Greetings, welcome to the Simpson Manufacturing Company Incorporate First Quarter 2019 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] Please note this conference is being recorded. I will now turn the conference over to your host, Kim Orlando, Investor Relations. Ms. Orlando, you may begin.

Good afternoon, ladies and gentlemen, and welcome to Simpson Manufacturing Company's first quarter 2019 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 or 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 solid start to the year with our first quarter 2019 net sales increasing 6% year-over-year to $259.2 million, primarily due to higher average selling prices. Our sales volume was relatively steady with the fourth quarter of 2018. Although, it was down on a year-over-year basis due to unusually wet and cold weather conditions across the U.S., which negatively impacted our sales volume as it relates to our connector products. That said, our sales volume in the concrete space was up nicely year-over-year, mainly due to the continued roll-out of a mechanical anchor products into the Home Depot stores. U.S. housing starts which are a leading indicator for approximately 60 percents of our business remains soft, following the challenging fourth quarter and strong first quarter last year. This was especially true in the western and southern regions of the U.S., which were impacted by adverse weather conditions. However, we believe there are many underlying factors to support healthy growth in U.S. housing starts, including strong consumer confidence, extremely low unemployment rates, declining interest rates, and a low level of housing stock availability. Looking ahead to the second quarter, we expect demand to improve with the month of April already off to a solid start during improved weather conditions. Over the long term, we remain cautiously optimistic that U.S. housing starts will increase at an annual mid-single digit rate over the next few years. Our first quarter gross profit margin of 42.5% was pressured by increased material and labor costs, plus unabsorbed factory costs attributed to lower volumes. While the current microeconomic climate has negatively impacted our gross profit margin, we continue to maintain one of the highest gross margins in the industry due to the longstanding brand reputation we've built through our…

Thank you, Karen, and good afternoon everyone. I'm pleased to discuss our first quarter financial results with you today. Our consolidated net sales for the first quarter of 2019 were $259.2 million, up 6% compared to $244.8 million in the first quarter of 2018. Within the North America segment, net sales increased 7% year-over-year to $221.4 million primarily due to increases in average product prices and sales volume. In Europe, net sales decreased 1% year-over-year to $35.8 million, primarily due to negative foreign currency translations resulting from Europe currency's weakening against the United States' dollar. In local currency, Europe net sales increased primarily due to both higher sales volume and average product prices. Wood construction products represented 84% of total net sales in the first quarter of 2019 compared to just under 87% in the first quarter of 2018. Concrete construction products represented 16% of total net sales in the first quarter of 2019, up from 13% in the first quarter of 2018. Our consolidated gross profit dollars increased by approximately 2% year-over-year to $110.3 million, resulting in a gross profit margin of 42.5%. Compared to the first quarter of 2018, our gross profit margin declined by approximately 180 basis points. As Karen highlighted, the year-over-year decline gross profit margin was primarily due to increased raw material costs including higher priced steel and higher labor costs resulting from tightening labor market conditions. On a segment basis, our gross profit margin in North America was 44.4% compared to 46.9% in the prior year quarter. In Europe, our first quarter gross profit margin improved to 32.3% compared to 31.9% in the year ago period. From a product perspective, our first quarter gross profit margin on wood products was 42.3% compared to 44.8% in the prior year quarter, and was 39% for concrete…

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

Good afternoon, Karen and Brian. Thank you for taking the questions. Let's start off with on the gross margin line, can you provide a little bit more color or perhaps quantify the impact of both steel prices and labor costs inflation? Kind of a year-over-year basis in terms of gross margin and with steel prices leveling off, do you see the gross margins in Q2 bouncing back to the range you've provided for the full year or might that take a little bit more time? Quick follow up, thanks

Sure, Dan. This is Brian. So, we still affirm our guidance there based on or the gross margin guidance we've given. Yes, we had the pressure on gross margin due to material. As you recall, last quarter, we commented on making some steel purchases, so that we have an adequate supply. And during the allocation, we were purchasing at a higher price than what was occurring earlier in the year. But we would expect that as we work through that inventory, it takes a couple of quarters, couple of few quarters that we would still expect to achieve our gross margin guidance. Labor had also that impact, that material had more of an impact on gross margin than this labor, but if we were to order them in magnitude, material first, labor second,

And would absorption be third behind those two?

Right.

Got it, helpful. And then, the R&D tick up a little higher, you've mentioned increased personnel costs is the 12 million plus kind of a good quarterly run rate to think about? Or is there anything unusual in the quarter?

No, nothing unusual during the quarter there, we -- at the beginning of the year, we put in on a standard wage rate increased soon as them like. So, I would expect that to be a fairly normal Q1 from that perspective. Karen, do you have any other thoughts on that one?

Yes, sometimes, you know, it's just we have code reports coming in place and that sort of thing, but nothing really unusual from the standpoint of what's happening in R&D.

Got it. And then lastly, for me anyway, and I recognized that this is a really but it's still a year to go in your 2020 plans. Once, we get through the cost reduction and obviously some work to do on the inventory management side still, when do we start to turn your attention toward priorities for the next two to three year plan in terms of capital allocation, growth, diversification? When do you expect to update investors? I know you're still in the execution phase right now, but just kind of looking ahead. Thank you very much.

Yes, that's a great question. Obviously, we're very highly focused on accomplishing the metrics that we put it in place for the 2020 plan. And as we've mentioned, we've got headwinds on a few of those and certainly some work for us to do. We're always looking at what our go forward strategy would be and we're not at the point where we would be ready to make that public information, but speak where that we're certainly working on what are the things that we want to do in the future from a growth standpoint and how those impacts, all of our metrics as well as you know the effects on the shareholders. So constant conversations that are going on work within the system management team and the board, and when we have something a little more defined, we’ll be ready to share that with investment community.

Okay, I'm going sneak one more in April. Could you give us a sense for overall volume growth and revenue growth for the month of April?

Yes, April was definitely a nice to see you as we mentioned, we were pretty slow in the first quarter, I think, pretty significant impact from the weather conditions, especially compared to 2018 where definitely in the West Coast we had a very, very dry weather compared to this year where we had quite a bit of rain and snow, and I think that was pretty consistent even across most of the countries. We did see improvement in April across all of our regions, little bit stronger in the West, but definitely improvement across all of our regions.

Our next question comes from Tim Wojs, Baird. Please proceed with your question.

Maybe just going back to the last question there, I guess, where volumes positive on a year-over-year basis in April, I'm just trying to turn -- because it sounds like they were down in the first quarter. And I'm just curious, if things just improved sequentially, if the volumes were actually up year-over-year in Q2?

I would think volumes are up a little bit there for sure in April.

And then, if we look at the gross margins in the concrete business, they -- it's been really nice sales for the last couple years and I guess as you kind of look maybe longer term. What's the right kind of margin level on a gross margin basis for that concrete business? I think, it's gone from really kind of a low to mid 30s to now something that's approaching your -- approaching 40%?

Yes, that's a great question. So, I think the concrete margins that team has done an excellent job of refocusing on our new strategy and really going after those six target markets where as we mentioned, we have an extensive product line, we have a big customer base, and we're able to differentiate our product. And obviously, that helps us from a gross margin standpoint. I think the wood margins will still exceed what we get in a concrete gross margin, but we're still pushing that team obviously to maybe get even slightly better than where they are now and they're doing a very nice job. Also helping the gross margin obviously from an overhead absorption is the volume that we have coming in place. So, the roll-out of the mechanical anchor line into the Home Depot really helps us from a volume standpoint, which helps our manufacturing costs and we make those products in our Xiong'an China facility. So that increased volume is helping that factory absorption. So, Tim, that team is doing an excellent job. There's more room there to have a little bit better. Margin, we're certainly looking at costs, but I think the main thing has been the focus and that focus has been on the market. We're sensing to differentiate our product line.

And then, I guess on it at Home Depot roll-out. How many stores did you -- I am not -- how many stores did you add into first quarter? I don't know -- have the Q4 number on hand?

Yes, probably about 300 to 350, so we're in 600 totals.

Probably end of the -- end of March.

Yes, end of March, we had 600 totals. So, in the quarter, we probably added around 300 with another 400 scheduled by the end of Q2.

And then, when we think about the ERP roll-out, it sounds like you've had a successful kind second launch or kind of second round? What -- when will the kind of the third and the fourth tranches of the ERP roll-out?

So, as we mentioned, we're looking at completing our North America roll-out, which should be early into next year 2020. We'll do another phase roll-out this year and we're working on preparing that location, but we should have all of our North American locations pulled out early 2022 then we will work into follow that up with our European location.

Okay, Great.

Our, yes, projection is a completion of the SAP project sometime in 2021.

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

Thank you, hi, Karen, hi, Brian. So, sorry, these aren't ground breakers, but it does sound like weather was a real issue for Q1. And I'm just wondering, do you think those stars can be recaptured in the next few quarters? Or what was lost was lost?

Yes, that's a great question, Steven. And I think it's really a function of where those starts were in the building cycle. So was the foundation in or are we a little bit delayed from that standpoint. I think from the builders perspective, there is still the limitation on the manpower. So you can't just throw more manpower at it, to catch up on those starts. I think we'll have a much better feel for that, as we get through the -- sort of the spring season. So as we get through Q2, we will have better feel whether we're going to be able to catch up. But really from the builder standpoint, it will still be -- they just can't throw more manpower at them to catch up, because that manpower is not available.

Well, that's a good segue into my next question, because it's a real source of concern for me at least. And so -- the last time I visited one of your facilities, you were looking to hire, you cited the higher labor as a source of margin pressure, and I'm just wondering, are we maxing out? I mean, is this going to be a governor on construction activity going forward, unless we change some policies?

Well, I think, Steve, there is a couple of things that are going on. First of all Simpson as well as other industry representatives are really working on trade schools, high schools and really doing quite a bit of training on trying to get people into the construction industry. So when teaching to be a framer or electrician or plumbing, the industry itself is really working on enhancing those efforts. The second thing we're seeing is we're seeing a lot of under the roof building. So people are prefabbing walls, floor systems and roofs, and then taking the components out of the job site and they're doing that as a means of helping these labor constraints. So there's definitely some areas that are being looked at and actively worked on, to help those labor issues and those are really two the main ones.

Yes. And both of those initiatives seem like perhaps even long overdue. So, if you could put it to an innings context, are we in the early innings of this initiative or have people seen this coming down the pike and realized that we've got to get young people to embrace the trades and have offsite or factory inventions for construction.

I think both of those questions kind of ebb and flow. Factory manufacturing is not a new concept. It was something that was attempted by some builders several years ago, and there was no manpower shortage, so it kind of fell off. Now, the manpower shortage really pushes this concern about, should we try to build more of this -- from a factory standpoint. When we look at labor, I think there has been such a push. You know, we don't have -- they don't teach trades in high school anymore. So there's been such a push, that that's not available. And also, I think a push that everybody needs to go to college. So there's definitely some thought process on getting people engaged in these trades associations. A lot of work with high schools and junior colleges in both of those areas and really training of this group that this is a -- it's a good role, its good area to work in, and giving them the experience to be able to walk into some of those jobs. So I've seen both of these things ebb and flow in my time here.

Sure, will not to digress too much, but I mean, Sears prefabricated homes existed 100 years ago. I mean, is there some sort of bias against a home that is perceived to be a kit?

I'm not sure there's a bias. Obviously things have changed a lot, as far as what you could do from the architectural standpoint. And I think, we see the for the under the roof kind of building going on in various aspects being looked at, as to how complete you take a project out to the job site. As I mentioned, from walls and the flooring, the roof, all the way to sort of a completed module, where you stack the modules on top. So different aspects, I don't think there's so much resistance from the buyers of the home. It's a question of logistics, how far can you ship things, there's just a give and take in each of those aspects.

Okay, and final question, switching gears. For Q1, you expect the steel prices to be flat. Now you're saying that they could actually be down in Q2. Does that -- do you want to extend the forecast for the rest of the year? You think that could be down and is it that view on steel that allows you to maintain that 44.5% to 45% gross margin?

Hi, Steven, it's Brian. Yes, that's right. We -- I don't know that we are saying that it would continue to drop from levels where it is today. Although we've seen it obviously moderate from earlier, higher prices. But that assumption is what is baked into our guidance for the year. That moderate decrease that we've seen, but I guess holding fairly steady from this point forward.

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

So I appreciate you calling out the strong start you had in April. But how optimistic should we be about year-over-year volume growth in Q2, when we consider you had a pretty tough year-over-year comparison on the volume side, in the prior year quarter?

Yes, that's a great question. And as we said, after having a pretty dismal first quarter, based on volume and weather and everything associated with it. As I said, we saw strong April in all regions, which is really encouraging and a little bit more in the West, and as we've discussed, when we have increases in the West and South, we will put more product into the content of those houses. So that's always encouraging for us. Also as we've looked at housing starts, not on a quarter-over-quarter basis, but if you just look at the February versus the March numbers, you see a little bit of an uptick into the West and the South on the start numbers. So that's also an encouraging factor.

Okay, that's helpful. And I just wanted to drill down a little bit more on that Home Depot roll-out. Think you said you're at 600 stores and should be at 1,000 by next quarter, which I think is faster than you called out on your February call. Can you just talk about if anything has changed there and is there a prospect, if you may be completing the entire store roll-out faster than anticipated?

Yes. As we said, we had -- we set 600 stores by the end of March, and it's currently available in 600 locations and there are 1,900 stores that we're working on. Another 400 are scheduled to be finished by the end of the Q2. So that would leave us another 800 to 900 stores. I don't have a schedule on how those will roll-out. But we are still constantly working with Home Depot on trying to push that rollout as fast as possible. But, as we've mentioned it, it's really finding space in a Home Depot, which is a much more difficult process. So we have continued to work with Home Depot on the schedule of those rollouts. But, I don't have anything beyond that in the second quarter numbers.

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