Greetings and welcome to Simpson Manufacturing Company’s First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. Now I would like to turn the conference over to your host, Kim Orlando of ADDO Investor Relations.

Good afternoon, ladies and gentlemen; and welcome to Simpson Manufacturing Company’s first quarter 2021 earnings conference call. Any statements made on this call that are not based on historical facts are forward-looking statements. Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties. Actual future results may vary materially from those expressed or implied by the forward-looking statements.

Thanks, Kim, and good afternoon, everyone. And thank you for joining us today. I'll begin with a summary of our key first quarter performance drivers and initiatives. Brian will then walk you through our financials and updated full-year 2021 business outlook in greater detail. Our first quarter consolidated net sales were strong, growing 22.6% year-over-year to $347.6 million on significantly higher sales volumes. Our gross margin expanded to 46.7% from 45.7% in the prior year quarter primarily due to lower labor, factory, warehouse, and shipping costs, which were partially offset by higher material costs. Our solid gross margin combined with our diligent expense management and reduced costs due to COVID-19 drove a significant year-over-year increase of 38.6% in our income from operations to $68.4 million, and an increase of 39.8% in our earnings per diluted share to $1.16. The increase in sales volume we experienced in the first quarter was primarily as a result of the continued momentum in the home center distribution channel, where sales increased over 60% compared to the prior-year period. As a reminder, the home center distribution channel includes both our home center and co-op customers, and it is where we see much of our repair and remodel business. We are continuing to see increased activity in the repair and remodel space likely as a result of the ongoing pandemic as consumers continue home renovations. Lowe's contributed significantly to the channel growth compared to the first quarter last year due to their return as a home center customer in the second quarter of 2020. Our sales further benefited from solid trends in US housing starts. As we generally experience a multiple month lag in demand from the time of the start, in the first quarter we benefited from strong fourth quarter 2020 housing starts, which grew over 10% year-over-year.

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 refer to the first quarter of 2021 and all comparisons will be year-over-year comparisons versus the first quarter of 2020. Now turning to our results, as Karen highlighted, our consolidated net sales were strong, increasing 22.6% to $347.6 million. Within the North America segment, our net sales increased 20.7% to $300.6 million primarily due to higher sales volumes in our home center distribution channel which includes our home center and co-op customers. Sales volumes were supported by the return of Lowe's along with increased repair and remodel activity. We also continue to benefit from solid demand trends and other distribution channels which are experiencing increased demand from new housing starts and repair and remodel activity. In Europe, net sales increased 35.3% to $44.3 million primarily due to higher sales volumes in local currency. Europe's sales also benefited by approximately $3.6 million of positive foreign currency translations resulting from some Europe currencies strengthening against the United States dollar. Wood construction products represented 87% of total sales compared to 86% and concrete construction products represented 13% of total sales compared to 14%. Consolidated gross profit increased by 25.2% to $162.3 million which resulted in a stronger Q1 gross margin of 46.7% compared to last year. Gross margin increased by 100 basis points primarily due to lowered labor, factory, warehouse and shipping costs which were partially offset by higher material costs. On a segment basis, our gross margin in North America increased to 48.5% compared to 47.7%. While in Europe, our gross margin increased to 34.4% compared to 32.7%. From a product perspective, our first quarter gross profit margin on wood products was 46.6% compared to 45.4% in the prior year quarter and was 42.5% for concrete products, the same as the prior year quarter. Now, turning to our first quarter costs and operating expenses. Research and development and engineering expenses increased 9.0% to $14.6 million primarily due to increases in personnel costs, professional fees, and patent costs. Selling expenses increased 8.0% to $30.8 million due to increases in stock-based compensation, personnel costs, and professional fees, offset by a decrease in travel-related costs.

Thank you. At this time, we'll be conducting a question-and-answer session. Our first question is from Daniel Moore of CJS Securities. Please proceed.

Karen and Brian, good afternoon.

Hi, Dan.

Thanks for taking the questions and congrats obviously on really impressive results. First question is a clarification. The latest round of price increases of 6% to 12% going into effect in June, that's on top of the price increases that you put in April 5 or is it on a different set of products?

That’s – so the first price increases were 5% to 12% and those were on varying set of products. The second set of price increases were 6% to 12% mainly on the wood connector products.

Specifically wood connectors. Okay. That's helpful. Just want to make sure I heard that. Perfect. Q1 North America sales up 23%. Can you give us kind of approximate breakdown between volume and price?

Again, it’s Brian. Not a lot of price in there, but mostly volume. Just a reminder, we did not have lows in Q1 of 2020. So obviously, we've got that element there, and so mostly volume. There were a little price increase impacts in Europe, but – so mostly the volume elements that I just mentioned.

Yes. So most of the pricing benefit obviously is still ahead of us given the timing of those price increases?

Correct.

Okay. And then looking at the guidance, you previously pointed to as you mentioned, Brian, 16.5% to 18.5% operating margins for this year. And I think – and we did say a couple of times not to be picky, but I think we said a few times that 2020 levels would – probably wouldn't be sustainable. Now, we're looking at least that and potentially materially higher. So just trying to parse it apart, how much of the increases – this latest round of price increases, how much of it is just stronger volume than expected and is there anything else in the sort of delta in the initial guide and where we are now?

Sure, Dan. So primarily, price. As I mentioned in my prepared remarks, it does take a while for currently sourced higher-priced steel to make its way into our cost of sales based on weighted average cost of inventory. However, the price increase is in effect early April or June as we noted earlier. So, there's that element and just as – while I'm at it, just a reminder that as that weighted average cost of raw material increases, we will see that cause that operating margin – gross margin to pull back in 2022, again based on information that we have today. So, largely due to those, maybe a little bit of volume benefit, but mostly due to the selling price and element that we've noted in the past.

And is there a revenue growth assumption range kind of underpinning those new margin targets that the new targeted margin range that you can share?

We're still expecting volume to be up mid-single digit, and we're not necessarily sharing the topline revenue number, the finished number for 2021. But yes, there is that element that the revenue associated with volume that I just noted and the price increase is influencing that operating margin guide. And of course, it's a pretty wide guide right now. We still think there's a fair amount of uncertainty for the back half of the year.

Perfect. And then lastly for me, increasing focus in terms of capital allocation at least as you've described potentially as M&A. I think you mentioned you've brought in some outside consultants, etcetera. Just any commentary on what the pipeline looks like. Are you looking at kind of smaller tuck-ins or are you just looking at larger deals as a possibility as well. Thanks.

Yeah. Let me see if I can address that one, Dan. So, as we’ve talked about, we’ve talked many times about opportunities we like to see in the fastener space, really being able to control our manufacturing from an onshore standpoint versus buyouts. But also as you look at our new initiatives, the mid-rise steel initiatives, some things from a software standpoint that might help us with the DIY space, it opens up a few more opportunities for us to look in different areas still obviously in building materials, but it widens the funnel slightly for us as we look into those growth initiatives that we're working through.

All right. Very good. Thanks for the color again. I'll jump back with any follow ups.

Thanks, Dan.

Thanks, Dan.

Thank you. Our next question is from Tim Wojs of Robert W. Baird. Please proceed.

Hey, everybody. Nice work. Congratulations.

Thanks.

Maybe my first question, just I guess if you look at the – you did say there’s a little wider range, a fairly wide range on the operating margin guidance. What's the primary kind of toggle point between getting to the lower end or the upper end, because I guess when you guys deal with price, I mean, you generally get what you ask for. So it seems like there's a decent amount of visibility there. So, I guess what can get you to the lower or upper end? Is it really just volume?

Hey, Tim. It’s Brian. So, volume primarily related to the back half of the year, and also when we had come out with that guide earlier, we had just announced to our customers that price increase. And so, the – as we're looking at that current guide now, the elements around volume toward that Q3, Q4 time period are part of the wildcards on that guide.

And did the prior guide include any price realization?

It did on the first price increase.

Okay. Got you. And I guess when you look at the supply chain side of things, I mean, Karen, like you mentioned some benefits you saw. It sounded like it was mostly in Europe. But if you look at the US market, I guess, how are you handling supply chain issues, I mean, if you had any? And have you benefited at all from competitor kind of challenges in the marketplace that you know of?

Well, as you know, I think almost everybody discovered that resins are used in many, many building materials from OSB to cardboard and for us our adhesives. So when we had that freeze in Texas, there were certainly some supply chain issues being able to get resins. And that's what I mentioned. We've been able to take care of any of our customers, but that was certainly something that we felt. For us, the supply chain issues for wood is obviously not an issue in our manufacturing process. The main thing, of course, is steel. And as we've talked about not only is steel pricing increasing, but availability is getting tighter. We are not seeing the word allocation use at this point which is great. And we are continuing to be sure that we have a very tight monitor on our forecast, what we’re producing and the steel or raw material that we’re being able to get from our vendors. So supply chain is difficult in many, many areas within the construction industry. We're managing it quite well with our buying group that we have as well as how we're working through our manufacturing, our forecasting and working with our customers. So at this point, we're in good shape. Even from that resin standpoint, we're back in good shape with that.

Okay.

Just on a little bit there, Karen, some of the other challenges would be in logistics containers, bringing product over from our facilities in Asia or items that we buy out there. We're managing it. But it's certainly a challenge. And, Tim, I think you also asked a little bit about our volume. We think we're benefiting from our inventory position in Europe, being to supply customers with product versus maybe our competitors having a little bit more difficulty there.

Okay. Okay. Good. And then the last one from me, when you think about SG&A relative to maybe where we were two months ago, has your assumption changed for SG&A spend this year?

Not significantly. I mean, we've got, of course, new initiative spend that we're looking at there. And typically as a company, I think you know what we focus on things like testing and code reports for product ahead of – earlier than we would when we're bringing on sales folks and the like. One thing I do want to call out on the SG&A is some of our expense in the company and it's more heavily weighted in the admin line is associated with performance share unit, so equity compensation tied to future results. And a year ago the forecasts were much less than they are today. So we had over – a $6 million delta in stock comp expense in Q1 relative to Q1 of last year. Now, because the year – last year progressed very nicely that a lot of that expense came back. But just looking at Q1 versus Q1 I wanted to highlight that as a little bit of a delta.

Okay. Okay. Great. So sounds like the SG&A spending levels are relatively consistent and just have a higher base of sales. Okay. Good. That’s all I've got so I’ll hop back in queue. Thank you, guys.

Thank you, Tim.

Thank you. Our next question is from Kurt Yinger of D.A. Davidson. Please proceed.

Yes. Good afternoon Karen and Brian and thanks for taking my questions.

Hi, Kurt.

Hi, Kurt.

Hey. Maybe, Brian, just starting with you at the investor event about a month ago. I think you alluded to kind of mid-teens operating margin kind of before getting back into that high teens again by 2025. Realizing that some of the gross margin pressure is yet to come, given the increase to the margin outlook for 2021. Is that still the case or does this kind of higher jumping off point change how you're looking at the next couple of years or your expectations around that.

Yeah. Good question, Kurt. No, I don't think it changes that longer term outlook. It's more of a timing issue within 2021 and 2022. As you've seen in prior years, Our cost of sales lags on steel pricing increases and then it goes the other way. So I would say, to reiterate what I had mentioned in the prepared remarks, 2021, we'll benefit. 2022, we'll have a bit of a pullback there due to gross margin. And then, I think if we ever get back to a more normalized steel environment, it gets back to that longer range average for gross margin and then we then build up or ramp up to that high-teens operating income level that we expect for in five years or so due to the growth initiatives leveraging the additional revenue there.

Got it, got it. Okay. That makes sense. All right. And then the home center channel has been obviously a really positive contributor to growth. How do you think about that impact kind of lapping the lows when in Q2 of last year? And then is there any way you could kind of help us ballpark what that home center channel subset is kind of as a percentage of revenue at this stage?

Well, we don't – we're not breaking out the revenues on its own for those customers. As we noted, it's up over 60% year-over-year primarily due to the comparable that I mentioned on a previous response, lows not being in our Q1 2020 numbers. We would expect, it's a very – it’s been a strong market. 2020 was very strong for that category just in general as people were improving their homes and residences and the like. We do see sales to that channel just continue to increase, although from a comparable perspective, Home Depot did pull back on the product line that we've talked about. That's pretty well-documented, and mechanical anchors, what I'm referring to there. So, as far as RNR and DIY, we expect it to continue, although the growth rate on a comparable perspective, post-load-in, we would not expect it to see just because so much of that – so much for DIY business came in 2020.

Right, right. Okay. That makes sense. And then just last one for me, Karen, you had alluded to being in different stages within the growth initiatives, within those different target markets. As we look at the next 12 to 18 months, can you just talk about, which areas you think could be kind of most impactful to the overall growth trajectory? And where you're, I guess, further down the line as compared in earlier stages?

Yeah. That's a really good question. And I think if we would talk about those areas, where our fastener line can have the biggest impact, so we discuss the OEM, the DIY, RNR market, as well as the mass timber, those are opportunities that use a significant amount of fasteners. And so, there's some nice growth opportunity there. We have the majority of products needed. Obviously still more products – always more products to develop. But we do have the majority of products needed for those areas. And we also have code listings behind those areas. So I would see that that market probably has the least amount of extra work we have to do, I would say. Again, we already have distribution lined up for those market areas. The steel market, probably a little bit more work there. Again, even though we have the product and we have the testing, we have code reports, we have the product in the steel design manual, still some work to do there, getting that product visible, a lot of marketing work and a lot of legwork for our sales team on that particular part of those growth initiatives. So they're all in various stages. As I mentioned, in each case, we have we absolutely have products all ready. Do we have a complete line? Not in some cases. But in many cases, code testing, literature, in some cases more literature needed in others. So that's why I'm saying they're in various stages on those five initiatives.

Okay. All right. Well, great. Appreciate the color and good luck here in Q2.

Thank, Kurt.

Great. Thanks, Kurt.

Thank you. Our next question is from Julio Romero from Sidoti & Company. Please proceed.

Hey. Good afternoon, Karen and Brian.

Hi, Julio.

Hey, Julio.

My first question is just on the home center year-over-year growth. The portion of that growth that’s not driven by Lowe's, I understand the growth rate. It won't be as robust as you lap the comparables. But the increased R&R activity, what are you hearing from your customers in terms of the length of the runway that they expect that strength to persist?

Yeah. I think the R&R is going to continue to grow, and I think it was – even with those – not putting in the Lowe’s business, we still saw that both Lowe's and Home Depot had a substantial growth in 2020. And I think probably some of that growth was – future growth was pulled forward, but we are hearing that they still think there's a lot of home improvement projects that are being worked through, and so I think it will still be a very strong market.

Okay. And on your weighted average costs of raw material, how long does that weighted average cost typically lag a price increase by? How should we think about that?

It’s a good question, Julio. And that's why I wanted to note the 2022 element. It could be that long just due to the amount of steel we have on hand. And as we wait – as we consume and bring in with purchases, it could go through the end of the year, early – into early next year. And then at that point, assuming prices – steel prices stay where they're at then we would expect that gross margin pullback just because selling pricesfully reflect those increases, and the steel prices catch up through cost of sales.

Got it. But I think – just to clarify, does your expectation kind of expect steel to continue to rise all the way through 2022 or…

No. Sorry. Let me clarify. So at current price, it will – the weighted average amount in inventory will increase even if prices were to stay flat in the spot market. So if we were to continue buying at today's price, the weighted average of our inventory will continue to increase because we've got a pretty large amount that we had sourced prior to this current market environment. So anything we bring in at the current price will just continue to increase that weighted average. And our cost of sales is based on that weighted average on how we're consuming it. So it's not like a LIFO, where what we're buying today is getting consumed today, so there is a bit of a lag. But as of prices today, we don't have any commentary on future steel prices at this moment. But based on what we see today, we would see that gross margin pullback into 2022.

Okay. I appreciate the color on that. And I guess just – you touched on this earlier. But on your on your key growth initiatives, you talked about – you have a product for all your five growth initiatives. Maybe if we could talk about the concrete initiative Can you maybe talk about some of the nascent opportunities within that space? And I know you're working to develop some of those markets there, so I don't know if you could give us any progress update on how to think about those market developments.

Yeah. The concrete market area, we've talked about this. Our carbon fiber product is really the one that's looking to have some growth opportunities as we get repairing bridges, buildings, roadways that sort of thing. And so as I mentioned, we've got product, we've got testing. We now have code reports on that carbon fiber product and more work being done with specifiers so that they're aware that the product is available and it can meet the solution that they're looking for when they repair or retrofitting their structure. So that's certainly an area in the concrete and the concrete space. Also expanding, I think as we mentioned when we did our 2020 plan, we really focused on six key market areas for our concrete products. Those were in the residential area, the wastewater treatment plants. I'm trying to remember all of them but also expanding into those areas.

Okay. Great. Thanks for taking the questions. Nice quarter.

Great. Thanks, Julio.

Thank you, Julio.

Ladies and gentlemen, we have reached the end of the question-and-answer session and this will end today's conference. Thank you very much for your participation and have a great day.