Greetings. Welcome to the Simpson Manufacturing Co., Inc. Third 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 that this conference is being recorded. I will now turn the conference over to Madeleine Crane, Investor Relations. You may begin.

Good afternoon, ladies and gentlemen, and welcome to Simpson Manufacturing Company’s third 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. Except to this extent required by applicable securities laws, we undertake no obligation to update or publicly revise any of the forward-looking statements that we make here today, whether as a result of new information, future events, or otherwise. Please note that the company’s earnings press release was issued today at approximately 4:15 PM Eastern Time. The earnings press release is available on the Investor Relations page of the company’s website at ir.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, Madeleine. Good afternoon, everyone and thank you all for joining us today. I'd like to provide a high-level overview of our third quarter financial results and the associated performance drivers. I will then wrap up by summarizing our key growth initiatives. Brian will then walk you through our financials and full year 2021 business outlook in greater detail. Our third quarter net sales of $396.7 million were once again very strong and increased 8.9% over the prior year period. Sales growth was primarily driven by product price increases to offset rising raw material costs. While the macroeconomic landscape remained challenged throughout the third quarter, due to ongoing global supply chain constraints, limited steel availability and a tight labor market. We continued to deliver on the key elements of our business model to ensure our customers' needs were met. This includes but is not limited to ensuring availability of our trusted product solutions, typically within 48 hours or less. To date, we have implemented four price increases in 2021. In early April, mid-June, mid-August, and our fourth price increase in mid-October. These price increases ranged from mid-single digit to mid-teens depending on the product mix for certain of our wood connector, fasteners, and concrete products in the United States. Looking at our sales results in greater detail, although third quarter net sales benefited primarily from a full quarter of the first two price increases, our top line moderately declined by 3.3% compared to the second quarter of 2021, predominantly due to decreases in sales volumes from our home center channel, which I'll discuss in more detail shortly. These price increases were primary contributor to another quarter of strong gross margins, which increased to 49.9% from 47.9% in the prior quarter and 47.6% in the year ago period. As a result,…

Thank you, Karen, and good afternoon, everyone. I'm pleased to discuss our third 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 third quarter of 2021. And all comparisons will be year-over-year comparisons versus the third quarter of 2020. Now turning to our results, as Karen highlighted, our consolidated net sales increased 8.9% to $396.7 million. Within the North America segment, net sales increased 6.8% to $338.6 million, primarily due to product price increases that took effect through the third quarter of 2021 in an effort to address rising material costs, and were partially offset by a decline in sales volumes, primarily in our home center channel. In Europe, net sales increased 22.5% to $54.8 million, primarily due to higher sales volumes compared to last year's COVID-19 related slowdown. Europe's sales also benefited by approximately $900,000 of positive foreign currency translations resulting from some Europe currencies strengthening against the United States dollar. Wood construction products remained consistent at 85% of total sales and concrete construction products also remained consistent at 15% of total sales. Consolidated gross profit increased by 14.3% to $198 million, which resulted in another strong gross margin quarter at 49.9%. Gross margin increased by 230 basis points primarily due to the aforementioned price increases which were partially offset by higher material costs. On a segment basis, our gross margin in North America increased to 52.1% compared to 48.9%. While in Europe, our gross margin declined slightly to 37.7% compared to 37.9%. From a product perspective, our third quarter gross margin on wood products was 50.2% compared to 48% in the prior year quarter and was 44.6% for concrete products compared to 42.1% in the prior year quarter.…

Thanks, Brian. Again, we are very pleased with our third quarter financial and operational results that we've achieved despite ongoing macroeconomic challenges. While we cannot control elements of the economy, we are dedicated to managing the key areas of our business that we can control and we remain confident in our ability to execute on our five year company ambitions. These include strengthening our values based culture, being the partner of choice in all aspects of our business, being an innovative leader in our product categories. To continue our above market growth relative to U.S. housing starts and maintaining an operating income margin and return on invested capital targets within the top quartile of our proxy peers. I want to thank you again and thank all our employees, customers, suppliers, and stockholders for your continued support of Simpson strong tie. With that, I'd like to open up the call for questions. Operator?

Thank you. At this time, we'll be conducting a question-and-answer session. Our first question comes from the line of Tim Wojs with Baird.

Maybe just to start if, in North America, if you could maybe true up a couple numbers for me. I guess the first piece is what was the contribution from pricing in the quarter?

That was, give me just a second here, about $75 million, Tim.

Okay. And is that if you kind of look at the four price increases that you've implemented, what would you think run rate kind of pricing should be on a quarterly basis once everything's fully effective?

Good question, because the third price increase that took effect was halfway through the quarter. And of course, we've got the fourth one that's just very recently took effect I'd say about 100 million all in, of course that is comparing it to prior to any price increase. So as we start lapping quarters here, we're going to start lapping quarters with price increases in them. But 100 million, all in versus no fresh increase. That makes sense?

Okay. That makes sense. That's helpful. Thank you. And then, I guess on the home center business, is there a way to kind of indicate how much that business was down in dollars.

So we had a pretty, there was a -- from a comparability perspective, it was down a pretty good amount. Part of it was due to the load in last year as noted. But also part of it was due to, we believe they were, the home center customers were doing some inventory leveling during early, like July, August of the quarter, because they had a pretty good inventory position leading up through the end of Q2. So don't have a dollar amount that we're going to share with you. But a big portion of that was due - of the volume decline in the quarter was related to the home center channel. Again, tough comparable because last year heavy DIY projects in addition to the load in, but also the inventory leveling, we believe, was taking place. For the end of the quarter, we feel that more normal buying patterns are in existence, probably through in September. And on a go forward basis, we would expect more of the normal patterns of purchases through the home centers.

Okay. And what about kind of, I guess, if you look at like October, did you -- if you kind of look at your volume numbers, you can look at it total or by home center and by kind of legacy distribution, but did October see improvements? Because it sounds like the core distribution channel was down a little bit in the third quarter? Has that started to kind of grow again, as you as you've gotten into the fourth quarter?

Yes, Tim. We're seeing some nice growth in early, obviously, we're early in the fourth quarter, but as Brian mentioned, we saw the home center business kind of pick up a little bit to become more normal buying in September, continuing through October. And as we also mentioned, our other means of distribution, really contractor distributors, lumber yards. They were also pretty slow in the first couple of months of Q3, we're seeing that pickup again, also.

Got you. Okay. And then just the last question I had on lead times Where are your lead times today, in terms of, when customer is ordering, how quickly you're able to fulfill those orders? And how has it changed over the last six to nine months? Has there been a lot of ups and downs? Or you've been pretty consistent on lead times?

Yes. As you know, we think -- our availability of product and lead time is a very large differentiator for us. So we're still north of 97%, on lead times on the majority of a product that a customer would order doesn't mean that if there was a special or something that might take a little bit longer, but we're still running a little north of 97%, in that 24 to 48-hour lead time. And that's a key differentiator for us.

Yes. So basically, would you agree with the statement that your customers don't necessarily feel the need to over order or stock in the sense that they know your lead times are pretty good. And so they're not necessarily, a lot of their orders are actually reflective of end market demand for any sort of inventory build.

Yes. I mean, we've done a really good job probably, ever since the 2008 downturn, I would say, has been able to -- I would say, still our customers feel comfortable that they don't need a lot of product in their inventory, because we can fill their orders in an expedited manner. So we haven't really seen that change, like we're not seeing a lot of customers add extra inventory. And again, I think that's just a credit to what we've been able to do with our lean manufacturing and being able to meet those customer needs and fill those orders in that, 48 hour time frame and at that 97%, 98% rate.

Thank you. Our next question comes from Daniel Moore with CJS Securities.

Just wondering, obviously, we're in our fourth round of price increases. Are you seeing it doesn't sound like it, given the pickup in band in October -- September, October? But are you seeing any signs at all of your customers, customers demand being impacted after multiple rounds of pretty significant price increases over the last six to 12 months?

Yes. I think, Dan, those price increases we're seeing in all construction materials and of course, we focus on anything associated with steel. So as they see price increases with anything really associated, I always refer to garage doors and appliances, obviously, our products. What's really been the huge driver for us has been the availability of product. We mentioned, we think we've heard from our customers that we've been one of their best suppliers in this really tight market from a supply chain standpoint. We've heard from some of our competitors customers that they're having -- they'd like to get some product from us. So I think we've gained just a little bit of market share, especially in our European market by being able to meet those needs and have that inventory. But it's really been a supply issue rather than focus so much on pricing not to say from our salesmen standpoint, that it's easy to get a price increase through. It's always a difficult thing but it's so highly publicized in the market space that our customers understand why we're having to have these price increases.

It’s helpful. And I think you mentioned this in the prepared remarks, but your increased inventory levels, how much does that reflect just pricing versus quantity? And at this stage, do you feel pretty comfortable about your ability to procure, so you don't need to strategically continue to build inventories in terms of actual volumes, any commentary there?

Hey, Dan. The majority of the increase is price related on the inventory.

I would say from the steel again, our purchasing group has done an excellent job of making sure that we've got steel to be able to meet our customer needs, but as you pointed out, it's about balancing act right now. Ensuring that we have steel that we can continue those fill rates, but then not having too much steel if we have any pricing decrease that we see. Right now, we still see the steel industry is -- I would say maybe it's slowed a little bit it hasn't come down but price increasing has slowed a little bit. So we'll just see how that continues. I think most people, most industries would think that there is some new volume for steel mills coming online. It was supposed to come online in fourth quarter now it's anticipated late first quarter, I think that will help. And we'll see how things go from there. But we're very cautiously trying to balance customer needs being sure we have that product for them, as well as steel inventories.

Perfect. Maybe just one more kind of high level, just as you look around the country, are you seeing any changes in building codes and standards in any particular areas that could potentially impact your revenue or competitive positioning over the coming years?

We actually, I think this is kind of early on but this build to rent concept, we have had some of those owners of those buildings contact us about building to a resiliency standard versus a life safety standard. Resiliency, meaning that they're going to hold on to that building for quite a long time as they continue to rent it. And so they want the building to be able to be occupied after any sort of natural disaster. So it's just starting but that's quite interesting for us, because it means typically, you would put more of our content into a house built from a resiliency standpoint, versus a house built from a life safety standpoint. And just on the tip of the iceberg of seeing what happens with this.

Thank you. Our next question comes from the line of Kurt Yinger with D.A. Davidson.

Just starting off, when we think about the increase in the operating margin outlook, kind of back to the prior range after the strong Q3. Just curious, what were the biggest upside surprises in terms of the performance in the quarter relative to your expectations, because it sounds at least like volume was pretty challenging and you hadn't kind of yet benefited from the four price increase. So just curious, what was better than expected there?

Yes. Part of it is the price increase relative to the use of the associated inventory, the timing of that. And then, think we may have saw a little bit more strength in European margin. And then, also the trajectory of expenses through the balance of the year, what projects would start and continue through the balance of the year. So yes, at the six month mark, we were making some estimates, obviously, with an additional three months under our belt. And just only three months left in the year, give us a little bit more of that insight into bringing that operating margin back up to high end there -- low end and high end.

Got it. Okay. And then, historically, Simpson has had a premium price position relative to peers, and it would seem that the value proposition is there currently, perhaps even more so than it's been in the past? Is where your pricing today? Is that consistent with where you've been historically? And how does kind of competitive positioning factor into your decision-making process around price at a time when inputs are rising so meaningfully?

And I think, Kurt, you mentioned a key point to us. From the standpoint of the services that we provide for our product. As we talked about, this on time delivery, we talked about large SKU mix, our customer service both inside and our outside sales team, as well as our engineering that we really pride ourselves. Again, as we talked about, we don't want to sell on price, we want to sell on all the services and that's really where you see that pricing premium. I would say today, we still probably have that pricing differential in place. And as I mentioned, what's key to our customers is availability of the product. We never want to be the vendor that shuts the jobsite down because we didn't have product available for those customers. And I think it's been really well appreciated as we're in times of a tight supply chain.

Right. Makes sense. Okay. And then just last one for me. I didn't hear it in the prepared remarks. But I'm just curious whether sourcing from overseas has been a challenge for you guys, at least in the last few years. I think North America, fasteners production capabilities have been something that's been of interest, given everything that's going on, is that still a priority? And is that something where you would look to M&A or something you can maybe build out organically?

Yes. It's a great question. As we've mentioned, our fastener business is one of our fastest growing has been for probably over the last three to four years. We domestically manufacture at a Simpson facility about 35% of our fasteners, and we buy the other 65% offshore, basically, in Taiwan. A typical lead time before this year would have been maybe three to six months to get a product. We are now running about 10 to 14 months lead time on those products out of Taiwan. And that certainly makes it very difficult when we think about forecasting and also having that inventory on hand. So as we talked about in the past, we're very interested in trying to grow through either acquisition or organically, more control of our capabilities of manufacturing that product and a little less dependent on buying out of that product. So certainly, it's on our radar and something that we're constantly looking for.

And do you have -- I guess, extra space at the existing facility? Or would that be something where, if you were to do it organically, it would need to be kind of a greenfield location?

Well, a lot of that. Kurt, the additional manufacturing that -- for the local manufacturing that Karen had mentioned, we have stood that up over the last number of years, within an existing factory, here locally in the U.S. As we move things around and utilize space, we've been able to bring that production in-house. A lot of things that we also do from a lean perspective, try to take advantage of that to the best that we can. But we're getting to the point where it may hit an inflection and we may need to add some facility footprint into those locations that we're doing that in. So you've always heard us talk about we like local production to be able to respond quick to customer needs. And this has been the build up of that but we will -- if we continue to significantly grow the amount of local production we would need to make some investments in facility.

Thank you. Our next question comes from the line of Julio Romero with Sidoti & Company.

So I wanted to dig a little more into the channels in North America other than the home centers. Think you mentioned the volume headwinds in contractors and lumber yards. There may have been some different drivers, then that drove the decline in those channels, then what happened in the home centers. I believe you mentioned more of a cautious stance because of their own labor and supply constraints. So I was hoping you could speak a little more to that. And if you've seen and have those labor and supply issues alleviated in those channels at all?

Yes, it's a great question. And we certainly saw and heard from some of our customers in the slowdown on that new construction standpoint. Just because, one pricing of lumber, which is now gone down, but pricing of lumber was very high, unable to complete structures because of supply chain issues, again, whether that be doors or windows, appliances, faucets, sinks, it didn't really matter but unable to complete the structure. And so we definitely saw that slowdown in that space. We have now seen as we came out of third quarter in September. And as we're looking at fourth quarter with where we are so far, in early October, an uptick in those markets, just as we've seen an uptick in that home center buy also.

Great. And would you say that the uptick is to the same extent that you've seen in home centers, either on -- I guess on a percentage basis or wherever you want to take that?

Yes, I mean, I think as we know, the cyclicality of our market is pretty well defined and also when you think from the home center standpoint. So I would say we're seeing a -- what I would call a normalized if there is such a thing, a normalized uptick in both what we see from our contractor, distributor lumberyards, as well as the home center. So nothing -- no unusual anomalies, at least in the last 60 days or so.

And that's relative to the prior or same period.

Right. Relative to Q4.

At this point, we have reached the end of the question-and-answer session. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation and have a great day.