Greetings and welcome to the Simpson Manufacturing Company's Fourth 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. I would now like to turn the conference over to your host, Madeleine Myers, Investor Relations. Please go ahead.

Good afternoon, ladies and gentlemen and welcome to Simpson Manufacturing Company's fourth quarter and full year 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. 2018 was a year of solid operational execution at Simpson. We achieved consolidated full year net sales of approximately $1.1 billion, an increase of 10% from $997 million in 2017, due to increases in both sales volumes and average unit prices. This, combined with our focus on cost cutting initiatives, resulted in our full year of 2018 operating income of $176.2 million, increased 28% compared to the prior-year period. Net income increased by 40% to $129.5 million and we produced strong earnings of $2.78 per diluted share, an increase of 43% year-over-year. Throughout 2018, we repurchased $111.1 million of our common stock, a record for Simpson, reflecting our continued confidence in the strength and outlook for our business. These results represent solid progress towards our key financial targets under the 2020 Plan, which we announced in the third quarter of 2017, with the goal of maximizing operating efficiencies and driving long-term shareholder value. Today I'm pleased to confirm, we remain focused on achieving these aggressive targets. These include: achieving our organic net sales compounded annual growth rate of 8%; reducing our total operating expenses as a percentage of net sales to the 26% to 27% range to result in an 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%. As part of our 2020 Plan announcement, we also provided specific benchmarks to achieve in fiscal 2018. These included: operating expenses as a percent of net sales in the mid-29% range which we adjusted mid-year to be the mid-28% range; a gross profit margin between 38% to 39% for our Concrete business; and a European operating income margin of approximately 5% excluding our SAP, severance and goodwill…

Thank you, Karen, and good afternoon, everyone. I'm pleased to discuss our fourth quarter financial results with you today. Our consolidated net sales for the fourth quarter of 2018 were $241.8 million, up 4% compared to $231.7 million in the fourth quarter of 2017. Within the North America segment, net sales increased 7% year-over-year to $204.7 million, primarily due to increases in average net sales unit prices. In Europe, net sales decreased 9% year-over-year to $34.9 million. Europe net sales were impacted by reduced sales volumes in our concrete business as we experienced strong demand for asphalt paving products in 2017 that did not repeat in the fourth quarter of 2018 at the same level. Europe net sales were also negatively affected by approximately $1.3 million in foreign currency translations, primarily related to the weakening of local currencies against the United States dollar. Wood construction products represented 84% of total net sales in the fourth quarter of 2018 flat compared to the fourth quarter of 2017. Concrete construction products represented 16% of total net sales in the fourth quarter of 2018. Our fourth quarter consolidated gross profit decreased approximately 3% or $3.5 million to $98.4 million from $101.9 million in the fourth quarter of 2017 resulting in a consolidated gross profit margin of 40.7%. As Karen highlighted the year-over-year decline was primarily due to increased factory and overhead costs on lower production, higher material costs, including higher priced steel and higher labor costs resulting from tightening labor market conditions. On a per segment basis our gross profit margin in North America was 42.3% compared to 46.2% in the prior year quarter. In Europe, our fourth quarter gross profit margin was 31.7% compared to 34% in the year-ago period. Our Europe gross margins were pressured by a year over decrease in…

Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Tim Wojs with Robert W. Baird & Company. Please proceed with your question.

Good afternoon, everybody.

Hi, Tim.

Hi, Tim.

I guess my first question, maybe just -- could you elaborate just a little bit on what you think stable growth means? Should we expect the rate to be kind of stable with Q4 levels, kind of, stable with 2018 levels? I'm just trying to kind of understand how the volume cadence kind of played out through the quarter and kind of what those volume numbers look like in January more explicitly, please?

Yes. Tim, I think, we are still thinking that the starts are going to be in, again, low to mid-single digits. We would -- again, continue to reiterate, when you look at our business, very cyclical, very common for fourth and first quarter to be lower volume numbers and second and third quarter to be actually our largest numbers. So we had a December that was pretty low on a volume standpoint as we've mentioned. We've seen it come back in January, not only from just the price increase, but also we have seen organic volume growth in January. So a little early to tell what the year will look like, since we're in the first quarter and that's always a tough one when depending on what weather conditions are. But we're anticipating, again, that mid to single-digit growth on housing starts.

Okay. And would you expect that to maybe be weighted more towards the second half kind of Q2 at all? I'm just trying to think through how you would expect that to kind of play out because it's actually me start a little down here in the first quarter.

Yes. I mean, again, just based on weather conditions and what historically we've seen from our growth cycle second and third quarter always our largest periods of growth.

Okay. And then when we think about just kind of gross margin and some of the modest improvement there you're expecting through the year, is there any sort of kind of cadence to kind of keep in mind on a quarterly basis? I mean, would your production levels be down at all maybe in the first half if you need to right size your sort of inventory? Or I'm just trying to think of I know the gross margins were a little stronger in the first half -- first three quarters of the year and obviously a little weaker in the fourth quarter, so just how should we think about gross margins as we go through the year?

Hi, Tim. It's Brian. I would expect that as we have a greater selling activity to support customers for the busier building season, we absorb more overhead during those periods. So, of course, second and third quarter typically traditionally are a little bit better. On the gross margin, all things being equal than first or fourth, again from a factory-absorption perspective. We've noted that it's a tight labor market and we're seeing that impact on our gross margin there particularly in the fourth quarter that was one of the elements there. But as we look at 2019, we would expect second and third quarter to be a little bit better than first and fourth again just from a volume perspective.

Okay. Okay. And then I know you kind of reiterated the SG&A target for the 2020 Plan. Do you have anything kind of explicitly that you are targeting for SG&A whether it's growth or as a percent of sales for 2019 at all?

It's Brian again. So we would expect SG&A that's all of the elements of those to be approximately 27.5% to 28.5% of net revenues for 2019.

Okay. Okay. So just kind of gliding towards that 26% to 27%? Okay. And then…

Correct.

And then just last question, do you have any -- in the gross margin guidance, do you have any benefit from just kind of the moderation that we've seen in steel incorporated into that range?

Not necessarily. I mean, the way we're thinking about that is -- as we mentioned in the third quarter, due to availability, we increased our raw materials -- raw material and we’ll need to sell-through that. So that guidance that we've given is estimating that it will take us a while to work through, the current on-hand raw material, and then of course will be back in the market buying more throughout the course of the year. I'd say, it's a little early yet right now to specifically comment on your question there, but how we're looking at 2019 in that gross margin range is taking into account that growth that Karen had noted in addition to our current on-hand inventories.

Okay. Okay. Great. I'll hop back in queue. Good luck on 2019.

Thanks, Tim.

Thanks, Tim.

Our next question comes from the line of Daniel Moore with CJS Securities. Please proceed with your question.

Good afternoon, Karen. Good morning, Brian. Thanks for taking the question.

Hi, Dan.

Hi, Dan.

I wanted to try to drill down a little bit and get a little bit more granularity on gross margin in Q4, specifically North America, if we look at the roughly 400 basis point decline year-over-year. Can you give – is there any way to give a little bit more specifics in terms of impact of factory overhead on lower production and just absorption number one, number two, raw materials warehouse cost, number three, labor? If not to the basis point, maybe just kind of rank order so we get a little bit better sense of those moving parts?

Sure, Dan. This is Brian. I would say that, the factory and tooling as a percent of revenue was the highest. So, as we think about spend and absorption of that spend, so spend was up and – so with increased dollars and the volumes being what it was that one has the biggest impact. I'd say material, would be next, again as a percent of revenue, followed by direct labor and then our shipping and warehouse cost.

Got it. Very helpful. And this maybe piggybacking on the last question, but as we think about the guidance, do you think it's reasonable to get back towards that lower end of your full year guidance range for Q1? Or is that more of a ramp as we get into the year given seasonality and maybe some of the weather related softness that you described?

Right. I would say that, it's – the year amount that we’ve – the year estimate that we put out there, we've not specifically broken out the individual quarters. But as I mentioned earlier, the first quarter is typically aren't going to be as good as – the first quarter wouldn't be as good as Q2 or Q3, and then again moderating on Q4. But we're looking at the annual for that range and haven't put out a Q1 gross margin guidance.

Got it. And then lastly, the revenue job that you experienced in December, obviously well documented kind of softness – saw passion in anything housing related. But what have you heard from your customers in terms of explanations? Do you see them pulling back on inventory materially? Any sense of where they are in terms of those inventory levels, any color around that would be great?

Yeah, Dan. This is Karen. It's tough for us to tell exactly from our customers on an inventory standpoint, as you know we can get products to our customers in the 24 to 48 hour timeframe. So, if they chose to pullback a little bit on inventory, they certainly know that we would be able to support them in January and maybe that's a part of what we're seeing. But again, because we're not engaged in their inventory, it's real tough get very precise on that. I think just a lot of the economic uncertainty that we saw especially in the November and December timeframe seems like it impacted all the building industry and we were certainly a part of that also.

Got it. Thanks. I'll jump back in queue if I have any follow-ups. Thank you.

Thanks.

Thanks Dan.

[Operator Instructions] Our next question comes from the line of Steve Chercover with D.A. Davidson. Please proceed with your question.

Thank you and forgive me, I was a little distracted on the call. But could you give us any geography locations where the housing activity really fell off in Q4 or in December as you said?

Yes, Steve, that's an interesting question. As you now the housing perks are -- the numbers are not out because of the government shutdown, so we still don't have the December housing numbers. So, that's one thing that doesn't give us a good indication. The other thing I would just say from a standpoint of what we're seeing in the weather, certainly in the Western states, we're having a pretty significant winter this year. And that definitely started somewhere in the November-December timeframe. So, don't have anything specific on it and we'll have a little bit better information once that starts numbers come out. But it's real hard for us to really delineate anything specific in those regions. Again, we're kind of seeming what appears to be a normal fourth quarter-first quarter slowdown.

But to be fair you don't really need the housing statistics from the government to know where you traditionally sell? So, I mean did you see it in Florida? Did you see it in California?

Yes. I mean again as I mentioned we saw what would be our normalized slowdown that we would see in that fourth quarter timeframe and that's really a function of when weather hits.

Yes, I would think -- Steve, it's Brian, I would think that we should see some softness in the West housing starts and the South based on internal figures that we have here. So we are really interesting once those come out and see how the Census Bureau starts correlate, but I would say that should be again less than South issue.

Okay. And the 8% organic growth that's embedded in your 2020 Plan, do you expect to see that this year? Or did the late 2018 pause give you concerns that that might not materialize in FY 2019 and I recognize you said things would snap back in January?

Yes, as we look at that 2020 Plan, again, that's an 8% compound annual growth rate starting in 2016 and continuing through the end of 2020. We're tracking very nicely on that particular metric. Again as we talked about there's other elements that we're working on from that growth standpoint, the mechanical anchor line that we're looking to introduce in Home Depot that's not really tied to us, the housing start number; the work that we're doing in Europe to roll out our fastener line in Western Europe and then our connector line in the Nordics. So we have some elements definitely of that 8% CAGR that are not associated just with housing start number.

Okay. And then finally, since I'm not invited or I don't attend, but there's a big housing show I believe in Las Vegas every year I think it's coming up and I'm just wondering if you have any new initiatives to propel the trust offering that will be more prominent this year than the years passed.

Yeah, so the Las Vegas show that's International Builders Show. That's coming up in two weeks, I think in Las Vegas. Definitely the show where we showcase our trust offer that happens at the Component Manufacturing Show and that one's in October. At the Builders Show, again we tend to showcase any new products that we have whether it be in our fastener line or carbon fiber or connectors, but that's not really an emphasis on the trust software that's -- again that was that in October. That was a very successful show that we just had in October with Building Components, showed our products, our trust offering, our software to a significant number of component manufacturers, and are getting some good results with those that are interested in converting to our program in the next few months.

Okay, and I guess final question forgive me. I love to see the repo, give us a great message to the shareholders and a good disciplined return, significant part of your excess cash. Has there been any thought given to – inserting more nuance into how you actually do it? I mean, my gut says your stock might be a little bit weak tomorrow, is it kind of on autopilot? Are you trying to get more dialed in as you become deeper into this initiative after several years?

Steve, its Brian. So on that I would say that we've used a couple of mechanisms to do share repurchases. We've used accelerated share repurchases, we've used 10b5-1 plans, of course, those need to be initiated during open trading window periods. So yes we'll be looking at trying to achieve that 50% return to shareholder goal throughout the year, and we'll provide more updates as we get further along the year. As it relates to the dividend we've -- the board typically looks at --- well, they've discussed -- we discussed capital allocation throughout the year, but in over the last few years the board has typically increased the annual -- the quarterly dividend on an annual basis at their April meeting and we'll discuss that along with share repurchase levels. As we noted there's $100 million authorization for 2019 and we'll see how that -- we'll see where that -- those take us throughout the course of the year.

But just to clarify, the board does have an intrinsic sense of the enterprise value or the -- yes, I guess the enterprise value that is incorporated into the capital allocation decision?

Correct.

Yes.

Okay. Thank you, both.

Thank you, Steve.

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

Hey, good afternoon. Thanks for taking the questions.

Yes.

Hello, Julio.

So can you talk a little bit more on the European segment and what caused those lower sales volumes? I think I might have heard you mention, there were elevated sales in the prior year quarter, so if you can elaborate on that at all?

Sure. So part of our European business, our Concrete business over there has products, carbon fiber products for potentially large jobs. So asphalt paving products, runways and the like and got some large jobs in Q4 of 2017 that we didn't have at the same level in Q4 of 2018. So not that the entire European businesses is this large job-based business, but there is a bit of that impact, European Concrete business related to larger projects, that sales are recognized when those projects are being conducted. So sometimes there's a bit of a timing issue on the comparability.

Okay. And then just, I think, we've spoken about this before, but can you just talk about again how building maybe above code, resiliency can be a driver for you guys in the long term? And how should we think about maybe best guesstimate for a repair and remodel as a percentage of sales?

Sure. I think, we've talked about the codes. Again, there's one national code and you've required to design to that as a minimum standard. They recently typically will put more content in the structure when it's on the West Coast or anywhere along the coastal areas, it's due to the earthquake or high-wind requirements. The codes are looking at potentially designing to something called resiliency versus life safety. And I think there was a really nice example of that when Hurricane Michael hit Mexico Beach. I think many people have seen this one house was standing called the Sand Palace that was built to about a 50% higher than standard building code practices, basically it was able to withstand a Category 5 hurricane. So a lot of interest about being able to build to resiliency versus life, just to life safety, what would it cost, what would it create? When you think about code change, I think that's a change in the positive direction, because what you see is entire communities devastated. There are no houses, there are no schools, there are no jobs to come back to. So this concept of maybe changing those design standards is an interesting conversation that's occurring. And as I've mentioned, when you think about code changes, typically they take many, many years to enact. It is quite interesting that people are starting to talk about this and then they actually have a proof-of-concept in this house that survived that Category 5 hurricane. So certainly, it would be interesting, where we will stay on top of that, but that is not a near-term code change. My guess is you’re 7 to 10 years out before someone would be willing to adopt those code changes.

Helpful. And just on repair and remodel, I mean, I think what would kind of be a fair range of what would that be as a percentage of sales?

Yes. We are -- as we’ve mentioned in the past, tough for us to give a specific number. We're certainly working on trying to get a better handle on that. And the real reason is again the same products can be used in new construction as well as repair and remodel and they go through the same distribution channel. Obviously, we have some products like our Outdoor Accents, that's really a repair and remodel type of project so we can track a few products, we can track a few types of distributors, but we're definitely working on getting a handle around better ideas of how much of the business goes to repair and remodel. As we've brought the fastener line in, I think that's been able to expand that opportunity in repair and remodel. So I don't have a specific number for you, but definitely we are putting more products that go into that consensus and house additions, the garage organizers, cargoloads all those sort of things.

Okay, fair enough. Appreciate, you taking the questions and good luck in 2019.

Thank you.

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

Thank you again. And I apologize if this was asked in a different form previously. But just – Karen as it relates on your comments about January's demand being described as strong. How does that dovetail with the expectation for kind of that low-to-mid single-digit growth in housing starts for the year? Is that level of more kind of stable flat just what are you seeing so far in the quarter?

Yes. And again, it's always difficult to pick a quarter based on one month. But we definitely saw organic growth in January at a fairly decent pace. Will it continue? Hard to tell again, we're February 4th or something here. And it's also hard to know on that, January was that some filling of warehouses. As we mentioned that’s real tough for us to see from a distributors standpoint, but definitely the January increase is not just based on the price increase. There is definitely organic growth in that January number.

Perfect. Appreciate it again. Thank you.

Okay, thanks Dan.

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