Greetings. Welcome to Simpson Manufacturing Co. Inc. Second 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 Co.'s second 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. Thank you for joining us today. I'll begin with an overview of our second quarter financial results and performance drivers before turning to an update on our key growth initiatives and capital allocation priorities. Brian will then walk you through our financials and fiscal 2022 business outlook in greater detail. As many of you already know we completed our acquisition of ETANCO, a leader in fixings and fastening solutions, primarily for commercial building construction market throughout Europe on April 1st. Since we announced the transaction back in late December, planning for and initiating the integration of ETANCO has been our primary focus, and it has been progressing according to plan. We pulled together a project management office that includes a leading, globally recognized external advisory consulting group, together with a multidisciplinary team of key management from both Simpson and ETANCO. Because of our complementary cultures and values, our combined team has been working extremely well together as we develop detailed plans for each of our specific integration tracks. Our approach has continued a high employee retention rate throughout the transition. After several months of hard work, we were very pleased to have found no material adjustments to our previously identified synergy opportunities. Although the realization of the full amount is subject to change based on current environment in Europe. With the groundwork we've laid so far, we believe we are still well-positioned to capture meaningful benefits from those synergies in the coming years. We delivered strong financial and operational performance in the second quarter Net sales of $593.2 million, increased 44.6% year-over-year. Our sales growth was primarily attributed to our acquisition of ETANCO, which contributed $80.3 million in sales. Our sales further benefited from product price increases we implemented throughout 2021 to offset rising…

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 2022. And all comparisons will be year-over-year comparisons versus the second quarter of 2021. Now, turning to our second quarter results. As Karen highlighted, our consolidated net sales increased 44.6% to $593.2 million. Within the North America segment, net sales increased 30.2% on relatively flat volumes to $456.4 million, primarily due to the price increases we implemented in 2021 to offset rising raw material costs, which was partly offset by foreign currency translations. In Europe, net sales increased 136.1% to $133.2 million, primarily from ETANCO, which contributed $80.3 million in net sales, and to a lesser extent price increases, intended to offset higher material costs abroad. As Karen shared earlier, Europe's volumes without a taco were down compared to the prior year quarter. Europe sales were negatively affected by $6.9 million in foreign currency translation related to Europe's currencies weakening against the United States dollar. Wood construction products remain consistent at 87% of total sales and concrete construction products also remain consistent at 13% of total sales. Consolidated gross profit increased by 32% to $259.3 million, which resulted in a gross margin of 43.7% compared to 47.9%. On a segment basis, our gross margin in North America decreased to 48% compared to 49.9%, primarily due to higher material costs as a percentage of net sales, which were partially offset by the product price increases we enacted throughout 2021. Our gross profit dollars in Europe totaled $39 million and included $19.2 million from ETANCO, which is net of $9.2 million in fair value adjustments for acquired…

At this time, we will be conducting a question-and-answer session. Our first question is from Daniel Moore with CJS Securities. Please proceed with your question.

Thank you. Good afternoon Karen and Brian. Start with North America, you continue to generate really exceptional growth given pricing actions above our expectations. Give us an updated view on your updated view and overall housing growth, what that implies for volume growth as well as kind of overall revenue growth as we think about the remainder of fiscal 2022 compared to the back half of 2021?

Yes, that's a great question, Dan and I'm sure you've seen that the housing start numbers are coming down a bit. I think that builders are not quite as optimistic as they were in the first quarter and so we're starting to see a little bit of those numbers come down also. One of the things I would just keep in mind when you look at the housing start numbers, is the residential starts are down, which is what we're seeing, but the multifamily starts up. So, I would just reiterate to put a lot of content pretty much in anything built out of wood. So, we certainly will have content in those multifamily. And the other thing I would just mention is as we look at our much more balanced portfolio than we had in sort of the last choppiness of the residential housing starts, again, much more balanced when we look at about 50% of our revenue being tied to U.S. housing starts where about three years ago, we would have said 60% of our revenue would have been tied to US housing starts, but certainly seen with the rise in interest rates, the builders are seeing it's definitely a little less optimistic about the back half of 2022.

Very helpful. Maybe trying to break that down a little bit more pricing, I think previously said about a $300 million benefit in fiscal 2022, is that still the right kind of overall level of benefit? Has that increased at all with continued rising raw material missionary pressures?

No, we're still comfortable with that approximate $300 million incremental impact of pricing in this year versus last year.

Very helpful. Maybe switching gears, sounds like that the ETANCO integration is going great, but timing, obviously, a little bit dependent on what's going on with the macro, which is uncertain. Can you elaborate or quantify -- elaborate at all or quantify what you're seeing in terms of maybe the shifts and timing of realizations of some of the synergy targets at ETANCO? Thanks.

Yes, so remember the $30 million of synergies that we had listed, excuse me, about half of those were defensive synergies and half were offensive synergies. So, we certainly think that the economic conditions we're seeing in Europe might push our offensive synergies out a bit. But we believe we remain on track as far as our timing at the end of 2025 for those defensive synergies.

Got it, that's very helpful. And then maybe lastly just the -- elaborate on the facility expansions. You talked about the Ohio project, maybe what that entails, you gave us the CapEx numbers not to go through those again, but what kind of incremental capacity do you expect to be able to generate once that's all said and done? And that's it for me. Thanks,

Yes, it certainly adds additional footprint there for expanding our warehouse. What that also allows us to do is to be -- to rearrange and make our manufacturing operations in that facility, very optimal from an efficiency perspective. So, as we look at additional capacity, as you can imagine over time, the -- we just have to add additional square footage in facilities we've done in other locations over the years. And this one is just a facility that we've evaluated the metrics and the growth plans that we've got. So, being able to able to continue to serve our customers, produce product close to our customers, and by adding on to the warehouse, again, makes overall operation there that much more efficient as we grow into our current plans.

Very helpful. Thank you.

Our next question is from Tim Wojs with Robert W. Baird. Please proceed with your question.

Hey, everybody. Good afternoon. Maybe just on the back half of 2022, any kind of thoughts or, kind of, modeling considerations around volume in the second half? I mean, I think within North America, I think the last two quarters, we've seen kind of flattish volume to kind of start the year. So, at this point, would you kind of have us model volumes down in the back half of the year or do you think that's too onerous at this point?

Flattish to maybe down just a little bit.

Okay. How do you feel about the inventory levels at some of your customers at this point? I'm just, I guess I'm trying to understand if you guys have any kind of destocking -- if you've seen any of the stocking? If there's a risk around destocking, it starts start to decline more meaningfully?

Yes, that's a really great question. And, obviously, we have a lot of salespeople that are out with our customers every day, and we're not seeing any concerns about customers having a destocking situation, their inventory. As we mentioned, we're seeing a little bit of increase from a home center standpoint on some of those key things that they've brought in, obviously for their big selling season. But we haven't seen anything with our other distributors from a destocking standpoint on their inventory.

Okay. Okay, good. And then I guess just from a margin perspective, Brian, I mean, in the back half, I mean, they caught you know, year to date, you're doing like, just over almost 23.5%, 24% operating margins and you're counting to 19% to 21%. Is it kind of glide down in terms of the cadence? I mean, is Q3 better than Q4? Or how would you kind of think of the cadence of the margins in the back half of the year and into next year? I guess when you see kind of the best picture from raw material normalization?

Yes, so glide down is a term that we would use as well through for the second half of the year. Having the -- it's interesting this year, it seems like volumes, so volumes impact overhead absorption, and of course, overhead absorption in traditional Simpson Q2, Q3 this year, we would absorb more -- have a better margin profile, it seems that's less of an impact just because that seasonality has been less of a function, but still part of the business, but to a lesser degree. But that being said, Q3 margins better than Q4 margins gliding down. And then as we look at 2023, as we all evaluate the general operating margin getting back into middle higher part of the current range, not yet to call the 2023 guide yet, but certainly seeing Q3 gliding down to Q4 as we wrap up the year.

Okay. Okay. So, it's fair that Q4 might be kind of the peak kind of normalization for margins, kind of the peak impact?

Right, based on our current estimates.

Okay, good. And then the integration and transaction costs, so I think you took the guidance up by $5 million to $8 million there from what it was last quarter. I guess what exactly is going up on the integration costs?

Well, right now we -- through the first half of the year, are in Q2, continue to work with consultants and our teams to formalize many, many tracks within our integration plans to capture those synergies looking at if there were any one time costs associated with any kind of severance or things like that, that would be potentially part of -- that would be the bulk of that.

Okay. Is that $20 million to $25 million go away Next year?

For the most part, yes.

And it -- and the $20 million to $25 million, is that inclusive of the inventory step-up or not?

Not. That inventory stuff up all up in that -- in that cost of sale line. This is just -- totally separate. So, as we tried to call out the various elements associated with the inventory, step up or the intangible amortization, the integration costs are separate and distinct from those other two.

Got you. Okay. Okay, good. That's what I had. So, thanks for the time and good luck on the back half of the year, everybody.

Thanks Tim.

Thanks Tim.

Our next question is from Julio Romero with Sidoti & Co. Please proceed with your question.

Hey, good afternoon Karen and Brian.

Hi Julio.

Hey Julio.

So, I kind of wanted to start on pricing a little bit. Give you all my -- by my math, about $60 million of price remaining. On the topline in 2022 versus 2021, can you just maybe talk about how we should think about the -- maybe the cadence of the impact being felt in 3Q versus 4Q? Should we expect anything at all in 4Q in terms of topline price?

Mostly, all of that Q3 Julio.

Got it. Okay. And then maybe thinking about ETANCO, the margins look pretty impressive at first glance, 35% op margin -- gross margins and 22% op margin after adjusting for kind of transaction cost and all that. And that's better than the historical margin that you purchased it at, if I recall. So, was this in line with your expectations? And how do you see those margins trending as we progress throughout the year?

Generally in line, and obviously, we're monitoring those very closely with the operating environment in Europe and it's very challenging. Now, we are working very closely with that -- not only the integration team, but their management team, we're getting out doing sales ridealongs and just learning as much as we can about the business now that now that we're there. But it's really the volume -- that topline volume story and paying very, very close attention and helping them. They do a really good job managing their pricing, their gross margins, but those are things that are very much front and center with us.

Okay, understood. And then just your prepared remarks sounded like on the investment side, there might be more to come beyond the Ohio expansion. Just what are the considerations and key objectives in play as you weigh additional expansion?

We like to, again, make sure our facilities support our growth initiatives, our R&D testing initiatives, the service that we deliver to the customers is one of our value propositions and we want to make sure that is a continued focus for us. How can we be more efficient, with more volumes running through the facilities and at some point that that fixed footprint we've got to just expand them at a certain tipping point, that's where we are with Ohio. So, to the extent that we can't manufacture more product closer to our customers, we're always looking to be able to do that. Don't have a lot of other details to share at this point, but it's really trying to highlight -- or trying to focus on those areas where we can really add value to our customers and making sure we're doing -- we're supporting our manufacturing, our warehousing and other operations with efficiency, safety, and ultimately, how do we continue to translate that into really good customer service.

Got it. Now, that's good color there. Thanks for taking the questions.

You're welcome.

Thanks Julio.

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

Great. Thank you and good afternoon, everyone.

Hey Kurt.

Yes, hey, just back on ETANCO, I mean, can you just talk about what you're seeing there in terms of commercial, kind of, construction activity in France and Italy and -- I mean, how you're just feeling about the revenue outlook for that business? I think the last quarter, you talked about maybe $220 million of sales this year. Do you think that's still achievable based on the book of business? Or maybe a little bit weaker than that?

Yes, I think Kurt certainly, if you think about in the Paris area they have in the Olympics in 2024, so a lot of construction going on. We mentioned a project that we worked on together with the Simpson team and the ETANCO team to put some of our products on those -- some of those particular projects that are going on for the Olympics. So, a lot of commercial business going on there. I would say in in general in Europe, though, because of the uncertainty that's going on with the war, things are starting to slow down a bit, both on the residential and the commercial side. But we still do estimate the $220 million approximate of revenue from the ETANCO team

Of course, with their certain parts of Europe, very much focused on, excuse me, energy efficiency, the products that ETANCO brings to market from helping put up new facades and cladding and the like very, very much in line with some of the -- what we think are some of the tailwinds are in Europe. But of course with the uncertainty -- the great amount of uncertainty in Europe, in the region that seems to be just a bit of a headwind there as well.

Okay. All right, that makes sense. And you talked about the home center business, kind of, outperforming expectations a bit, again, this quarter and some softness on the traditional distribution side. Was that pretty consistent from start to finish of the quarter? Or I guess, any thoughts around how that dynamic may have shifted here early in Q3, if at all?

One of the things about -- so let me talked about Q3 or July, in particular, we're certainly seeing volumes are up a little bit compared to last year. But just a reminder to what we saw in July-August of Q3 2021, home center is doing some inventory destocking. So, it may be a bit of a easier comp, so to speak, from that perspective, just a lot of lumpiness within that particular part of the business, when it goes to inventories that are being brought in and when those orders are being placed. So, the comparable is favorable now, but it would be off of a pretty soft comp from last year.

Okay.

In general.

Yes. No, that's a good reminder. And then just my last one, I know you kind of reconfirmed the $300 million of sales from price this year. And I didn't hear you talk about it, but have you guys taken additional pricing, I guess, actions on non-connector business in North America at all?

We've done a little bit of pricing in North America, mainly on some of our fasteners and some of our specialty products. In Europe, they've done some pricing on the breadth of line of products, whether that be connectors, fasteners, or anchors, but in North America, really more of the faster market.

Okay. Well, appreciate all the color and good luck here in Q3.

Thanks Kurt.

We have reached the end of the question-and-answer session. This does conclude today's conference and you may disconnect your lines at this time. Thank you for your participation.