Greetings. And Welcome to Simpson Manufacturing Company Inc. First Quarter 2022 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 your host, Kim Orlando with ADDO investor relations. Please go ahead.

Good afternoon, ladies and gentlemen, and welcome to Simpson Manufacturing Company's first quarter 2022 earnings conference call. Any statements made on this call that are not statements of historical fact 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 website. Except to the extent required by applicable securities laws, we undertake no obligation to update or publicly revise any of the forward-looking statements that we may 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 p.m. 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 Chief Executive Officer.

Thanks Kim and good afternoon, everyone. And thank you for joining us today. I'll begin with an overview of our first quarter financial results and performance drivers before turning to an update on our key growth initiatives, and capital allocation priorities. Brian will walk you through our financials and updated fiscal 2022 business outlook in greater detail. We delivered strong financial and operational performance in the first quarter. Net sales of $493.6 million increased 42% over the prior year period. Sales growth was primarily driven by the four product price increases we implemented in April, June, August and October of 2021 to offset rising raw material costs. The price increases ranged from mid-single digits to mid-teens, depending on the product mix of our wood connectors, fasteners and concrete products in the United States. While our sales benefited from higher volumes in our home center channel, which includes both our home center and co-op customers, and is where we see much of our repair and remodel and DIY business. This was offset by software volumes through our other distribution channels. As such volume was flat year-over-year. Our consolidated net sales in Europe for the first quarter grew 16.2% year-over-year also due primarily to product price increases in response to rising material costs through 2021. Our consolidated gross margin supported by our product price increases grew 130 basis points to 48% compared to 46.7% in the year ago period. As a result, we grow our income from operations to $124.4 million and generated strong earnings per diluted share of $2.18. Brian will elaborate further on our margin expectations for the remainder of the year. I’d like to thank our entire Simpson Strong-Tie team for their solid operational execution. We appreciate your dedication to serving our customers and remaining on track with our…

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 2022. And all comparisons will be year-over-year comparisons versus the first quarter of 2021. Now turning to our first quarter results. As Karen highlighted, our consolidated net sales increased 42% to $493.6 million. Within the North America segment, net sales increased 46% to $438.7 million, primarily due to the four price increases we implemented in 2021 to offset rising raw material costs. In Canada, our net sales also increased due to product price increases and were partially offset by lower sales volumes. In Europe, net sales increased 16.2% to $51.5 million, primarily due to product price increases, which were partially offset by the negative effect of $3.7 million in foreign currency translation related to Europe's currencies weakening against the United States dollar. Wood construction products represented 88% of total sales compared to 87%. And concrete construction products represented 12% of total sales compared to 13%. Consolidated gross profit increased by 45.9% to $236.8 million, which resulted in another strong gross margin quarter at 48%. When compared to the first and fourth quarters of 2021, our gross margin expanded by 130 basis points and 60 basis points, respectively. On a segment basis, our gross margin in North America increased to 49.7% compared to 48.5%, primarily due to the continued benefit of the aforementioned price increases, which contributed to lower overhead and labor costs as a percent of sales partially offset by higher raw material costs as a percent of sales. However, in Europe, our gross margin declined slightly to 33.9% from 34.4%, primarily due to higher…

Our first question comes from Daniel Moore with CJS Securities.

Thank you. Good afternoon, Karen and Brian, thanks for taking questions. And congrats on obviously exceptional results. First is on the guide, the revised ‘22 operating income margin guide. If we excluded ETANCO would it still be generally in that 19% to 20% range higher or lower?

Yes, Dan, it would be in the same ballpark range.

Got it. And you tried to give some color and it's appreciated. Just trying to understand the difference between the view now and kind of two months ago or so what's different in the macro environment that or the environment for Simpson? Or is it more just a function of kind of initial conservatism?

Well, I think a couple of things. One was obviously a little more line of sight into the year and seeing the demand trends that came through in Q1. And then our continued work on our forecasting and modeling within our business, but largely due to the forecast that we're seeing based on talking with customers and vendors throughout the year. Q1 was a little better than planned, as well.

Okay. And maybe one or two actually more, I'll shift gears to ETANCO. How would you describe the environment in Europe, and specifically Italy, France, their core markets today, compared to maybe last summer when you announced the deal. Are demand levels higher or lower? Just any changes in the operating environment there to speak up?

Yes, I'll take that one. We are still seeing some pretty nice demand in Europe, obviously, a little bit of choppiness based on what's going on in with Russia and the Ukraine, but we still based on the forecast and information that we get from industry in the European market, it's still looking like there's some strong demand in our residential and also some pretty good demand in the commercial market, which is where ETANCO is.

Got it. And lastly, again, related to ETANCO. If not sort of a volume growth projection, you've given us good color on pricing here in North America. How do we think about the pricing that come through in their business? Either at the back half of ‘22, or into back half of ’21 and ‘22? What type of uplift should we expect from ETANCO year-over-year from price? Thanks again.

So from a pricing perspective, they tend to put any price increases in place in Europe, I think you're aware, you can only do it a couple times a year. And certainly as we've looked and work with them last year, those prices were put in place to cover their rising material costs also. So they would continue or we would continue that process now as we see any material fluctuations, but again, pretty limited in the European market to two times a year to being able to put any pricing increase in place.

And some of the countries do allow a little more frequents there. But they've got a very complex SKU mix, a different pricing approach. They do a lot of quoting for particular commercial jobs and applications to contractors that they sell to. So it's but they definitely tried to capture rising material costs into their selling prices as well.

Your next question comes from Tim Wojs with Baird.

Hey, good afternoon, everyone. Hello, maybe just -- maybe starting on just kind of price cost and I just want to make sure I understand it. Is there an underlying improvement kind of baked into your outlook? Or is there some sort of kind of shift that maybe some of the timing impacts from normalization actually kind of fall in ‘23? I sort of make sure there, just kind of clarify that.

Well, Q1 as mentioned a moment ago, Q1 was a little better from a volume perspective than what we had thought heading coming out of last year. One of the interesting things that we're seeing is due to various factors influencing construction, such as lack of labor, the continued supply chain efforts, it seems like seasonality is less impactful than it had been to our business in prior years. One, our dependence on housing, as we've noted is been decreasing, but also just builders being very fully booked maybe that's not the right word way to say it. But they're often commenting to us that they're sold through their 2022 releases, and they're just building themselves, it feels like there's a little less seasonality built into that. And as we think about our business going forward. Again, that a little better than Q1 versus last year, and then just the continued complexity in our business around our SKUs, the steel that we use, some steel, some products were turning a lot faster than others. So it creates the dynamic of trying to pinpoint when that gross margin cost to sales impact would be, so just a little better view now versus four or five months ago, and or a few months ago, coupled with just that I guess little lag, little less seasonality in our business, which helps overhead absorption in the factories.

Definitely. Okay, good. No, that's really helpful. And I guess if volume growth was better in the first quarter than maybe you thought I mean, what's kind of baked in now to your outlook for volume growth for ‘22?

It's still mid little -- mid to high single digits from a volume perspective. We are seeing though April is a little softer than what we thought. But as we look at the balance of the year, and remember last year, we had some interesting volume running through due to buying patterns of some of our customers. The comparative will be, it’ll be little more interesting, but just from a fiscal year 2022 that mid to low, mid to high single digits is where we're expecting.

Okay, good. And then I guess on ETANCO just kind of two clarification questions. So is ETANCO being reported on a GAAP basis? And if it is, what's the intangible amortization number that we should think about being included in the operating margin guide.

So the only numbers right now that we, so obviously ETANCO there's zero, other than the transaction fees that we called out separate. On the operating expense line, there's no ETANCO impact in the P&L revenue expenses because the acquisition was April 1. On a go forward basis, the operating margin guidance assumes right now a very high level estimate for intangible amortization that we are spending the next couple of quarters to fine tuning the fair value purchase price allocation valuation to really fine tune that. So right now we just have some high level estimates baked into that operating margin guide that we provided.

Okay.

So I can tell you it's going to change. It's in the 10s of millions, or in terms of intangible amortization, we just, there's a lot of assets to value, whether it be purchased intangibles, step up in fair value and in other assets that would roll through. So it's a very high level estimate at this point.

Okay, no, that's fine. I mean, but the 19% to 20% includes the charges, it includes the intangible amortization for ETANCO at least what your estimated to be. Okay, got you. And then what would you think that the revenue contribution for ETANCO should be per quarter?

Per quarter we're still dial in that in but for the balance of 2022, it’s -- to be about, it should be a little north of $220 million for the balance for the second, third and fourth quarters of the year.

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

Great, thanks and good afternoon, everyone. I just wanted to unpack the comments, I guess on the volume side first, and hoping you could maybe provide a bit more color on the demand trends between distribution and kind of the dealer channel as well as the home center customers. And Karen, if I heard you right, I thought you said that volumes were kind of flat year-over-year and relative to expectations, it sounded like that was better. So I just wanted to understand whether that was kind of a specific comp issue related to some home center strength in Q1 of last year or kind of what to make of that flat volume.

Yes, Kurt, I think it has to do quite a bit with what was happening this time last year, right, we had announced the April price increase. So I think we had some pre buying that went in a little bit of pre buying to help offset that price increase. In 2021, we also had quite a bit of concerns about supply chains. And I think a lot of customers were just basically making sure they had product available. So it's pretty choppy for us based on again, the price increases and all the things that were going on with supply chain to get a really nice quarter over year-over-year view, we did see a little bit of increase in our home center volume. But as we had said in the third quarter of last year that volume had decreased. So we see home centers kind of trying to do a little bit of an increase in their volume before any spring or summer business that comes in and basically a little bit down in our other distribution channels.

Got it, okay. And then, Brian, you've kind of touched on maybe a bit softer than expected April. I mean, was that primarily on the home center side, maybe with a little bit of a delay in spring in certain geographies, or is that on some of those channels that would serve the new construction market as well?

Kurt that was just total not broken down by channel in that regard, so we look at our daily sales trends in total and that was where that comment came from. So not specific to any particular channel at this point.

Okay, got it. And then just last one, I know it's still early on, but relative to the 500 basis points of European kind of operating export expansion, do you kind of expect within ETANCO any sense of kind of what the baseline to build that off of is.

So when we were commenting on that late last year, it was around a high single digit Simpson European business through I believe it was -- we were analyzing those forecasts during the fourth quarter last year, so that high single digit was the base that we were looking at there.

Our next question comes from Julio Romero with Sidoti.

Hey, good afternoon, Kevin and Brien. So you had mentioned raw materials continued to rise in the quarter. Are you considering or expecting any additional price increases? And if so, what's your sense of how willing the market is going to be able to absorb additional price increases?

Yes, that's a great question. We certainly saw the yield start to come down a little bit at the end of the fourth quarter and maybe even slightly early into January. And then as things kind of changed, in Russia and Ukraine, we've actually seen it picked back up again. And but as we've always stated, we need to ensure that whatever those price changes are, are sustainable before we go to the effort of making significant changes in our price structure, and certainly creating a lot of that work for our customers. So at this point, we're obviously watching it. But we do not, at this point, have any thoughts of price increases going in place, unless, of course, it really changes dramatically. But currently, it looks like we'll stay status quo is where we are right now.

Yes, there could be a little bit of pricing in Europe.

Yes.

Markets are a little bit different there. So Karen, I think you are mostly talking about North America.

Correct.

And there may be some -- Julio, sorry, one last thing on that there may be small slices of our business, particular product category that we might need a little bit of pricing, price increase on but nothing significant in the US.

Okay, no, I appreciate the call there. And I make sense that you guys are being thoughtful about everything there. Can you maybe speak to what you're hearing from your customers and just the sentiment in regards to the outlook for new single family versus multifamily construction?

Yes, I think, as Brian mentioned, many of our customers have already sold out their releases for the year. So there's still the demand. And there's the same elements that everyone is concerned about increasing interest rates, certainly what's going on in the overall economics. But our customers are clearly saying they still have demand. And I think there's sentiment is that they feel pretty good about both multifamily and single family as we go through the rest of 2022. As you know, Julio for us, we put our products in both single family and multifamily. So when we look at housing starts, even though we break it out by geography, because we've talked about the content we put in, multifamily starts are good for us also because we’ll put quite a bit of content in those starts.

Yes, understood. And just over on ETANCO. You expand on your commentary with regards to the integration costs that you expect in the $8 million to $10 million of incremental expenses. I wasn't quite sure what were they incremental too or they incremental to your initial expectations? Just any clarification there?

Good point. So the $7 million that we booked in Q1, it's incremental on that, gets it to the $15 million to $17 million total for the year.

Go you.

So before I go to more details, is that one make sense on that one.

Yes.

Okay. So, working with consultants, so part of that is the amount that we paid to our investment banker to -- on close of the deal, or when the deal was closed in there, a lot of efforts around integration consulting, there may be costs associated with some of the activities in the integration, and then as well as all the other costs that come with the added financial reporting requirements, additional audits, valuation work that some integration of systems to be able to provide each -- provide their locations, buying demands or what have you with their counterpart location. So just general activities associated with pulling the two organizations more closely together.

Got it. That's really helpful. And one last one for me is, Karen, you spoke earlier about how the first quarter of last year, you had seen some pre buying in advance of a price increase. Just remind us if what you had seen in the second quarter of last year, just as we come up on the quarterly comp, if you saw any pre buying or abnormal volume activity as well in the prior year quarter.

Yes, I mean, as we've always talked about, we need to give our customers somewhere between a 30 to 60 day notification of price increase, we always try and put things in place to stop pre buying. But of course, that's almost impossible to stop 100%. And we did have a price increase that we implemented in June. So we would have had a little bit of pre buying that also happened in second quarter.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And this concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.