Greetings, and welcome to Simpson Manufacturing Company Inc. Fourth 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 would now like to turn the conference over to your host, Kim Orlando with Addo Investor Relations. Thank you. You may begin

Good afternoon, ladies and gentlemen, and welcome to Simpson Manufacturing Company’s fourth quarter and full year 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 involve risks, uncertainties, and assumptions that could cause actual results to 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 04:15 PM 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’m pleased to discuss our results with you today. I’d like to begin by reiterating our commitment to positioning Simpson for long-term sustainable and increasingly profitable growth. To that end, we made significant progress both operationally and financially throughout 2019.Our net sales improved 5.4% over 2018 to $1.14 billion, driven by higher sales volume, despite the adverse weather conditions experienced in the first half of the year and lapping the benefit of higher sales prices following the price increases we implemented in mid-2018.This combined with our focus on rationalizing our cost structure resulted in a 100 basis point improvement in our total operating expenses as a percent of net sales to 27.9% versus last year in line with our expected range. In addition our tax rate decreased to 24.9% from 26.4% last year. As a result, we generated strong earnings of $2.98 per diluted share up 9.6% over 2018.Importantly, we continue to make progress towards the aggressive targets we unveiled as part of our 2020 plan in order to maximize operating efficiencies and drive long term stockholder value. Accordingly, by the end of the year, we expect to do the following; achieve an organic net sales compounded annual growth rate of 8%, reduce our total operating expenses as a percent of net sales to a range of 26% to 27% resulting in an operating income margin of approximately 16% to 17%, improve our return on invested capital to a range of 15% to 16%, improve our concrete business gross margin to approximate 42%, and finally improve our European operating income margin to be within the range of 8% to 9% excluding SAP, severance and goodwill impairment.As a testament to our confidence and execution against the 2020 plan, we were pleased to have returned $101.1…

Thank you, Karen, and good afternoon, everyone. I'm pleased to discuss our fourth quarter financial results with you today. Before I begin I'd like to mention that unless otherwise stated all financial measures discussed in my prepared remarks today will be referring to the fourth quarter of 2019 and all comparisons will be year-over-year comparisons versus the fourth quarter of 2018.Now, turning to our results. Total net sales were strong increasing 8.5% to $262.5 million. Within the North America segment net sales were up 11% to $226.8 million due to both increased sales volume and higher average product prices.In Europe net sales decreased 4% to $33.5 million mainly due to the impact of negative foreign currency translations resulting from Europe currencies weakening against the United States dollar. In local currency Europe net sales were down only slightly for the quarter Wood construction products represented 83% of total net sales compared to 84%. And concrete construction products represented 17% of total net sales compared to 16%.Gross profit increased by 12% to $110.1 million resulting in a gross margin of 41.9%. Our gross margin increased by 130 basis points primarily due to lower factory and overhead costs on increased production, along with a slight decrease in raw material costs.On a segment basis, our gross margin in North America improved to 43.9% compared to 42.2%. While in Europe our gross margin declined to 29.9% versus 31.7%. From a product perspective, our gross margin on wood products slightly decreased to 40.8% compared to 41.1%.However, our concrete products gross margin increased substantially to 44.0% compared to 31.7% due primarily to the impact of a price increase we implemented in August on certain of our products in the US. To a lesser extent, concrete gross margin benefited from lower material costs as well as lower factory…

Thanks, Brian. Before we turn it over to Q&A, I'd like to extend my thanks to Ricardo Arevalo for his 20 years of service to Simpson including his most recent role as Chief Operating Officer, as he will be retiring in mid-February. We are in the midst of a formal search for Ricardo’s permanent successor as COO. We thank Ricardo for all his many contributions to Simpson over the years and wish him the very best in his retirement.Operator, you may now open the floor for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Daniel Moore with CJS Securities. Please proceed with your question.

Karen and Brian, good afternoon. Thanks for taking the question.

Hi, Dan.

I want to focus first on gross margin and the outlook. You know finish the year up gross margins and in the low 43.3% somewhere in that ballpark. A little below expectations as you described, the guidance is essentially flat to up 100 bps roughly. And I'm just wondering why you wouldn't expect to see a little bit more recovery. Are you expecting incremental steel price pressures? Any changes in mix or just kind of simply being conservative as we start the year?

There's a couple of pieces, Dan. Certainly as we talked about we’ll start getting to Certainly, as we've talked about, we'll start get into a little bit better, still and we have seen in the last part of the year, steel prices go down and now we're seeing steel prices go up again.So, really, we're just basing on what we've got from a steel inventory standpoint and what we're looking at from those low-single-digit housing starts. Those are really the main elements that are impacting that gross margin. Certainly, we're very comfortable with labor factory tooling. But those two elements are really the ones that are driving this.

Got it. And then, as it relates to those housing starts and the outlook for 2020 of low-single-digit, you alluded to earlier to kind of easy comp you had a tough weather in the first half of 2019 creating – and that should set you up for a little bit easier comp and stronger starts to exit late in Q4 of 2019. So, is there upside to that guide as we look out for the next quarter or two from your expectations or would you expect that to be relatively flat over the course of the year?

No, I think that guidance is – it’d be pretty flat over the course of the year based on just what we're getting from a lot of market information. I think this low-single digits is pretty consistent. I mean we certainly had a nice bump in the Q4 comparables, but again, that was a variance – a very, very soft to 2018. Weather is looking a little bit better than it was this time last year, so that might help us a bit. I think it's too early to make any, any adjustments beyond that low-single digit.

All right. So, no major delta as far as the cadence over the quarters is concerned.

That's correct.

Okay. Maybe sneak one more in. Obviously, return to healthy amounts of $100 million to shareholders in fiscal 2019 including over $60 million of buybacks. We have stocks days in and around current levels. Would you expect a similar amount of share repurchase activity next year? Just any commentary there would be helpful. Thank you.

Again it's Brian. So, we review our capital allocation strategy on a regular basis with our board. And as of now, we don't have any changes to announce but we'll be reporting any updates as we go through the year. As we've talked in the past, we do have that goal to return 50% of the cash flow from operations to shareholders. However, we've been utilizing a bit of a mix of trying to be opportunistic as well as meeting that 50% number.Looking at the current price and the return that we get at various levels and we'll continue those analysis. So, I don't have much more other than that but you're right with the, the current prices as it is today and that far exceeds the average price that we were able to acquire stock back in 2019. We'll have to look at that but we are mindful of the return at the current price and as you mentioned we'll continue to have those capital allocation discussions with the board and see if we making adjustments there but those are, those are ongoing.

Very helpful, color. High class problem either way. I'll jump back in queue if any follow ups. Thanks.

Our next question comes from the line of Josh Chen with Baird. Please proceed you’re your question.

Hi. Just a question on the housing starts. So am I right in interpreting that you talked about the strong starts in Q4 that you haven't quite seen it fully impact your numbers yet and would it then make sense that Q1 would be off to a better start just because you're starting to see those housing starts number flow through?

We talked a lot about the sort of the lag between the housing start number and when we might start to see our product. Again some of it is going to go into the concrete foundations and then the majority of it into framing. And we typically discuss that there could be anywhere between a three to four month lag.It just depends on how well the particular areas prepped for all the infrastructure, plumbing, electrical and all those sorts of things. So certainly it was encouraging numbers in Q4 but I think we have to remember that the increase was against the really, really soft 2018. So yes I would anticipate we should see some of that in the upcoming months.

All right. And then a question on your – kind of a long--term guidance for 2020. Do you expect to achieve basically every element of that – of the guidance because there are certain elements that you may not need to achieve in order to – and you can still hit the overall EBIT margin target for example so you might not have to hit the European margin or even the OpEx reduction. So I was just wondering if you could clarify for us So, I was just wondering if you could clarify for us, are you expecting to hit every element or would some elements be easier than others?

Yeah. We put those targets out in the third quarter of 2017 with the full intent of being able to hit all those targets. I think they're very important for the growth of the company, as well as the profitability of the company. So, as we've stated in this earnings release, we're working extremely hard to be sure that we can still hit all of those targets. As you mentioned, we might be able to hit targets without hitting others, but that's not – our goal is to be sure that we put the people and the resources in place to try and hit all those targets.

All right. Yeah. That's helpful. And last question for me, maybe an inventory. So, kind of a decent improvement in inventory turns over the last couple of years. Any thought in terms of where that could potentially go in 2020?

Yeah. As we mentioned, we've – our inventory has gone from 2 to 2.5 turns. And more importantly, from a pretty significant reduction in our pounds of finished goods. Certainly, what our manufacturing branches are working at is still being able to bring that pounds down and be more efficient. And if we get some normalization in steel, we would also be able to work on bringing down our raw material inventory.So, we don't have a target set for 2020, but we do have all of our manufacturing group working continually every day to be the most efficient they can be. And when those things go in place, we'll start to see that target increase.

Okay. Great. Thanks for your time and good luck in the first quarter.

Thanks, Josh.

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

Hey, good afternoon, everyone.

Hello, Julio.

So my first question is on the North American segment. Pretty significant lower operating expense year-over-year. Is there may be a more recent reduction you've done there or maybe something unusual you lap from the prior year quarter? You did mention the G&A and that segment was lower by 13%. I mean, is there something kind of unusual there and maybe how much more runway for cost reductions in that segment do you kind of foresee going forward?

Hey, Julio, it's Brian. So, in 2018 we had recorded a settlement for a legal matter and we also had success based fees for management consultant that didn't – neither of those repeated in 2019. So, there’s – those are the primary drivers that we're seeing in North America comparisons and we're going to continue to focus on green lighting projects and initiatives that utilizes SG&A cost, G&A cost and the like. But I don't know how much more significant reductions we'd be looking at because we did have those 2018 items that I mentioned that did not repeat in 2019.

Got it. Understood. And on the European segment, called out relatively flat sales year-over-year on a constant currency basis. Bu, can you just maybe talk about maybe price volume mix? I think was there an increase in one and a decrease in the other one? Any color that would help.

Yes. As we've mentioned, I think, on local currency, they were up 3.5% for the year. Europe tends to do a cadence of a couple price increases. So, typically, there's some January and June type of thing. So that was helpful. Also, I think the change in management there had put in some price increases that maybe had been delayed a little bit. So that was certainly helpful. And I think we're starting to move a little bit more of our fastener volume on that standpoint.

Helpful. And then maybe last one for me here is on the CapEx of $40 million to $43 million for 2020. I think it implies a little bit more growth CapEx for this year. I mean, can you talk maybe about some of the initiatives you have planned for the year?

Not to go into specifics but there are some growth projects in there that are not necessarily the maintenance type CapEx or that kind of annual run rate that we've had. Historically, I think, if I recall the last few years, we've been calling out CapEx in that call it $32 million, $33 million range for the last few years. So, yes, we've got a couple additional projects in there that we'll be looking to initiate this year that are more on the growth side.

Understood. Appreciate you taking the questions and best of luck in 2020.

Thank you.

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

Thanks. I wasn't that good on jeopardy in the star one but just a couple questions and there's somewhat follow-ons. So it does sound Brian, like there is going to be some nuance to the repo because I mean there's a 27% difference between what you paid in Q4 and what you paid for the full year, so it's not just automatic, right?

Correct. Correct, not at this time and as I mentioned, that's the – the conversations that we have with our board around looking to utilize both opportunistic versus just share reduction count mix and looking to continue that until we've pivoted off of that position.

And what is it that could, I mean, push you off, presumably not returning the target 50% of cash flow to shareholders, but I mean, presumably, you're filtering it through some sort of return on capital lens and what other items could rise to the front?

I think you touched on it. The current screening, if you will, or the evaluation is the returns at today's price or for those -- for that capital and not to say that we're doing this but versus looking to reduce share count regardless of price and finding if there’s a different balance to those two elements today.We very much utilize the return wins, as we're looking at the share repurchase, and as you noted, it's at a much higher price today than what we saw as an average through the year in 2019. So, again continuing to evaluate the return that – obviously the return for the 2019 repurchases would be much better than they would be at today's level and just making sure we're taking that lens into account.

Do you have any capital projects that would be significantly large enough to soak up some of that capital that could percolate to the top or I mean, is your property, plant, and equipment pretty much where you want it to be and where you want it to be?

That's a good question, and as I noted, too, on the question a moment ago, our CapEx is planned to be a little bit higher in 2020 than 2019, although we're generating a fair amount of cash to be able to fund those with internally generated cash.With the manufacturing footprint, we noted that and we just sold one of our smaller facilities, but I don't know that there would be any significant change to our real estate portfolio mix from where it stands today. But as we evaluate an operation and if they need something that's different than what they have today, we evaluate the buy new – buy again versus leasing and take those on a case-by-case basis.But today we are generating the cash to be able to beat those additional CapEx projects. We'd like to find some larger areas where we can invest in that create returns that enhance our shareholder value. And that's always the goal is putting that cash to use for improving the business with the dividend and the share repurchase as the other elements are capital allocation.

But that said as you maybe contemplate M&A for bolt-ons we've already gone through that over the years and I can't imagine what it would take for that to be to really move up the hierarchy, so, if you kind of refine your focus on wooden concrete. Is that fair?

I think that's fair but we also want to make sure that there’s – we have a push to find fastener acquisition that would help our US domestic North American business. But you're right in that as part of the 2020 plan, we scaled back some of the areas that we are looking to invest in with M&A particularly around concrete, repair type products but with product line extensions or intellectual property or other assets that could enhance our business and we want to make sure we're taking a look at those. We've not found anything of size really recently but we're constantly looking for things that can help us in our strategic initiatives.

Okay. And I might have missed it but is the SAP project coming towards its conclusion?

We have got a another major facility in the US that we're expecting to come online here early in the year and then a couple of smaller operations here in North America. And then that will complete North America which is about 85% of our revenues. But we still have Europe and Asia-Pac to do. So we anticipate by around the end of 2021 to have the rest of those locations completed.

Okay. And final one. Despite walking back a couple of elements it looks like you've come pretty close to achieving your 2020 targets. So, it goes without saying you're probably thinking of some 2023 or five year plans. Would you share those with us in due course?

Yeah. You see that's been a really common question. I think the key is to not take our eye off the ball. We still have quite a bit of work and we want to be sure everybody, employees are engaged in meeting our 2020 goals. There's still quite some aggressive things that we're working on. But as you can imagine from the management team and the board standpoint we're already looking at what some three to five year strategies would be and will most likely get those of refined a bit more and probably be sharing them I would imagine around third or fourth quarter.

All right, we'll look forward to having it. Okay. Thank you both.

Thank you.

We do have a follow up question from the line of Daniel Moore with CJS Securities. Please proceed with your question.

Thank you again, just mostly housekeeping but I missed the cash flow from operations number for the full year, Brian?

Let me pull that. It was $205.6 million for 2019.

Perfect. And then the SAP implementation costs, let’s see, is Q4 a reasonable run rate to think about for the next few quarters?

That's a really good question. I would say the – as we shift from North America to focusing on rest of world, I think that might be in the ballpark. I mean, we continue to refine the plan on who's going where and using local consultants and the like to complement our existing team. But maybe it's a little too early to call on that one right now.I mean we're really focused on getting that – those remaining locations that I referred to just a moment ago. We expect those to be done in the first half of this year. And there's been a lot of focus on prepping and getting ready for those sites. So, I think Q4 might be a decent run rate quarter.

Helpful. And lastly, and you called out the $5.6 million nonrecurring gain in the quarter, are there any other facilities or assets that you might consider monetizing over the next year or so?

No nothing. Nothing in the plan right now.

Helpful. Thank you again.

Thanks, Dan.

Ladies and gentlemen, we have reached the end of our question-and-answer session as well as today's conference call. We thank you for your participation. You may now disconnect your lines at this time and have a wonderful day.