Greetings. Welcome to Simpson Manufacturing Company Third Quarter 2019 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Kim Orlando with ADDO Investor Relations. Ms. Orlando, you may begin.

Good afternoon, ladies and gentlemen and welcome to Simpson Manufacturing Company’s third 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 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 Investor Relations page of the company’s website at www.simpsonmfg.com. Today’s call is being webcast and a replay will also be available on the Investor Relations page of 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. I am pleased to discuss our results with you today. Net sales for the third quarter of 2019 totaled $309.9 million, up 9% year-over-year primarily due to higher sales volumes throughout almost all areas of our company. U.S. housing starts, which are a leading indicator for approximately 60% of our business, grew 4.1% versus comparable period last year. Notably in the south where we provide a meaningful amount of content into homes, starts grew 8.3% year-over-year. Our volumes were also up from the second quarter of 2019 due primarily to the unusually wet and cold weather conditions we experienced across the U.S. in the first half of the year. Our third quarter net sales increased even though we experienced a labor strike by one of the unions representing hourly employees at our Stockton facility through most of September which was in large part due to the successful execution of our contingency plan. I am pleased that through good faith negotiations with the union we reached a new 4-year collective bargaining agreement in early October that we believe is fair to our employees and representative of the labor market that exists in the Central Valley, where this plant is located. We strongly believe the resolution will provide many more years of economic growth for the Stockton facility and community. And I would like to thank all of our employees throughout our company who helped us through this process. Looking ahead into the fourth quarter, it is important to remember our volume maybe impacted by the typical Q4 seasonality that we experienced as a result of fewer shipping days from holiday related closures and a slowdown in construction activity due to the winter months. We still believe there are many underlying factors to support healthy growth…

Thank you, Karen and good afternoon everyone. I am pleased to discuss our third quarter financial results with you today. Our consolidated net sales for the third quarter of 2019 were $309.9 million up 9% compared to $284.2 million in the third quarter of 2018. Within the North America segment, net sales increased 10.7%, year-over-year to $265.5 million, primarily due to increased sales volume and higher average product prices. In Europe, net sales increased slightly by 0.5% year-over-year to $42.2 million, despite the impact of the negative foreign currency translations, resulting from Europe currencies weakening against the United States dollar. In local currency, Europe net sales increased primarily due to increases in both volume and average product prices. Wood construction products represented 83% of total net sales in the third quarter of 2019, compared to 84% in the third quarter of 2018. Concrete construction products represented 17% of total net sales in the third quarter of 2019, compared to 16% in the third quarter of 2018. Our consolidated gross profit dollars increased by approximately 3% year-over-year to $137.6 million, resulting in a gross margin of 44.4% compared to the third quarter of 2018, our gross margin declined by 270 basis points. The year-over-year decline in gross margin was primarily due to increased raw material costs, factory and overhead costs on lower production as well as higher labor costs resulting from tightening labor market conditions. On a segment basis, our gross margin in North America was 45.6% compared to 48.8% in the prior year quarter. In Europe, our third quarter gross margin was 38.4% compared to 38.2% in the year ago period. From a product perspective, our third quarter gross margin on wood products was 44.4% compared to 47.3% in the prior year quarter and concrete products decreased to 41.6% compared…

[Operator Instructions] Our first question is from Daniel Moore, CJS Securities. Please proceed with your question.

Karen, Brian, good afternoon. Thanks for taking my questions.

Good afternoon, Dan.

Just starting with Q3 relative to Q2 in terms of whether any way to quantify how much revenue North America may have benefited from delayed volumes in Q2 given much tougher conditions early in the year?

I think that would be tough to get you a metric associated with that volume. As we stated in Q2, I think it was one of the wettest first half of the year that we have seen. And so I don’t have exactly what that push of volume would have been into Q3. We started seeing a little bit of improvement I think as we were kind of coming out of June.

But due to the lack of labor, I don’t know that we would be able to necessarily catch up and continue with the volume in Q3, just due to the lack of those skilled labor positions in that industry.

Understood. Yes, that makes certainly makes sense. I guess, as it relates to the strike, congratulations on settling that. Were there any revenue and or operating income impact in Q3 and any lingering impact into the first couple of weeks, Q4?

Yes Dan, it’s Brian. We would expect approximately 2% to 3% impact on revenue that would be more likely than not pulled into the fourth quarter. And based on that, there was unabsorbed overhead probably 20 to 30 to 40 basis points of gross margin impact, net to the negative in Q3. So – and the reason I’m saying approximately is obviously volumes can fluctuate on a day-to-day basis. So, we don’t know exactly how much we would have shipped in September, but that’s our best guess at this time.

Okay. The gross margin impact I understand I’m just trying to understand, the revenue to 2% to 3% impact on Q4, is that volumes that will – do you think you’ll incur in Q4 that you couldn’t in Q3 or just help me understand that commentary. Thank you.

So, sorry, to clarify 2% to 3% on Q3 revenue.

Got it, got it. Impact on Q3 revenue, okay. And then, you gave good commentary, one more from me just in terms of COGS and steel inventories. How much longer do we expect to be working through the kind of higher cost steel – higher cost inventories? I know you mentioned through Q4, could that bleed into Q1 at all or we expect to be largely through that by year-end? Thanks for the color. I’ll jump back in queue.

Yes, Dan, I think, obviously, that’s a function of what we see, it’s a function of the typical fourth quarter weather. So, at this point, we think it’s certainly going to take it through all of 2019 and the rest of the puzzle will be really what happens from the winter standpoint on weather.

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

Hi everybody, good afternoon. Hello?

Hi Tim.

Can you guys hear me?

Yes. You’re good.

Okay, great. So maybe just kind of circling back on the last question, so if I am hearing you right, you basically thought you lost about $6 million or $7 million from the strike in the third quarter. I guess just back of the envelope that implies like North America would have grown 15%. And so, I’m just trying to understand what the gap is relative to starts, because I know you obviously have more content in the South, but starts is only up 8% in the South, and I think they’re only up a little bit less than that in the West. So, can you just kind of help us bridge the gap between what that kind of underlying volume growth is and what the starts activity is?

Yes. Part of the – what we’re looking at Tim on the starts are – the starts during the month of the quarter compared to last year. So for July, August, September, we see the South up about 8%. We see the West down about 3%, 3.5%. But just a reminder, last year Q3 we had the price increase taken – take place at the very beginning of that quarter and we suspect that was some pre-buy into Q2 of 2018 on that. So, I think that’s where you’re really seeing the volume change in Q3 of 2018 to Q3 of 2019.

Okay. So, it’s just that it was that sizable of an impact last year?

Well, I think that with the starts, the activities that we’re seeing that are up and then the balance, that’s what we suspect being attributable to that pre-buy, and on the revenue you’re right, it’s about 2% to 3% consolidated due to the strike, which would have – had we had those sales in Q3, obviously it would have had the additional volumes there.

Okay. And was any of the inventory improvement tied to the strike at all, just the fact that you might have had some stock inventory that you were still able to ship, even though even production was down. And I guess if so, is there any plans to kind of replace that inventory level or is it kind of a permanent reduction?

Yes. Tim, I think what we saw during the strike was a lot of great effort from the Simpson employees to be able to meet our customer needs, and some of that was met by shipping from our other producing branches. So certainly the strike lasted for almost a month and that certainly would have had a pretty significant hit, stocked into probably our second largest manufacturing facility. So, I think our, again, employees did a great job on really making sure, we were focused on the customers and really trying to get products out some of the other locations. We are working quite a bit of over time to be sure we can do that. So, you will see us trying and that’s where we are right now is rebuilding some of that inventory, and so we are very actively working on that at all of our locations of rebuilding that inventory – production that we lost during that strike time.

Okay. And then, I guess as you look into 2020 conceptually, how would you think about kind of SG&A leverage, kind of looking out to next year? I mean, I don’t have to get a number, but should SG&A just conceptually grow at a lower rate than revenue and if so, or if not, why?

Well, it’s certainly what we’ve been working on, ever since we put the 2020 plan in place, is the fact that SG&A should not grow at the same rate revenue has, and obviously we were very successful in 2018 of being flat – fairly flat from a dollar standpoint. I think our teams have done an excellent job this year of ensuring that the costs that we are putting in place, whether that be from a headcount or from projects that that’s contributing nicely to both our top and bottom line, being more profitable from the company’s standpoint and we will certainly continue that process as we go into our 2020 budgeting cycle.

Okay. And the last one I have is, the building that you’ve sold, is there any sort of gain that runs through the P&L in the fourth quarter?

Can you clarify again – the building that – the building that we announced in the earnings release that will close in the fourth quarter?

Right.

Yes. We are anticipating – I think we’re expecting $3 million plus or minus $3 million to $4 million on a gain on sale there.

Okay, thanks. Good luck on the rest of the year.

Thanks.

Thanks Tim.

Our next question is from Steve Chercover, D.A. Davidson. Please proceed with your question.

Thanks. Good afternoon, everyone.

Hi, Steve.

Hi, Steve.

So, just not to beat a dead horse on steel, but are you currently laying in some cheaper steel, and we’d have to run through the higher cost stuff because it’s FIFO accounting?

Well, certainly Steve, we look at making sure that not all steel is exactly the same, and not all products are produced at the same rate. So, we absolutely have had to have some infill to meet the needs of the raw material for for specific products. So yes, we bought some steel from an infill standpoint, and you would see that steel be a slightly lower, however not enough of that to where we are aren’t seeing this gross margin impact.

Sorry, Steve, it’s more on a weighted average costing, not on a FIFO.

And typically, how many months worth of inventory do you carry?

Well, if you think of our turns being it, too, that would give the indication of how many months, however, obviously, one of our goals is to hit that inventory turns to four. We had very nice plan in place before the tariffs came into effect, which kind of threw our plan out the window. So, typically on most of our steel, we’d like to get those inventory on hand somewhere around 3 months to 4 months, depending on the unique specification of the steel. What were impacted with is, again, we did an additional by in Q4 of 2018, the first half. I think sales started falling off pretty dramatically in December of 2018, and then of course the first half of 2019 was dramatically less than anticipated. And that’s why we’re still finding ourselves working through some of that steel that we purchased in Q4 of 2018.

Okay. Thanks, Karen. And one of the bright spots in the quarter in my opinion is concrete products, which almost experienced a step function change. So, is that segment a beneficiary of the pent-up demand associated with the wet weather or something else accelerated?

No. I think, what you’re seeing in the improvements in the concrete space, again we’ve changed our strategy. We have our sales force focused on these fixed target markets where we’ve got products to meet those markets. So, a good change there. Some price increases that were put in place, and then of course, the mechanical anchor roll out that we’ve had in just a little over 1100 – think about 1100 Home Depot stores. Those have certainly been things that have really helped that gross margin on the concrete side.

Alright. So, a higher run-rate going forward presumably?

Yes. I mean, a higher run-rate more factory absorption in our China facility that’s helping us from that costing standpoint.

And my final question is maybe it’s almost kind of thing that the analysts should be answering, but the stock went almost parabolic in the last few weeks, and is there anything in your order book that you’ve noticed over the same time frame, permit applications or anything else that would prompt that or was it just optimism versus housing?

I think there is quite a bit of optimism about housing. Again, interest rates are trending down. We still have quite a bit of pent-up demand, very low inventory available. All of those things I think are a positive sign from the standpoint of just housing in general. From our order book, as you know, we can provide products to our customers in a 24-hour turnaround time, so we don’t really have a lot of visibility from what we would call an order book. And from the housing start numbers, you know, for us, again that positive would be that increase that we saw in the South. We’ve talked about – we put more content in those hurricane areas, in those earthquake areas. So, for us that’s a positive trend seeing that 8% increase in starts in the southern markets.

Alright. How about the fires? Did it impact you in any way in California, either from a production standpoint or anything else?

So, depends on which wild wire. So, the latest fires there are obviously some structures that had been burned as we talked about in previous years, typically it takes somewhere between 12 months to 18 months before we might see any rebuild in those fire damaged areas. So, there will be no immediate impact from those rebuilding of those structures, in those burnt out areas.

Alright, thank you.

Our next question is from Julio Romero, Sidoti. Please proceed with your question.

Hi, good afternoon everyone.

Hi Julio.

Hello.

Brian, did I hear you mention that within concrete products gross margins declined, even with that double-digit increase in the concrete sales? I’m not sure, if I misheard you, but if that’s correct can you just kind of provide any color there?

That was compared to last year. And there was a slight decrease in gross margin in concrete versus Q2 – I’m sorry Q3 of 2018 and there is a fair amount of concrete gross margin tied up in carbon fiber-based products, which are often large sales – large projects. So we will often see those impact gross margin, I think from a mechanical anchor, chemical anchoring, it’s – I don’t know for sure, actually I was going to speculate, but….

Okay, that’s…

I think that’s primary reason there.

I’ll just follow up with you offline with that. On the European segment, you had almost a 13% op margin there, just looking at the numbers, I think it was a big step down in the OpEx in that segment. Did that OpEx shift to maybe another segment or is there something material that got taken out on the cost side there?

I think as we have been focused on our new European strategy and management team, there have been very aggressive looking at SG&A costs in Europe and the like. We may be lapping a little bit on some severances that we’ve taken in prior years, but I think, we’re really focused on the European strategy as we laid out a couple of years ago, and starting to really see some benefits there. Little bit of cost consolidation in some facilities, very minor, but trying to take a look at that entire operation, whether it’d be facilities, we can combine or just the general strategy I mentioned. We are seeing some nice improvement.

Got it. And maybe last one from me here is, I think Karen you mentioned you had 1100 stores to date, I think that’s already ahead of the year – the end of year target you might have called out in the last call. Can you just give us any update on the rollout there and where you maybe expect to be, maybe by end of year and the couple of quarters after that?

Yes. I think overstated that by a few stores, I think we’re at a 1050. We’re still working with Home Depot on the rollouts of these stores. And as we said, it’s very, very difficult to reset and move things around. I think the rollout will probably continue to be about the same pace that it’s at. We had a really nice push in second quarter and now, I think you’ll start to see that really kind of slow down at each of the Home Depot locations. Again, it’s a one-by-one type of process as we roll these out. So today we’re at 1,050 still looking to get a few more before the end of the year.

Helpful. Thanks for taking the questions and best of luck in 4Q.

Thank you.