 2020 from our reported 2016 net sales of $861 million. Our target net sales compounded annual growth rate assumes four primary contributing factors beginning with growth in the U.S. housing starts, which we believe are a leading indicator for approximately 60% of our business. We continue to expect U.S. housing starts will improve at an annual mid-single-digit rate over the next few years. In addition,…

Thank you, Karen and good afternoon everyone. Well, I am pleased to discuss our fourth quarter financial results with you today. Our consolidated net sales for the fourth quarter of 2017 were $231.7 million, up 16% compared to $200.2 million in the fourth quarter of 2016. Consolidated net sales in the fourth quarter included $8.3 million from our recent acquisitions of Gbo Fastening Systems and CG Visions. Within the North America segment, net sales increased 10% year-over-year to $190.9 million primarily due to increased sales volume and unit prices. In Europe net sales increased 52% to $38.4 million, largely as a result of acquired net sales as well as positive impacts from foreign currency translations. Wood construction products including connectors, truss plates, fastening systems, fasteners and shearwalls represented almost 84% of total net sales in the fourth quarter, down slightly from 85% in the fourth quarter of 2016. Concrete construction products including adhesives, chemicals, mechanical anchors, powder actuated tools and reinforcing fiber materials represented 16% of total net sales in the fourth quarter compared to 15% in the prior year quarter. Our fourth quarter consolidated gross profit increased 8% to $102.7 million from $95 million in the fourth quarter of 2016 resulting in a consolidated gross profit margin of 44% compared to 47% in the prior year quarter. Despite this year-over-year decline due primarily to our recent acquisitions and increased material costs, there is still industry leading gross profit margin as a direct result of the high level of value added services we provide to our customers and our engineered and tested product solutions. On a per segment basis our gross profit margin in North America decreased to 47% from 49% in the prior year quarter due primarily to increased material costs which were partially offset by factory costs. In…

Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Daniel Moore of CJS Securities. Please proceed with your question.

Thank you. Good afternoon, Karen. Good afternoon, Brian. So let’s start with maybe gross margin, talk a little bit about obviously some of its acquisition, but on North America more specifically rising input costs, do – would you expect to start the year perhaps in Q1 a little below that 45%, 46% guide and improve as the year goes on, just talk about the kind of how you see margins playing out over the year and I have a quick follow-up?

Sure. Hi Dan, good afternoon. I would say in a similar fashion to – in prior years Q1 and Q4 typically are going to be the lower gross margin quarters compared to Q2 and Q3. But as it relates to the full year the raw material input costs as you noted is what’s driving where we are projecting to be in 2018. So similar seasonality trend and but on an annual basis looking at that 45% to 46% range for the full year.

I guess that in other way do you have price increases going on in Q1 or at some point in the near future?

Yes. Hi Dan, this is Karen. So as we have mentioned in the past that certainly there is a lot of volatility right now with the steel industry and what we are seeing on steel prices, currently, there seems to be uptrend in those steel prices. And as we have said in the past, this does become something that we potentially have to pass on to our customers we certainly will take that action when necessary, but keeping in mind that it takes about some of our customers have a 60 to 90 day lead time on any price changes. So today, we do not have a price increase in place, but we certainly are monitoring what’s going on with the steel prices.

Got it. Very helpful. To give a lot of good color as it relates to guide for 2018, can you talk a little bit about SG&A, I think if I heard some of those comments correctly, it sounds like SAP-related expense will go up particularly with amortization by several million, but just overall directionally, how should we think about SG&A for full year ‘18?

Yes, we have done a – we have worked very hard with our groups across all our business segments and certainly all of our business areas to really take a look at our costs. And then as we stated, we have positioned our SG&A absolute dollars to be less than they were in 2017 even after taking into account the increased in the SAP cost. We are really looking at all projects that we are working on to be sure that they are returning profitable investments to the company. And we believe that those SG&A reductions that we have put in place along with what we are seeing from top line growth will put us in that mid 29% range from SG&A as a percent of sales.

Got it. Very helpful. And last question Brian, I heard two different numbers for severance, I heard $1.9 million I think and then another of like $4.8 million, just help me understand what the total severance and any other kind of discrete one-time items in the quarter?

So, the quarter $4.8 million was the severance and operating expenses. There was a little bit more in cost for sales, maybe about $0.5 million, but that was the fourth quarter severance. And I think that’s really the only item of note on a one-time basis.

Got it. Very helpful. Thank you.

Thanks, Dan.

Our next question comes from Tim Lange of Robert W. Baird. Please proceed with your question.

Hey, everybody. Good evening or good afternoon.

Hi, Tim.

Hi, Tim.

Maybe just going looking at the D&A expense that you expect for the year, I think it’s up maybe $5 million, $6 million on a year-over-year basis, what’s the – from a segmentation perspective, how much of that falls in cost of goods sold and how much of that will be in SG&A?

Tim, it’s Brian, hi. So, we are estimating there is probably $4 million related to software whether it’s a combination of SAP which will be put into use and will begin advertising that and then the truss software that we have been developing that will be showing some increase there. I think the rest of it is mixed around throughout the rest of the organization, majority of though which is in factory in cost of sales, but those with the SAP and the truss were bit of a step function in those depreciation numbers.

Okay. And then the loss from the acquisitions in the quarter, I think was $3 million and I think it had been – I think that’s double or triple what it was for most of the year, so what happened in the fourth quarter, I mean, is there severance in there or some losses to kind of keep in mind?

No, I think it’s more around the European acquisition for significant amount of December, the operation shutdown around the holidays and the like, but of course fixed costs are still there. So, I think that’s largely attributable to that number.

Okay. So, it’s mostly seasonal, okay. And then the 29.5% of sales as a percentage for OpEx as a percentage of sales, that’s for the full year right not ending the full year that’s for the – that’s not in the Q4 ‘18, that’s for that the full year ‘18?

That’s correct, full year 2018.

Okay, great.

I know that, well go ahead.

Sorry, no, go ahead.

I was going to say you said 29.5 or saying mid-29, so just I know that maybe splitting area.

Yes, I know, fair enough, okay. And then as we think about – as we think about the fourth quarter just on the sales line, I mean was anything – was there any sort of pull forward or anything like that, I mean I thought that the sales performance was stronger particularly in America that maybe we would have anticipated given the comparison, so any sort of just added color on what drove the sales increase in North America will be great?

Yes. I think Tim, if we remember back to fourth quarter last year we had some pretty heavy rains in December. So certainly, we had the weather being very helpful in the fourth quarter not only on the West Coast where we are really inundated with rains, but more of a late winter to the Eastern Seaboard also. So just able for contractors to still build found – get their foundations and then start building.

Okay. If I remember correctly you had a very wet Q1 last year, especially in California?

We did, yes. We have a sort of a continuation of that December rains and certainly the California State – California area we were pretty significantly impacted by those heavy rains throughout all of Q1.

Okay, great. Well, good luck on to the [indiscernible] team.

Thanks.

Thanks Tim.

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

Thanks. Good afternoon, everyone.

Hi, Steve.

Hi, Steve.

So, I guess, I don’t know if you can name the consultant, but the consultant team on after you announced the 2020 initiative, is that correct?

Yes. So the 2020 plan was a – put together with the Simpson management team and in certain engagement of the Board, there was no outside consulting help as we looked at putting those targets and actually the areas that we were really focused on. That was really input from a lot of the conversations that we had with our shareholders on additional information to get some ideas about success. And then part of that was to also look to hire an outside consultant and give us sort of an outside view of potentially what other areas that we might be able to improve.

So just to understand the internal review and targets are basically just that, their targets you believe are attainable and these outside folks will help you actually establish the roadmap to get to your targets?

No, what I would say is the internal targets that we feel are very aggressive that we put in place. We already have many steps that we are working on. Again, we mentioned some of those in the fourth quarter, the restructuring of our strategy in Europe and the severances associated with that. The restructuring of our strategy in the concrete space focusing on really six market areas and certainly the severance is associated with that model. We are looking for the outside consultant to see is there more that we can do in other areas that we didn’t really look at. So we have a clear plan in place on how to accomplish these very aggressive goals that we put into the 2020 target – 2020 plan, but we want to take an advantage of the expertise of that outside consultant to tell us is there more that can be done in different areas that we may not have reviewed.

And then you have mentioned Karen that if you fall behind on your – the benchmarks that you have established, then you will take measures to I guess accelerate or offset any shortfall, could you give us an example?

Sure, I mean I think as we put the metrics in place we certainly have things that we can track on a quarterly basis, some of them more on an annualized basis if we talk about our inventory turns, we have got some aggressive goals for some profitable operating income in Europe. And I think we have had two pretty significant strategy changes in both Europe and in our concrete space and as we look from quarter-to-quarter how those things are tracking there may be more aggressive things that we have to do, whether that’s looking at different product lines, looking at different strategies within those business elements.

Okay. And then U.S. housing I think you – Brian said was 60% of that the driver of your overall business, what would happen, is there anything you could adjust if in fact housing good shock to the system and we have had water for a little while?

Yes. I think certainly as we look at housing starts as we mentioned that’s a significant driver in these metrics as we look at our compound annual growth rate, we are looking at housing starts being in mid single-digits just as they have been for the past 3 years. Part of our assumptions in this plan is those will continue and certainly we will be aggressively pursuing that. With U.S. housing starts being about 60% of our business you can imagine there would be a significant impact if there was a significant downturn in that space. We keep track of that very carefully, obviously talking to not only our distributors and our builders and our large builders, but also some the industry experts are really looking at this housing space. So we feel very comfortable based on what’s going on in the past 3 years and we have the projections appear to be going into the next few years for the housing market.

Okay. And last question for me, I am just wondering whether you will be a bit more opportunistic on the re-poll going forward now you have done the first 677,000 shares of about $50 million?

Yes. Steve, it’s Brian, we would continue to look at those repurchases. There are some limitations around how much we can buy on a daily basis and the like. And as we have noted the accelerated share repurchase program is ongoing will wrap up sometime this quarter and we will continue to look at those opportunities around deploying that capital back to shareholders.

Very good, okay. Thank you.

Thanks.

Thanks Steve.

Our next question comes from Julio Romero of Sidoti & Company. Please proceed with your question.

Hey, good afternoon. Thank you for taking my question.

Hello.

Hello, can you hear me?

Yes. Okay.

Yes. Hi, good afternoon. Thank you for taking my question.

Sure.

So just on your software offering, how do you see the current competitive landscape regarding software and trust and maybe if you could talk about the current and expected progress of market penetration within the small and midsize targeted segment?

Sure I think to talk about our software initiatives, it’s more than just the trust offering or as we mentioned we acquired CG Visions, because they give us an opportunity to be tied closer to some of the large builders where we can look at options management, which is a pain point for them and take off which is also a pain point. So when we think of software, we really think of it as the elements that can help us make the building industry more efficient and obviously tie them closer to us personally. As we mentioned probably about 40% of our connector sales are some form our customers are using software some form, whether it be a truss software or whether it will be a takeoff software is becoming increasingly important in the construction industry to have that offering that makes those lumberyards, builders, component manufacturers more efficient. On the trust part specifically, we were at the building component manufacturing conference which was held in late sometime in October that’s really where you can showcase your truss software. Our latest release was very well received. The feature set allows us to go after some of those midsize customers and still focus on the customers we have converted. We want to still have complete support there with those customers that have been converted and we will focus this year on those midsize customers. Our sales people have identified the targets and those are the ones that they are currently and aggressively going after.

Very helpful, just shifting over to Europe just hoping for some color on how we should think about the cadence of our margin improvement there given the 45% to 46%, consolidated gross margin for fiscal ‘18 just how should we think about gross margin for Europe and up margin improvement in your overall?

Well, as Karen noted in our comments we have taken some costs out of Europe looking to improve profitability there as we right-size that operation and like necessarily have a – anything else to comment on really the costs that we removed and looking to have that operating margin as an improvement over 2017. So, the gross margin in Europe is partially impacted by the acquisition over there. So, it’s got a lower gross margin and when we have added in $40 million in 2017, $42 million in 2017 at a lower gross margin that’s where you are seeing that impact there for the year and a bit for the quarter as well. So, we are working on integration efforts to improve the profits of that acquisition. As we have mentioned prior calls, we bought it and then we sold off a piece of that business and we sold that smaller piece for nearly what we bought the entire things work. So we have got some work to do there with that acquisition, but we feel there is some good opportunities and then the cross-selling opportunities within Europe, the fasteners into Central Europe and vice-versa, the connectors up into that Nordic region, where Gunnebo is located. So, does that answer your question, Julio?

Yes, it does. Thank you. And just lastly, do you still see concrete gross margins at that 38% to 39% target for 2018?

Yes. I think as you look at some of the things that’s in the strategy that we changed late in fourth quarter, we are still pushing very heavily to help those gross margins in that concrete space. As we said some things that will help us there is volumes number one and that’s why we focused on these six market areas. The other reason we focused on these six market areas is they happen to be an area that has higher gross margin on these concrete products. So, we are certainly working on executing our plan and really executing some improvement in that gross margin space.

Got it. That’s all I have. Thanks very much.

Thank you.

Thank you.

Our next question is a follow-up from Daniel Moore of CJS Securities. Please proceed with your question.

Thank you again. Maybe just drilling down and just talk about Europe but more specifically on the Gunnebo acquisition, just talk a little bit about what ultimate margin profile can look like and in terms of timeframe what’s the path of profitability and to get those margin? Thank you.

So, Gunnebo specifically, Dan or if the combination of all of Europe?

We are really kind of drilling down on Gunnebo, because I know that there – Brian gave some color regarding what some of the factors seasonality that drove the loss in the quarter, but it was just more looking at that business specifically?

Yes. So as you know Gunnebo, we have a manufacturing facility in Sweden. We have been able to push their utilization up a little bit by having them make some of the products that we use to buyout. So we will be looking at means of increasing that vector utilization. The other thing we have done is the products that we are releasing into Western Europe. We have a portfolio that is a consistent product portfolio for both France and the UK and Denmark and Germany and all of our locations. So we are really looking to push additional volume in specific sizes through the Gunnebo manufacturing facility and then into that Western European location. So, we have a couple of things not only from the sales perspective, but things we can do to increase that vector utilization and then certainly looking at anything where we might be able to do just a little bit more aggressive pricing program then they may have done in the past in some specific regions. So, it’s really a combination of multiple things that we are looking at on the Gunnebo side.

Got it. And then the corollary to that was timeframe, but unless you want to get tied into that?

Yes, I mean, we are only year two into our integration at large parts of our year one was divesting of the Poland and Romania part of that business. The strategy of what we are doing with the Swedish part of the Gunnebo business has not changed. We are introducing those products into Western Europe in the first quarter of this year, which is exactly on track as our plan was. So I think it’s a little bit things are progressing nicely, but again we are just in year two of this integration plan.

Got it. Appreciate the color.

Great. Thanks, Dan.

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