Greetings and welcome to Simpson Manufacturing's First Quarter 2020 Earnings Conference Call. [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 first quarter 2020 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 or the company's corporate website.Please note that the company's earnings press release, which was issued today at approximately 4.15 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 first begin with a high level summary of our first quarter financial performance and will then turn to a more detailed discussion on the Coronavirus pandemic, the impact it has had on our business and the actions we are taking to address this unprecedented situation.We delivered a solid first quarter, operationally and financially. Sales of $283.7 million increased 9.4% over the first quarter of 2019 and were driven by higher sales volume in North America. Sales volumes increased primarily due to the milder weather conditions in our key markets compared to a year ago which was an unusually cold and wet winter. Sales were partially offset by weaker conditions in Europe, which was impacted by the COVID-19 beginning in mid-March.Our gross profit margin was strong at 45.7%, an improvement of 320 basis points year-over-year. This was largely due to sales mix and decreased material costs. Our gross margin coupled with the relatively flat operating expenses, help generate operating income of $49.4 million, up 64.4% year-over-year and strong earnings of $0.83 per diluted share, up 56% [ph] year-over-year. Brian will provide additional details on our Q1 performance shortly, but now let me turn to discussion of the COVID-19. Our hearts go out to all of those who have been impacted by the Coronavirus pandemic. I would like to sincerely thank all of the first responders for their selflessness and courageous efforts to help those in need as well as extend my gratitude to our over 3,300 employees for their cooperation and commitment to help ensure Simpson remains a safe workplace.The health and safety and well-being of our employees, their families, our customers and our communities is our top priority, and is at the…

Thank you, Karen, and good afternoon, everyone. I'm pleased to discuss our first 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 first quarter of 2020 and all comparisons will be year-over-year comparisons versus the first quarter of 2019.Now, turning to our results. As Karen highlighted, our consolidated sales were strong, increasing 9.4% to $283.7 million. Within the North American segment, sales increased 12.5% to $249.1 million due to higher sales volume supported by stronger housing starts compared to the wet winter, weather conditions we experienced a year ago. U.S. housing starts grew 22% in the first quarter versus the comparable period last year, notably in the west and south where we provide a meaningful amount of content in the home starts grew 27% and 19%, respectively year-over-year.In Europe, sales decreased 8.5% to $32.7 million, mainly due to lower sales volume in our concrete business. In addition, first quarter sales were slightly impacted by our facilities in France and the United Kingdom which experienced government mandated restriction orders on operations in March for safety precautions in response to COVID-19. As a result, these locations were operating with minimal activity to comply with the orders. Europe sales were further negatively impacted by $1.0 million from foreign currency translations, resulting from Europe currencies weakening against the United States dollar. In local currency, Europe sales were down approximately 5.5% for the quarter.Wood Construction products represented 86% of total sales compared to 84% and Concrete Construction products represented 14% of total sales compared to 16%. Gross profit increased by 18% to $129.7 million, resulting in a gross margin of 45.7%. Gross margin increased by 320 basis points, primarily due to lower material…

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

Thank you, Karen and Brian. Good afternoon. Hope you and your families are well and congrats on obviously strong Q1 results. Karen you mentioned this unlike any other downturn, can you elaborate a little obviously tremendous uncertainty; but what does your crystal ball say about debt duration relative to 2008/2009? How is it similar, how is it different? Just any high-level thoughts would be helpful.

Sure. Thanks, Dan, and appreciate complements on the quarter. It was really a fantastic quarter, until about the middle of March as everybody knows. So as we discussed, when we did have the financial crisis in the 2008/2009 timeframe, certainly a huge impact on Simpson and our business, and some of the things that we see differently today is a fairly still high demand for housing, low interest rates and not a lot of inventory on the market. So we think the demand side of the equation is still good as we look at where we are in 2020. However, we're one month into Q2 and we're certainly already seeing a significant reduction based on where we were in March, and it's very difficult to know what that timeframe will look like as some states are starting to open up and others are not. So very difficult for us to predict, what the curve will look like? We're taking into account again that strong balance sheet so that we can ensure that we can be in good shape when we come out of this. But from a timing standpoint, again, it's difficult for us to know when things will pick up again.

What kind of volume declines have you experienced either sequentially or year-over-year thus far in April in North America and Europe?

From March to April, we have seen double-digit decline.

And maybe what type -- what percentage of capacity are you operating at? I know, obviously, Europe is a little bit more impacted, but in North America, what percentage of capacity are your plants currently running at?

Yes, that's -- capacity is a great question. It's impacted by a couple of things. Number one, our production and the actual customer orders. But the other thing that's impacting our capacity is the health and well-being of our employees. So today, we do have one facility that's got reduced hours, but the other facilities are running at full one shift capacity.

I'll sneak one more and jump back into queue. In Europe, can you give us a sense for what type of either weekly or monthly operating losses we're running at, at this stage, given shutdowns in those two large facilities and any steps you might be taking to mitigate that? Thank you.

Yes. So in Europe, obviously, the pandemic hit there sooner than in the United States and we saw, as we mentioned in mid-March, reduction and actually the government shutdown on both our UK facilities and our France. As we mentioned, those are two of our largest. They represent about 5% of our revenue, companywide revenue. Today, we're starting to see things pick up a little bit there as some of their shelter-in-place elements are being eased, and they did not have an impact on our concrete business, that was still fairly strong because of their typically commercial type of business. And the shutdown of the United kingdom and the France location did not have an impact on our Nordic business, which is supplied by our manufacturing facility in Denmark.

Okay. I'll jump back in queue with any follow-up. Thank you.

Okay. Thanks, Dan.

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

Hey, good afternoon. Hope you folks are doing well?

Thanks, Julio.

Just following up on the previous question. I mean when I think about the cadence of revenue for the year, I know you mentioned that double-digit drop off from March to April. But as I think about Simpson, specifically I think about the lag from housing starts to your sales of, to think about on average three months. I mean considering that and considering house starts have kind of perform this year. I mean is it fair to expect kind of a stronger drop off in 3Q -- in 2Q for the year?

Yes, I think what we saw in Q1 was part of that strong December/January housing starts. And obviously, the March numbers have come out, we've seen a drop off in those numbers and that's what we'll start continuing to see as we go through the second quarter. And I think that's what you're seeing already from our March to April drop off is that housing start drop off.

Okay. And I know you focus on rationalizing the cost structure over the past few years, but can you maybe talk about your current mix of fixed to variable costs and how that maybe compares to the cost structure maybe pre-2020 plan or pre -- or maybe the last downturn?

Hey, Julio, it's Brian. So part of the efforts that we spent over the last few years have really been too position our self not necessarily for pandemic situation, but really try to maximize operating efficiencies and alike. And although, we don't typically comment on the fixed versus variable cost structure within our business. The efforts over the last couple of years which we really started to see pay off as SG&A as a percent of revenue started coming down. The -- we believe those elements are going to -- we're going to benefit from going forward. But -- not going to comment right now on how much of our costs are fixed versus variable.

Fair enough. And maybe just my last one here is, I know you mentioned in the press release kind of tightening your belt on planned capital expenditures. I guess that along with kind of 2020 plan now and how you thought about capital allocation with that. I mean how do you think about maybe your balance sheet post 2020, and I know that there's a kind of uncertainty but assuming some type of recovery starts to happen within this year. I guess, longer term I mean how do you think about your balance sheet and the right cash position, assuming a recovery to materialize by the end of the year?

Well, it's a good question. The -- our initial response was look to preserve liquidity with the moves that we've made, and by focusing on CapEx that are primarily safety or replacing equipment that needs to be replaced is the primary focus, at least until we get better visibility into our end markets and take it from there. So we are -- we continue to monitor like I'm sure all other companies are doing, looking for those signs that things are either turning or they're going to remain this way for a while. But right now, just trying to focus on preserving that balance sheet and delaying, if you will, some of those other CapEx projects that we originally had in our 2020 -- in the fiscal 2020 plans and alike. So again, just looking to preserve that that flexibility until better more insight into the end markets come into play. So I don't necessarily have an answer for where we're targeting cash to be, but it's just again trying to maintain that flexibility.

Understood. Thanks for taking the questions and stay healthy.

Thanks, you too.

Our next question comes from the line of Tim Wojs with Baird. Please proceed with your question.

Good afternoon, everybody. Hope everybody is well? Nice job on the quarter and managing the expenses there. Maybe just -- hate to harp on kind of March through April, but you said April down double digits relative to March, and I assume you generally have a meaningful stocking that happens between March and April. So I guess, in a normal year, what type of trend which you see from April to March -- from March to April in terms of growth? Would it be up double digits or up single digits?

Well, as we've always said, our -- typically our best quarters are second and third quarter, and that's really a function of construction being able to be active based on coming out of winter months. So last year of course was an anomaly because we had a very tough winter first and second quarter. But historically, our best quarters are second and third quarters. So historically, we would have seen second quarter kicking up compared to where first quarter numbers were.

Okay, okay. And then just on the new customer you mentioned, is there any way to just kind of think about sizing or maybe where that customer is in terms of end markets and end product. The types of products that they're purchasing from you?

Yes, I mean I think we said that new customer is Lowe's. So that gives you an idea of their end market and we'll certainly be laying much more details when we finish or have our Q2 conference.

Okay. Just any -- is that a pretty sizable win and just in terms of overall size?

We'll give you more details on that size and product mix again when we've had that opportunity in the Q2 conference.

Okay, fair enough. And then just, I guess, when we think SG&A, you guys have done a good job controlling SG&A over the last couple of years with the 2020 plan. How should we think of just the flexibility around SG&A if you see meaningful sales decline? And I'm just trying to understand that if sales were down double-digits in the second quarter for example, would you expect SG&A to be down but by a lesser amount or would you expect it to be kind of flat, anything kind of directional, I think we would be helpful?

I would say, slightly down to -- or flat to slightly down. I mean there is variable compensation in there and, let's say, some profitability and alike when we've got lower volumes, lower profitability. But, I would say, slightly down there.

Okay. And then from a steel perspective, just last one I had -- just if you kind of look forward where prices are today, how big of a tailwind or how long of a tailwind can the material costs be for the gross margin line in your COGS?

Yes, that's a great. Go ahead, Brian.

Yes. It's so dependent on volume and alike and we're really not looking to comment on those elements. Of course, we're looking at steel and the markets and alike, but also looking to -- try to balance where we think demand will be with what we need to purchase, and kind of take it from there. So Karen, if you've got anything else to add there.

Yes, I would just say that, as we mentioned, our gross margin in the first quarter was good volume, good mix, more wood products and concrete products and certainly we had some contribution from the material side. It's tough to know again, material is really a function of what that volume is going to look like and it's tough for us to get any good crystal ball at this point and certainly we'll continue tracking what's going on with the housing starts and what's going on with the R&R market. But really tough to be able to give some clarity on that right yet.

Okay. Okay, fair enough. Thanks for the time and good luck managing through all of this.

Thank you, Tim.

Thanks, Tim.

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

Hi, Karen. Hi, Brian. So I was kind of late, so forgive me if there is any repetition. But it sounds like that the quarter could have been even better. How stiff a headwind or how steep was the drop-off that you experienced in the last two weeks of March?

Steve, I would say that, in Europe, we felt that drop off, as we mentioned in about mid-March. We probably didn't feel it as significantly. So we are really -- probably the last week in March is when we started to have the shelter-in-place orders come into effect.

Got it. And as we think of your U.S. regions, California and Washington amongst the seismic regions are currently down. Did things really slowdown a lot in your win share regions, because they seem to be a bit more liberal about getting things back and running?

Yes. As you mentioned, so regions have put these ordinances out in various phases. California did shelter-in-place and of course construction and hardware was still essential. And then some counties in California, and as you mentioned in Washington, [indiscernible] even construction activities, although keeping hardware as essential businesses. So certainly that would have impact as you mentioned in the western states. We've got a lot more content in those houses based on a seismic criteria. We're not seeing quite a stricter construction mandates in some of the other states, although parts of the Northeast had similar mandates where construction was not allowed in some areas in Pennsylvania market. So very quiet throughout the country.

Okay. And then, how much flexibility do you have adjusting your work hours. I mean I guess in Europe they kind of did it 40, but yes, any domestic facilities. Can you tell the rank in file. We're going to ring the bell after six hours, because we've got six hours' worth of work even though these are accustomed to doing an 8-hour shift. I mean, just how much flex is there?

Yes, that's a great question. And of course we have a very skilled workforce. And so we want to ensure that we're putting everything in place to make sure we don't have to go to reduced work hours. As I mentioned, we've only had to do that at one of our facilities, we went from a 40-hour week to a 32-hour week. And it is things that we have to work with if we're a union shop, we have to go through those processes. But again, we're doing everything as far as making sure we can look at what the production needs are, to be keeping that very skilled workforce in place.

Okay. And then switching to maybe Brian question, but the $150 million drawdown on your revolver. I mean was that just a full blown abundance caution kind of use it or lose it, are you concerned that somehow your bankers would withhold it or yank it from you?

Yes. Full blown abundance of caution and early -- in the early days, if you will, we just wanted to make sure that we have that access. Wasn't anything to do with any of our particular banks, I mean, they're all very strong banks and strong partners. But I think as we saw in '08-'09 crisis, companies had been paying for lines of credit and when they want to draw all of them, we're told they were -- funds were not available. So that was the -- our position was to make sure that scenario didn't happen to us. And I have not heard of any significant -- any restrictions in that regard in this go round. But again, it was just out of that abundance of caution to make sure it was there, if for whatever reason, the credit markets dried up and we weren't -- companies weren't allowed to pull it down. But again, I've not seen that this go around, but just to make sure we had it.

Got it. And then are you seeing any pockets of strength, I mean anecdotally, it sounds like a lot of the decking and fencing, I was going to call them honeydew projects that are not -- if the weather is conducive and people with bad time on their hand, that's the one area of where the home centers are really having a tough time keeping up with the demand. And I'm just wondering does that benefit for some of your outdoor accent products or other product lines that really cater to, well fencing and decking?

Yes. If I mean certainly hardware stores being essential business, we do business with the Home Depot, True Value to invest. And all of those, I think are active and busy. Major part of our business, as we always say is, about 50% of our business is driven from homes starts. So as much as these areas are doing better than maybe a contractor distributor, there is still not a really large part of our business. So I think they are seeing some good business through those locations. But again homes starts is 50% of our revenue.

Sure. Well, I mean, let's hope that your comments at the outset that indicate that there is not an oversupply of housing inventory and that rates remain low, allows us to snap back a little bit differently than that for 2008. Thanks and stay safe.

Thank you, Steve.

Thanks, Steve.

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

Thank you, again. And it'd be a shame to not ask at least one question on Q1, given how strength in the quarter. Maybe just Brian any commentary -- the 320 basis point gross margin improvement, can you break that out between volume and raw material or at least rank order them?

Well, we definitely saw volume compared to Q1 last year. But also, as we noted, gross margin benefited from material as a percent of revenue being a little lower, absorbed more overhead, which I guess tails into that the volume question. But also one of the other element there is mix, we had better wood margin, wood margins improved in Q1 of '20 versus last year and that wood product business was a little bit more of percent of the total for the company. So bit of benefit on mix, material and volume.

Okay. And lastly in terms of just getting back to capital allocation, the one thing we didn't mention was M&A, do you see potential at least for increased opportunity, given some dislocation or are we really on hold as far as that's concerned as well for the time being?

Hey, Dan. Obviously, we would keep our eyes open to see anything of interest was to come around. But certainly, we're not actively in that market.

Understood. Thank you for the color.

Great. Thanks, Dan.

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