Ladies and gentlemen, greetings and welcome to the Simpson Manufacturing Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Madeleine Myers. Thank you. You may begin.

Good afternoon, ladies and gentlemen and welcome to Simpson Manufacturing Company's third 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, Madeleine, and good afternoon, everyone. I'm pleased to discuss our third quarter results with you today, as well as provide an update on our progress towards our 2020 Plan. It's been one year since we announced our 2020 Plan to provide more clarity into our longer-term strategy and financial objectives. Today, I'm pleased to confirm we remain on track to reach our key financial targets under the 2020 Plan. These include, achieving organic net sales compounded annual growth rate of 8%, reducing our total operating expenses as a percent of net sales to the 26% to 27% range, resulting in operating income margin of approximately 21% to 22%, doubling our inventory turn rates and improving our return on invested capital to a range of 17% to 18%. I would also like to acknowledge the hard work and commitment of all of our employees, who remain dedicated to playing their part in helping us achieve these goals. We've made solid headway over the past 12 months, thanks to their efforts, and I look forward to discussing our most recent progress during the third quarter with you today. First, let's review some highlights from our third quarter financial results. We had a solid third quarter. Our net sales increased 8% year-over-year to 284.2 million, driven by growth in sales volume throughout almost all areas of our company. Net sales were also positively impacted by increases in our average selling prices. On July 1st, we passed on relatively small price increases for many of our products with the most significant being an 11.5% price increase in the US on the bulk of our wood connector products, which we enacted in response to rising raw material costs. As we mentioned on our last conference call, we have a process in place to help…

Thank you, Karen, and good afternoon, everyone. I'm pleased to discuss our third quarter financial results with you today. Our consolidated net sales for the third quarter of 2018 were $284.2 million, up 8% compared to $262.5 million in the third quarter of 2017. Within the North America segment, net sales increased 12.5% year-over-year to $239.9 million, primarily due to increases in average net sales prices and sales volumes resulting from steady home construction activity. In Europe, net sales decreased 11% year-over-year to $42 million. Net sales in Europe were negatively impacted by reduced sales volume due to the sale of Gbo Fastening Systems' Poland and Romania subsidiaries at the end of 2017, which contributed $5.3 million in net sales for the third quarter of 2017. Europe's net sales were also negatively affected by approximately $0.7 million of foreign currency translations. In local currency and excluding the impacts on the businesses sold, net sales in Europe increased by approximately 2% year-over-year. Wood construction products represented 84% of the total net sales in the third quarter of 2018 compared to 86% in the third quarter of 2017. Concrete construction products represented over 16% of total net sales in the third quarter of 2018 compared to 14% in the year ago period. Our third quarter consolidated gross profit increased 12% to $133.9 million from $119.1 million in the third quarter of 2017, resulting in a consolidated gross profit margin of 47.1%. Compared to the third quarter of 2017, our gross profit margin increased by approximately 170 basis points, primarily due to increases in average product prices, which decreased material and factory and overhead costs as a percentage of net sales. On a per segment basis, our gross profit margin in North America increased to 48.8% from 47.3% in the prior year quarter…

[Operator Instructions] Our first question comes from the line of Daniel Moore from CJS Securities.

First question, just a little bit more macro. Karen, when you described the demand environment looking out into Q4 is steady, maybe just elaborate on whether that indicates continued kind of low to mid-single digit growth. And just more generally, a lot of fear out there on the part of investors. So, what are you hearing and seeing from customers? Any evidence that rising rates are starting to take their toll on housing? Just your -- an updated outlook would be great, and a quick follow-up.

Sure. As you know, Dan, and as we've stated, Q1 and Q4 are traditionally a little bit slower in the building industry just from the standpoint of what's going on with weather conditions. We think as you look into some of the hurricanes that just hit in the South, that could put a little bit of pressure on new construction as they're working on sort of a clean-up and rebuild. We have seen at least a strong October at this point compared to where we were a year ago October, but we certainly always see typical type of slowdown from weather conditions as we get into Q4. From the standpoint of interest rates, I think there's always a concern whether we're talking about interest rates or labor availability, and we can just kind of continue to work -- what we're seeing so far is again a fairly strong October, and we'll have to just see how November and December plays out.

Helpful. Appreciate it. And then more micro. Great color on the -- your updated efforts in terms of inventories. I guess one, as you continue to work down inventories, are you seeing any push back for operational challenges? Number one, we're still confident there. And number two, maybe just quantify the impact if possible of your strategic decision to increase raw materials here in the short term.

Yeah. Great question. And as you said, we are working very diligently on certainly the elements of that inventory we can control. So we've got our SKU reduction, it is well underway. The lean initiatives that we've put in place at our plants have been very effective and efficient. I think you see that in that reduction of that finished goods and work in process, but certainly the concern about what we see from steel continuing into third quarter, we just want to be sure that we're covered from the standpoint of having inventory available to us. And so we don't want to make a bad business decision based on that inventory turn number, especially when we really want to be sure that we've got steel key element for us to have our business. So, we mentioned the increase that you see in the -- the inventory is predominantly from raw materials, and again that's just ensuring that we're going to have steel availability as we continue throughout Q4.

Lastly, and I'll jump out. Given you're already down below 27% OpEx as a percentage of revenue and the strides that you've made, does the 2020 goal start to feel a little conservative, or are there incremental expenses and investments that we should be thinking about that might offset some additional gains going forward? Thanks.

Yeah. Great question. And again, I would want to certainly complement everyone at Simpson. I mean, everyone has done an excellent job of looking at their departments, and where the opportunities were to take cost out of their departments and out of that SG&A, and we've been very aggressive with that target. I think it's a little bit too early to be recasting anything from the 2020 standpoint. As you can see, we've done a really good job of holding that SG&A not only at a percent basis, but also in absolute dollar basis. So, that's really a complement to everyone here within the company that’s had that within their targets.

Our next question comes from the line of Tim Wojs from Robert W. Baird.

I had a couple of questions just to kind of run through here. I guess, in North America, is there any way to think about how much of the 12% growth in the quarter was price versus volume?

You have that?

Yes. We don't have the specific breakdown. It was a bit of both, volume and price.

If I said half and half, would that be kind of in the ballpark?

I think so. I mean, give or take a little bit, I think that would be about right.

Okay. And then just on the SG&A guidance for the year, the 28.5% of sales. I think year-to-date, you mentioned you're about 27%. So, it implies a pretty substantial uptick in the fourth quarter, and I think there might be some seasonality there, but I guess what kind of upticks in the fourth quarter there for you guys in the SG&A side, especially since I think you had some restructuring charges to that line last year?

Tim, you're right around this. You're correct about the seasonality, and then also we've got success-based fees from consultants that we're projecting for the balance of the year. And as we look at wrapping up the year in the activities associated with our SAP implementation and the like, modeling out some there as well.

Okay. Got you. And then the difference between the two product businesses, so concrete has grown, I think, close to high teens in terms of growth rates this year. And in the third quarter, the wood product business kind of decelerated to kind of 6% growth. What -- was there anything particular there that's worth calling off? I think, it's been kind of mid-teens over the last prior couple of years.

Well, Tim, I'll chip in. On the concrete space, as we mentioned, we've been very active on our mechanical anchors, being able to set some additional sales there in the Home Depot, in addition to the 8 foot sets that we're working on. So that’s certainly helped. The other thing we're seeing in the concrete space is some of our jobs that we do on the carbon fiber are very significant in size and we're having some nice improvements in that area, so those have contributed. I think on the wood side, as we've talked about, even though we are pretty steady here and solid in October, as we looked into second quarter, you've got hurricane issues, and even those happened sort of late in the quarter. It's the prep that's going on. So, it's not only just when the hurricane hit, but it's the weeks -- we preparing for it. I think that's really what you're seeing.

And then last one, just on the inventory, the raw materials, was that kind of a one-time thing in the third quarter or do you expect that to kind of continue into Q4?

No, I think, as you look at that, we wouldn't expect a big -- another big swing in Q4.

Our next question comes from the line of Steve Chercover from D.A. Davidson.

So, yeah, congratulations on the progress you’re making towards the 2020 initiative. I guess my question is, first one, somewhat along the same lines with respect to the growth. I mean, so you indicated it's part price and part volume. I mean, first of all, would price even be lumped in with organic growth?

Well, when we had an issue, when we put out our initial 2020 targets, we did not project or put in price increases into those numbers. So, when we had that CAGR through 2020, it was an organic volume and market share based projection without price. But when we think about that number, it's more around, are we buying businesses and adding revenue via acquisitions, and the intent then was to indicate that that goal did not include any acquisition-related revenue.

And evidently, the deal that you did earlier this year for LotSpec, I mean, that's a software deal. So, maybe we shouldn't expect it to have traction immediately, but did that contribute anything?

Not material, that was primarily acquisition of an asset of the software and the developer.

So, is there a bit more pending from that 11.5% wood connector price hike that we should see in Q4?

Yes. Hi, Steve. I think as we mentioned, you know, the -- we would anticipate we didn't get 100% of that in Q3, and we would anticipate seeing 100% of that by the time we get to Q4. I would reiterate that the 11.5% price increase was only on US connector business. And just as a clarification point, again we got substantially -- got the substantial amount of that 11.5%, but not the full percent, full 100% of it.

Okay. I'll switch gears then. So, with respect to the repo, and I'm not trying to say uncritical, but you bought back about $60 million worth of stock, about $12 higher than the current share price. So, I'm just wondering, with the remainder of the authorization or perhaps any subsequent authorizations, will you be more opportunistic or nuanced?

Yes, I mean, I think we would have to take a look at what the opportunities are for the cash as we've always said, and would be opportunistic when we look at stock purchases.

And then final question, and this is kind of a bigger picture question. But, have you been paying attention to the emergence of mass timber construction, have you been partnering or doing research with any of the guys who are doing that cross laminated timber?

Yeah. Great question. Certainly something we're seeing in the industry is the cross laminated timber. We are engaged in research projects with cross laminated timber at a couple of different universities, and there is also a couple of large companies that we are engaged with our product and doing some R&D projects with them. So, we have our engineers working very closely in that space.

[Operator Instructions] Our next question comes from the line of Julio Romero from Sidoti.

So, just wanted to start high level, I guess, what are the organic growth drivers in your 2020 Plan? Is that mid-single digit range for housing starts [Technical Difficulty] in the quarter were up 3%; year-to-date, I think they're about up 6%. But in the South and West, they've always been a little bit higher. I mean, is this run rate kind of good enough for your 2020 Plan or do you kind of need -- do you need high single-digit growth in the south and west for you to hit your targets?

Yeah. Julio, that’s a great question. As we mentioned, third quarter over 2017 third quarter of about 3.5%, and I think you mentioned for the year about 6%. We've mentioned, as we will always put more content in those houses, if they're in the southern parts of the states and certainly the western part of the states. So as you look at the single starts in those locations, they become predominantly a bigger market opportunity for us than some of the other areas. When we looked at our 8% compounded annual growth rate, we did look at mid-single digit sort of as a generic number, not specifically needing a certain target in any of those particular regions, but really staying fairly consistent with how the housing starts had gone over the past.

Got it. And we've certainly seen housing affordability concerns. If there is a mix shift in the industry towards kind of lower price point homes going forward, how does that shift -- how do you see that shift translating into your business given your value prop of high service, high delivery? Just trying to parse out the effect on your business.

Yes, I mean, specifically, we would see, if we were looking at a lower price point house, whether we're talking about a smaller square footage, an entry-level type of house, again for us, it's really key where that house is located. So, even if you have a more entry-level type house from a size standpoint or a pricing standpoint, if it's built in those western and southern areas, it still has to meet the engineering design for those seismic and high wind concerns. So, we would still see higher volume of product that we would put in those types of locations. So, it's really a function of, as I mentioned in the past, where those houses are built is a function of how much content we'll put then in.

Okay. And maybe just a last one here. So, I understand you used your big steel consumer and you sourced a pretty good portion of it domestically. How is that playing out with rising steel costs and the NAFTA renegotiation, are you seeing any import competition for certain product lines? And if so, how much of the product line would be at risk to that import competition?

Yes, so we predominantly buy all of our steel domestic from US steel manufacturers. So, we don't bring in from Canada or Mexico. So, NAFTA is not really affecting us there. As I mentioned in the past, these tariffs have really allowed the US manufacturers to increase their price and put some steel on allocation. That's really what we're seeing and why we are ensuring that we have both steel again from pricing as well as availability standpoint. I think not quite sure what our competitors are doing from a steel standpoint, don't really know where they buy the steel. But as you look at what's happened in the tariffs, it's really kind of made it an even playing field whether you're bringing -- buying US or you're bringing in importing.

Thank you. Ladies and gentlemen, we have no further questions in queue at this time. And this does conclude our program for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.