Greetings, and welcome to the Simpson Manufacturing Company 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 today, Ms. Kim Orlando with ADDO Investor Relations. Please begin.

Good afternoon, ladies and gentlemen and welcome to Simpson Manufacturing Company's first quarter 2018 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 or the company's corporate website. Please note that the company's earnings press release was issued today at approximately 4:15 PM 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. We had a strong start to the year with our first quarter net sales increasing 11% year-over-year to $244.8 million, mainly due to growth in sales volume. As you may recall first quarter of 2017 was negatively impacted by severe weather. We have continued to execute on our 2020 plan, which we unveiled just six months ago, to provide more clarity into our longer term strategic plan and financial objective. The plan has been a welcome change within our organization, as we have been diligent in openly communicating with our employees who all know their role will make a difference. Given our goal oriented culture, we believe these necessary steps will take Simpson from what we view as already a great company to an exceptional company. I will now elaborate on our key 2025 objectives in detail. They include our focus on organic growth, rationalizing our cost structure to improve companywide profitability, and improving working capital management and overall balance sheet discipline. We continue to believe we can 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. Subsequent to quarter end, we announced an 11.5% price increase on all our U.S. wood connector products, in an effort to offset rising raw material cost. As a reminder, after announcing a price increase we provide our customers with a 60 day notice period before it goes into effect with a clause that prohibits significant pre-buying ahead of the increase, in order for us to properly manage our inventory levels. We anticipate the price increase will go into effect by mid-June, which will help us maintain our strong gross profit margin. Also factored into our top line growth assumptions is…

Thank you, Karen, and good afternoon everyone. I am pleased to discuss our first quarter financial results with you today. Our consolidated net sales for the first quarter of 2018 were $244.8 million, up 11% compared to $219.9 million in the first quarter of 2017. Within the North America segment net sales increased 12% year-over-year to $206.2 million, primarily due to increased sales volume over the first quarter of 2017, which was impacted by heavy rainfall in the western parts of the U.S. In Europe net sales increased 6% year-over-year to $36.3 million, primarily due to increased sales volume and unit prices as well as positive impacts from foreign currency translations. Sales growth in Europe was partially offset by the divestiture of our Gbo Fastener business unit in Poland and Romania in the fourth quarter of 2017, which contributed $3 million of net sales in the first quarter of 2017. Wood construction products represented almost 87% of total net sales in the first quarter, in line with the first quarter of 2017. And concrete construction products represented 13% of total net sales in both the current and prior year quarter. Our first quarter consolidated gross profit increased 8% to $108.5 million from $100.2 million in the first quarter of 2017, resulting in a consolidated gross profit margin of 44.3%. Compared to the first quarter of 2017 our gross profit margin declined by approximately 130 basis points, primarily due to increased raw material costs. Currently we do not anticipate the margin pressure experienced as a result of higher steel prices to impact our full year 2018 gross profit margin guidance of 45% to 46% due to the recently announced U.S. price increase on our wood connector products which will go into effect in the second half of this year. On a…

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

Good afternoon, Karen and Brian. Thank you for the color. Want to touch first on the gross margin guidance and price increases, certainly impressive holding the line given the inflation that we've seen. 11.5% is that one of the biggest price increases you've had to put through in more than some time and I guess what's the initial feedback you're getting from customers?

Hi, Dan. Certainly 11.5% is pretty substantial for what we see and I think it's pretty indicative of what's going on in the market from the tariffs and what we see from the steel pricing. The information is still predominant in the market and builders and our customers are getting price increases pretty much from anybody that had material made out of steel. So certainly it's understood, it's been publicized for a very long time about what's going on in the market with steel prices. Our customers appreciate that we give them a 60 day notification and they're in the process of accepting that price increases.

Very helpful. Just shifting gears in terms of the quarter, Brian, can you give us the sensitivity impact of both FX and price increases the raw material pass through had on the revenue growth?

Raw material price increase pass-through not significant. Karen noted that will be later in this year. Foreign exchange had a - bear with me just a second, about a $4.5 million positive impact.

Perfect. And lastly and I'll jump back in queue. LotSpec, any more details you can share, purchase price, what revenue looks like, EBITDA multiples and any color you want to give on how it fits in CG Visions beyond the prepared remarks would be great. Thank you.

Sure. Dan, it's Brian. It's really an asset, it wasn't a business per say. It was the software application that we bought. It was an immaterial purchase price and it will have a little bit of effect on depreciation on a go forward basis but on an annual basis it's not significant.

And just a little bit more about LotSpec, it's really an application for both AutoCAD and Revit. So AutoCAD being 2D Revit 3D drawing platforms and what it allows us to do is convert those drawings into a 3D model, which we can then push through what's called Pipeline which is a take-off software that's part of CG Visions software platform. So, it's really helping us make that take off much easier for the builders.

Got it. Thank you.

Sure.

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

Hey, good afternoon everybody.

Hi, Tim.

So maybe on free cash flow. So I think free cash flow was positive in the first quarter, I think for the first time since 2007. And so I was just wondering if maybe there is some guardrails to how we should think about free cash flow for the year as you kind of tie in some of the working capital reductions with inventory?

Sure Tim, this is Brian. So free cash flow in Q1, cash flow from operations as Karen noted in the prepared part of the remarks, $16 million, but largely CapEx and acquisitions in Q1 were much lower than in prior years. From a seasonality perspective, I'm not sure that I'm seeing on the operating cash flows much significant changes quarter-over-quarter. But you're right, it was a - last year we were a net use versus a net received on cash. So I think one of the primary ones was the - you'll see a change in inventory was a bit less this quarter. I think it's pretty much it. There were some other movements and other working capital items that changed that, from a use to provided.

Okay. Maybe I'll ask it a different way. So if I look - do you expect working capital to be down year-over-year in '18 versus '17?

Well, to the extent that we're returning cash to shareholders via buyback and dividend, yes. You've heard us talking about the improvement efforts we're looking at from inventory and then some of the AP and AR elements. We'll have to see how far we get with those two elements, but if we were to look at cash as a part of working capital, I would expect that to be less.

Okay. And then maybe back on to pricing just two questions, have you put through anything in terms of price increases in Europe? That's one. And then second, when you put through a price increase in North America, is the realization on that price increase typically pretty good in terms of, you don't have to give kind of back in the percentages. But if what - how good would you expect that 11.5% to kind of stick?

So hi, Tim, it's Karen. Yes we did put some price increases in Europe that was happening in the early part of the year. They also have some significant increases in the steel pricing in the European market. So again that was taken in the first part of the year. From the standpoint of I think as we look at our price increase we work very hard to justify what that needs to be and have conversations with our customers as to what's that based on? So certainly anticipate once you get through the staggering of customers and again that mid-June timeframe that majority of that price increase will stick.

Okay.

Hey, Tim, if I can give you one item on the working - on the cash flow from ops. Just as a reminder, last year, that bargain purchase gain of about $8 million was a use of cash. So that also contributed to the net differential or primarily the net use of cash in last year's Q1. So I just wanted to provide a little additional clarity there.

Okay, great. Now that's good to call out, I appreciate that. Good luck, see you guys.

Thanks.

Thanks Tim.

Thank you. Our next question comes from Kurt Yinger with D.A. Davidson. Please proceed with your questions.

Yeah, hi Karen and Brian. When you talked about the mid-29% operating expenses target, was that a full year 2018 goal or by the fourth quarter that's sort of what you're expecting from a quarterly run-rate

That's the full year 2018 goal.

Okay. And then with the lower tax rate in the first quarter here and the 26% to 27% guide for the full year, should we expect to be at the high end of that as we look out over the next three quarters?

On the tax rate.

Yes.

Yes. I think that's right.

And then could you talk a little bit about differences between the small mid and large size truss manufacturers, Myer [ph], like are gaining some traction, it sounds like with those mid-sized manufacturers?

Sure, so the small sized manufacturers are a little less complicated from the standpoint of what they need on the software from a feature set and typically they has a fewer locations that we're needing to support. So small size truss manufacturer again just using designing trusses, not floor systems and not wall panel. On the large - the medium size as we go up it becomes more complicated. So a medium size truss manufacturer typically has more locations. They require floor systems as well as trust design and certainly a management software and then as we get to the larger size component manufacturers they have many, many more locations and they require the use of wall panels, roof truss and floor system. The reason we are getting some good traction is last October at the Building Component Manufacturing Conference we released - we put out a new release of our software which had some additional feature sets which was well received by the medium size component manufacturers and we have got our sales force directed to work specifically with those medium size component manufacturers on those conversion.

Great, thanks Karen. And lastly, I apologize if I missed this. But can you talk about your CapEx assumptions for the year and are there any sort of significant discretionary spends within that?

So we do - Kurt, this is Brian. We have got sort of third of that what we called maintenance CapEx, and about a $30 million to $32 million annual amount projected for the year. So part of it is the timing so that assumes all project that we're looking at are finished by the end of the year and often projects to rollover is because the spending may carry over into early next year. But we based that amount on projected projects that would finish this year. So, it may end up varying a little bit from that again due to how much is completed and put in to use by the end of the year.

Great, thanks, Brian, I'll turn it over.

Thank you.

Thank you our next question comes from Julio Romero of Sidoti & Company. Please proceed with your question.

Hey good afternoon Karen and Brian.

Good afternoon.

Hello Julio.

Hey, so just appreciate the color that you gave on truss sales up year-over-year. You called out some new features that might be driving that, to the extent that you can - I don't know if you can go any more granular, is that really like based on the cloud based offering or any other features of that software that's resonating with customers?

Yeah, I think as we've mentioned in the past that our software is number one modular in design and number two it is on a cloud base. Additional feature sets are always added to software and it's the things needed to make component manufacturers more efficient. So as we survey our customers and potential customers and get the input that we're looking for, that what do they need to be more efficient, those are things that we have input into the software. So we just put elements that have made those medium size component manufacturers more efficient. And as I mentioned before it's not only our truss design but it's our management software that really can help them manage their inventory and efficiently produce those - produce the trusses. So it's the truss design software is worth our management software that is appealing to them. Again it has to be something that makes them more efficient so that it's worthwhile converting to Simpson.

That's helpful. And just on that point about the management software, the partnership with Hyphen Solutions, can you give an additional color there and should we expect Simpson to continue to explore those types of collaborations going forward with others in the market?

Sure. So, Hyphen Solutions is a leading cloud-based software for builders in the ERP space. So if you can imagine a large builder on the frontend has AutoCAD joints or whether joints 2D or 3D, the would like to get them into a 3D model, so they can when do a takeoff, which would happen in our pipeline which is 3D vision. And when you want to be able to push that data into an ERP system, that can help you with scheduling, warranty information and that sort of things. So, our connection with Hyphen Solutions is to allow a free flow of data, so that this makes again the builder's life much easier from both the frontend and the backend of their project with the current software solutions that are available. And Hyphen is predominate ERP solution used for most builders. So, it's been a - it's a nice partnership that we have and again it's just exchanging the data to make that a faster process for the end users.

Got it. I'll jump back into queue. Thanks for taking my questions.

We have a follow-up question from Daniel Moore with CJS Securities. Please proceed with your question.

Thank you again. I just missed - can we get the number of Home Depot stores that where mechanical anchors are now rolled out and what's the current run rate revenue look like?

We're currently in 335, I think is the right number. Of the 1,900 stores, we're currently in 330 locations. And on a run rate, we anticipate that we'll convert several hundred stores this year. It's a little hard Dan to give you the run rate and the reason is that we are not displacing but there is someone in the Home Depot. So it takes a little bit longer to find that space and it set those stores. But what we will do is be giving you a quarterly update on how we are progressing.

Helpful. And lastly, would you update your 8% organic growth goal if raw material prices continue to move higher or should we think of that is set of a net of inflation goal?

I think we are going to have to think about that one a little bit more Dan, provide a little bit more color possibly next quarter.

Understood. Okay. Thank you again.

Thank you.

Hey, Dan.

Thank you. At this time, I would like to conclude today's teleconference. You may disconnect your lines at this time. And thank you for your participation.