Greetings. Welcome to Simpson Manufacturing Company Incorporated Second 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. I will now turn the conference over to Kim Orlando with ADDO Investor Relations. Thank you, you may begin.

Good afternoon, ladies and gentlemen, and welcome to Simpson Manufacturing Company’s second 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. We encourage you to read the risks described in the company’s public filings and reports, which are available on the SEC’s or the company’s corporate Web site.

Thanks, Kim, and good afternoon, everyone. And thank you for joining us today. I'll begin with a summary of our key second quarter performance drivers and initiatives. Brian will then walk you through our financials and updated full year 2021 business outlook in greater detail. We experienced strong business momentum in the second quarter, generating net sales of $410.3 million, which grew 18% over the prior quarter and 25.8% over the prior year period. Sales growth was primarily driven by the implementation of two product price increases during the quarter along with marginal increases in sales volume. Throughout the quarter we were very pleased to be able to continue meeting the needs of our customers by providing them with our trusted product solutions typically within 48 hours or less. This is despite the current environment marked by the increasing prevalence of global supply chain constraints, limited steel availability and a tight labor market. The recent price increases we implemented drove significantly higher gross margins for the second quarter, which increased to 47.9% from 46.7% in the prior quarter, and 45.9% in the year ago period. As a result, our income from operations improved to $101.7 million and led to strong earnings per diluted share of $1.66. Looking at our sales results in more detail, the majority of the increase we experienced, both sequentially and over the prior year period, was a result of two price increases that became effective during the second quarter. These price increases were in direct response to rising material costs. Effective April 5th, we implemented price increases ranging from 5% to 12% depending on the product mix for certain of our wood connectors, fasteners and concrete products in the US. On June 16th, a second price increase ranging from 6% to 12% primarily on our wood connector products in the US also went into effect. As the price of steel continued to rise throughout the second quarter, we announced a third price increase in June in the range of 7% to 15% across a variety of our product lines in the US, which will become effective for most customers in mid-August.

Thank you, Karen and good afternoon, everyone. I'm pleased to discuss our second 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 second quarter of 2021 and all comparisons will be year-over-year comparisons versus the second quarter of 2020. Now turning to our results. As Karen highlighted, our consolidated net sales increased 25.8% to $410.3 million. Within the North America segment, net sales increased 22.2% to $350.6 million, primarily due to product price increases that took effect in April and June of 2021 in an effort to offset rising material costs along with marginally higher sales volumes. We also continued to benefit from solid trends in our distributor channel, which reflected increased demand from ongoing strength in US housing starts. In Europe, net sales increased 51% to $56.4 million, primarily due to higher sales volumes compared to last year's COVID-19 related slowdown. Europe sales also benefited by approximately $5.3 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 31.1% to $196.4 million, which resulted in a stronger Q2 gross profit margin of 47.9% compared to last year. Gross margin increased by 200 basis points, primarily due to the price increases Karen discussed earlier, which were partially offset by higher material costs. On a segment basis, our gross margin in North America increased to 49.9% compared to 47.4%, while in Europe, our gross margin increased to 36% compared to 35.1%. From a product perspective, our second quarter gross margin on wood products was 47.4% compared to 46.2% in the prior year quarter, and was 47.5% for concrete products compared to 40.7% in the prior year quarter.

Thanks, Brian. As Brian mentioned, in summary, we are very pleased with our second quarter results. We continue to manage the key areas of our business that we can control, while navigating the current macroeconomic environment, which is characterized by our ongoing rising steel prices. While these factors will result in a notable compression to our margins in fiscal 2022, we remain confident in our ability to achieve our five year company ambitions that we unveiled at our Analyst Investor Day in March. Our first ambition is, we want to strengthen our values based culture. Our Simpson strong tie employees are our most important asset and we will continue to engage with them to ensure, relentless customer focus that they're involved in leadership programs and instill a safety first culture. Second, we want to be a partner of choice in all aspects of our business. Third, we strive to be an innovative leader in our product categories. Fourth, we aim to continue our above market growth relative to US housing starts. This we will continue to target on operating income margin that remains within the top quartile of our proxy peers. While we expect increases in our operating expenses in the near term to support our growth initiatives, our goal over the long term is to expand our operating income margin from historical averages supported by enhanced revenue from our growth initiatives. And finally, we'll continue targeting a return on invested capital that remains in the top quartile of our proxy peers. In closing, I'd like to sincerely thank all our Simpson employees for their commitment as we begin to execute against our five year ambitions. We commend you for your dedication to safety and for working hard every day to achieve our mission of providing solutions to help people build and design safer, stronger structures. And with that, I'd like to open the call up for questions. Operator?

Thank you Our first question is from Daniel Moore with CJS Securities.

I'll start with volume. Press release mentioned marginally higher sales volumes. I assume that means low single digits. Is that correct in terms of ballpark terms? And what are your expectations for organic volume growth for Q3 and the remainder of the year, including that tough comp at Lowe's through the next quarter?

Well, we certainly saw volumes increase in Europe relative to Q2 of last year. Looking at North America, I think you've indicated it nicely. We have a low single digit volume expectation relative to what we're seeing or what we're hearing in the marketplace with respect to starch and in general DIY, R&R elements.

And then trying to understand, exactly what factors have changed over the past couple of months that caused the lowering of the top end of fiscal ‘21 margin range. I understand that the puts and takes as you described them. Just wondering if at any one of those has changed relative to kind of maybe two months ago that would necessarily take down that top end?

Well, for sure, steel prices continue to increase pretty dramatically from where we were the end of last year, and even the expectations where we were three months ago. And although we have announced multiple price increases this year, it’s just there is a bit of that. Also, though, there maybe a little bit of softening in some of the end markets due to other elements, for example, housing starts to be impacted by some supply chain issues with regard to things like appliances and the like. So just a number of various factors that we're modeling in now with another three months under our belt.

And similarly, for fiscal '22, appreciate the initial commentary, as everybody knows, there’s sort of a jump on next year. But this year we started out with margin expectation that was arguably conservative and quickly ramped higher. So are there factors in your mind that could cause that margin compression next year to be maybe a little bit lighter than what you've described?

I think, Dan, as we see steel pricing continuing to increase, seems like potential new availability coming online has been pushed back a little bit from fourth quarter into first quarter. So we're still seeing tight market and high prices continuing for some time to come.

And Dan, as we've talked in the past on these calls where as we buy new steel, it takes a while for our average price of steel used in our operations to reflect current market conditions. So it’s just that that element. We started the year with relatively lower price per pound in steel and it's gone up pretty dramatically and we'll see the full impact of that in fiscal '22.

Our next question is from Tim Wojs with Baird.

So maybe just to try to level set a little bit on a couple of basic questions. If I'm doing my math correctly, which probably isn't correct. But did you get -- in North America, did you have over $50 million of contribution in the quarter?

That sounds too much, that's too much.

That's too much. What was the price contribution?

Well, it would be up 40-ish.

And that's really only one price increase, right, because you really only had two weeks of the second and there's still a third coming, right?

Correct.

So could price be, on a run rate basis, $75 million, $80 million, $90 million a quarter?

Give me just a second, still a little math here. $80 million.

About $80 million. And so that would be kind of the annualized run rate going forward. So even though we're talking about a little higher, I guess, margin compression next year, it's off of a much higher revenue base than before. Correct?

Correct.

And then when we think about the volume growth, it sounds like the low single digits, did that include the lapping of Lowe's this quarter?

Yes.

And if you take that out, what would volumes have grown?

Well, we had Lowe's in last quarter, or last year Q2. So from a compatibility perspective, we're pulling out pretty large numbers out of both quarters. Our home center, total combined home center business, was down Q2 of this year compared to Q2 of last year due to that load in.

Is this POS positive?

We had the load in last year, there was a bit of POS. I believe so.

And then just on a dollar per dollar basis as you kind of normalize both input costs and the pricing increases. Will you have effectively offset higher costs with price and really numerically it's just margin dilutive because of the mass?

Margin dilutive, I would expect that to be correct. Yes.

Our next question is from Kurt Yinger with D.A. Davidson.

I guess just starting off, recognizing you're not kind of alone in this boat. I'm just curious how you think about the ability to continue to push price on the customers at the same time that it seems demand is moderating a bit. Just kind of the moving pieces within that, and what type of responses you're hearing?

Let me take a shot at that. Kurt, it is never easy to push price increases through. But since it's such a highly publicized information about what's going on with the steel industry and of course, it's not only Simpson who's pushing pricing through, it's pretty much anybody who’s got steel as a raw material in their finished goods. So it's very highly publicized as to what's going on with the steel industry, a lot of price increases going in all aspects of the construction industry. And so of course our customers are very happy that we have product to provide them. And as we've mentioned, we're certainly not a just in time shop and that means that we bring steel in, we have finished goods, we have raw materials in our inventory. And that's really to meet those customer needs and to be able to still have that 48 hour turnaround time. So although steel pricing or any price increase is hard to push through, I think the service levels that we provide is something that the customers appreciate. And again, they're certainly aware of all the changes that are going on in the industry.

And I guess sticking along those same lines, we've heard some comments around shortages of truss plates. I'm just curious whether you feel you've benefited in North America from some of your competitors perhaps being more strained from a service proposition or supply chain perspective?

We certainly have heard in our European market that we have benefited from some of our competitors being unable to supply building materials. And we've been able to pick up some customers in that European market. I think on a much smaller scale in the North American market, we've probably benefited from that also. But as we've mentioned, again, we want to be sure from an availability standpoint that we can definitely meet our customer needs. So we don't want to bring on a customer and then not be able to support another customer. So we're very careful on how we do that. But again, I think our team has done an excellent job of working with our customer base. The production team has done a great job of being sure we've got the right product in the right place, and really making sure that we're not up any jobs, that's for sure.

And I guess on the ‘22 margin outlook, obviously, you've talked about the drivers of the gross margin compression. I'm just curious whether -- what the assumptions you've made, whether you expect to get nice leverage on the operating expense line or should we expect that some of the investments you're making behind some of those targeted growth markets will start to ramp up and you won't necessarily see that leverage despite the fact that you're benefiting from a lot of price?

Kurt, I would say from an OpEx perspective, we've got our plans on how we allocate SG&A dollars from supporting not only just our growth initiatives but our current operations and the like. And as price increases push through, we'll look at the investments needed within SG&A to support our business. And so I would expect there to be some offsetting leverage on the SG&A side relative to the gross margin given the result being in that 2022 direction we gave. Does that make sense?

Yes, that's great. And then just one on technology. Could you just talk about what you've seen in terms of software usage and adoption among your customers? Talk a little bit about what metrics you watch to determine success there and whether you think that's something that can become a leading indicator in terms of product demand as you look out over the next couple of years?

So I think each customer is a little bit different on the elements of software that they choose to make their business more efficient. And that's really why our platform is based on applications that can help a component manufacturer, say a truss versus a different application that would be used at a lumberyard where potentially they would be doing a full bill of materials takeoff. So we first start by trying to figure out the needs of that customer and do we have a software application that could make them more efficient and more effective in their particular part of the building chain. We are seeing, for example, lumberyards using our takeoff tool because it's making them more efficient on being able to pull more jobs. We have a target to convert and to offer this product to a significant amount of lumberyards this year. We're seeing component manufacturers again use our software to design trusses and floor systems. We still have a small market share there, maybe 4% to 5% of that total market share in that application. We're seeing our home centers use our deck solutions and our fencing products to help bring customers into their locations as well as support, not only our products that are used in those applications, but of course, a lot of lumber is also sold as you're looking at a deck or a fencing. So there is no one answer, it’s across the board. The metrics that we use are, as we look at releasing new deck products, do we see an increase in our products specifically that are used for decking applications or fencing applications? We can get those metrics. We also know, from the component manufacturing side, the metrics that we use as pounds of plates that we sell to those component manufacturers. So each application a little bit different metric used. But I think the key is that can we at Simpson provide a building technology solution that can make our customer, and that could be a designer, the takeoff person, component manufacturer, the home owner building a deck, make them more efficient in that role and also specify our products on that final construction project that they're working on.

Some of the other metrics that we would utilize would be opportunities with customers. So we'll track them in our CRM tool, looking at various opportunities across customer facing technology opportunities.

Our next question is from Julio Romero with Sidoti & Company.

So your commentary on your expected margin compression beginning in late '21 and early '22. Can you maybe just talk about some of the assumptions there? Does that 300 to 400 basis point decrease in expected operating margin assume steel stocks rising and remains at the current elevated levels, or does that 300, 400 basis point decrease assume a steel price decrease?

We would expect -- as I mentioned earlier, it takes a while for our average -- the average price of new purchases in our inventory to catch up. So I would expect things to continue to increase before things level out. I was just going to say, today, we're well north of 2 times like the cost of new purchases versus what we held in inventory in at the end of last year. There maybe a little bit of a ramp down once we get to a peak in costs of new purchases coming in. But it'll take a while for those to -- it's just taken a while to go up, it’ll take a while to come back down as well.

But that's like ramped downward in price that could happen given the dramatic jump up in steel price, somewhat of a ramp downward is factored into your 2022 assumption, would that be fair or…

Yes, it would. It’s just lot of assumptions there, how much it will be and when, a lot of questions right now in those models.

Just asking because of the dramatic jump up with prices have done and just trying to think about that dynamic. I guess the steel prices rising, I think about some other inputs for some of your customers, such as lumber prices for maybe truss manufacturers. Lumber prices have gone down, steel prices have gone up. Does that dynamic if you will change anything for your customers in terms of the appetite for them to absorb your price increases?

I think if you look at that from just the standpoint of building a house, right, I mean, the majority of the product that's in the residential home would be lumber. So lumber price increases got a pretty significant impact compared to steel prices as we've mentioned and said in the past that we're probably well under a half a percent of the total cost of a house. And so even though our price increase is of concern and as we said it's not an easy thing to relate to our customers, it's a much smaller impact from the overall construction on the house. I'm not sure if that answers your question. But just again, from the overall construction industry, the wood pricing, which has been decreasing for about the past three weeks, is a pretty significant impact from a housing affordability point.

Just thinking about that from a broader perspective. I guess, shifting gears to some of your capital allocation commentary. I'm fascinated by the investment in the venture capital funds. Can you maybe walk through how that's helping you think about growth initiatives in the long term?

So where we're really excited about that is the opportunity to engage with firm that's looking at very cutting edge technologies within the building space, gets us access to their deal flow. We let them know what we're looking for, gets on their radar screen. We have periodic conversations to look at those opportunities and just new technologies that are at the forefront that we may not have had cross our desk that we can potentially take a look at. So advanced scouting, if you will. And it may not be something that we look to acquire, we made partner with, we may do strategic relationship in some form or fashion with these new technologies. But this gives us access to a more of that that we've not had in the past.

And then just last one for me is, the $5 million increase in CapEx for this year. Can you maybe give us a quick reminder of the implied growth CapEx I guess $40 million this year? Just give us a quick reminder of what's currently being worked on in this calendar year?

Well, we're working on a number of opportunities to in source products more. So we've talked in the past where we'll buy out a number of our products from vendors to the extent we can make more of that ourselves. We like to do that. We've got some opportunities to invest in machinery or capital equipment, because volumes have been up pretty significantly over the last few years, so we want to make sure our operations are reflecting that type of environment. And to the extent we can be more efficient, more cost effective with our products and solutions, we'll do that in investing in CapEx is one of those methods.

This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.