Greetings. Welcome to the Simpson Manufacturing Company Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] I will now turn the conference over to your host, Kim Orlando of ADDO Investor Relations. You may begin.

Good afternoon, ladies and gentlemen. And welcome to Simpson Manufacturing Company’s fourth quarter and full year 2023 earnings conference call. Any statements made on this call that are not statements of historical facts are forward-looking statements. Such statements are based on certain estimates and expectations that are subject to a number of risks and uncertainties. Actual future results may vary materially from those expressed or implied by the forward-looking statement. 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 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 Mike Olosky, Simpson’s President and Chief Executive Officer.

Thanks, Kim. Good afternoon, everyone. Thank you for joining today’s call. With me today is Brian Magstadt, our Chief Financial Officer. My remarks today will provide an overview of our 2023 financial performance, an update on our end markets and our capital allocation priorities. Brian will then talk you through our fourth quarter financials and fiscal 2024 outlook in greater detail. I’d like to begin by thanking the entire Simpson team for their strong execution in 2023 and relentless customer focus. The market improved in the second half, but it was a challenging year with lower housing starts. Together, we achieved above market growth and high profitability with $2.2 billion in annual net sales, a 21.5% operating income margin and a record $8.26 of earnings per diluted share. Our topline performance was driven by continued share gains across all of our end markets and product lines. Our operating income margin came in below our October guidance, primarily due to additional costs incurred to pursue our growth opportunities in the areas of new products and market penetration. This has contributed to a record number of product launches in 2023 with an expected stronger impact in 2024. Importantly, our 2023 North American net sales were up 0.9% from last year to a total of $1.7 billion on a 1% improvement in volumes, outperforming the broader market, which saw an annual U.S. housing starts decline by approximately 9%. Our outperformance is driven by high single-digit volume increases in our component manufacturer in commercial end markets and modest increases in national retail and OEM, which is partly offset by a minor reduction in our residential market. We are proud of this year’s revenue outperformance and we will continue to invest in and improve all elements of our business in 2024 to ensure that we…

Thanks, Mike, and good afternoon, everyone. Thank you for joining us today to discuss our fourth quarter financial results. Before I begin, I’d like to mention that unless otherwise stated, all financial measures discussed in my prepared remarks refer to the fourth quarter of 2023 and all comparisons will be year-over-year comparisons versus the fourth quarter of 2022. Now, beginning with our fourth quarter results. As Mike highlighted, our consolidated net sales increased 5.5% to $501.7 million. Within the North America segment, net sales increased 5.3% to 387.8 million, primarily due to higher sales volumes across all major product lines, which were partially offset by price decreases implemented during the first quarter of 2023. In North America, wood product volume was up 10.2% and concrete product volume was up 7.5%. In Europe, net sales increased 5.8% to $109.7 million, primarily due to the positive effect of $5.1 million in foreign currency translation. Consolidated gross profit increased 9.9% to $220.5 million, resulting in a gross margin of 43.9%, compared to 42.2%. On a segment basis, our gross margin in North America increased to 47%, compared to 45%, primarily due to lower raw material and labor costs as a percentage of net sales, which were partially offset by higher factory and tooling, warehouse and shipping costs. Our gross margin in Europe increased to 34.2% from 32.7%, also primarily due to lower raw material costs as a percentage of net sales. As you may also recall, our raw material costs in the prior year period included a $1.4 million inventory fair value adjustment for the acquisition of ETANCO, representing 1.4 percentage points of Europe gross margin. From a product perspective, our fourth quarter gross margin on wood products was 44.1%, compared to 41.9% and was 42.8% for concrete products, compared to 42.3%. Now…

Thank you. [Operator Instructions] Our first question comes from the line of Daniel Moore with CJS Securities. Please proceed with your question.

Thank you. Good afternoon, Mike. Good afternoon, Brian. Thanks for taking the questions.

Good afternoon, Daniel.

Hi, Dan.

I’ll just start with -- I appreciate all the color. As it relates to the outlook for 2024, you mentioned H1 maybe starting out a little tougher than H2 from an overall housing market perspective. Given your goal is to continue to generate positive growth above market, do you see flat to positive overall growth in your business and the first half of the year as being achievable or do you see maybe the cadence in H1 being a little bit tougher than that?

Yeah. It’s a good question, Dan. What we’re hearing from our customers is first half, again, flat-ish to maybe down a little bit. Second half, up a little bit. So add it all up, maybe low single-digit growth. And then we do definitely hear different stories from our different customers, our larger builders tend to be on the higher end of that and our smaller customers tend to be a little bit on the lower end of that. That’s what we’re hearing from a market perspective.

And from the company perspective, we’re expecting to grow above the market from an annual perspective. We noted in the release that on average over the last number of years, we’ve been outperforming the housing market by about 250 basis points and we would expect that to be higher than that.

Perfect. Very helpful. And then looking at the markets you’ve targeted to increase penetration, commercial, national, retail, building tech, among others and I know you gave good examples. Where do you see the biggest opportunity for further penetration and kind of moving the needle on growth this coming year?

Yeah. Dan, similar to last year, really, we’ve had good, let me comment a little bit on last year, because I think it carries over into this year. We’ve had good solid growth across all market segments and across all of our major product lines. And you know our business model really well, we’ve got 10,000 plus SKUs, 10,000 plus customers. So it’s lots and lots of small- to medium-sized applications and moving the needles. I mean, there aren’t really huge opportunities that are going to shift things one way or another. And as we look into 2024, we’re very happy with the playbooks we have by market segment, very happy with the playbooks we have by product segment and so we continue to see really strong growth across all of our markets and product lines.

Perfect. And one more, a little bit of review. Just looking at the SG&A in the quarter, what was the difference in variable incentive comp kind of year-over-year, obviously, given the strength and the revenue that you saw, I assume it was up considerably, you pointed that out. And then what are your expectations for SG&A growth embedded in your 2024 guide? Thank you again.

Hey, Dan. Let me make a general statement on SG&A as it relates to our financial. So, again, we run a very, very specialized business model and to really drive that business model with all those customers and products I mentioned, we need people. And it’s not easy to find the very specialized people we need to run our factories, to find the salespeople that know our markets, know our end product to fit our profile, it’s not easy to find the engineers that can develop these innovative products we’re working on, nor is it easy to find the software engineers that we need to develop new applications. And Dan, the bar is high for our team, we want actually the best people, super specialized, and we find them, we tend to hire them, we do everything we can to train them up and then we want to make sure we retain them. So, but on the cost side, I mean, we’re also, look, converse to that, we’re also very much committed to above market growth with top quartile profitability and operating income in ROIC versus our proxy peer group. So when we look at the last couple of years, we started forecasting better gross margins, we knew that would enable us to over invest in the business in some areas that would, one, help us provide even better support to our customers, while still hitting our financial targets, and at the same time, planning seeds to accelerate future market growth, and we’ve been doing this now for three years. And as Brian said, the last eight years or so, we’ve grown about 250 basis points above the market. But the last three years, we’ve been able to over invest in the business and provide that great support for our customers, we’ve grown about 800 basis points above the market. And so when we look at that, we think that also that business model helps us keep that 600 basis points of operating margin improvement we’ve realized versus the pre-COVID years. And again, we think there’s a housing shortage as the market picks up, Dan, we’ll have the people in place that can really help us take advantage of that rebounding market to accelerate the business even more.

And Dan, to get into a little bit of the specifics on some of the SG&A or broader operating expenses. So from an equity compensation perspective, we’ve got a multi-year performance periods, and a year ago, we were looking at 2023 to be more negative than it ultimately turned out to be. And the expense associated with multi-year equity of grants reflected the kind of lower expectations of 2023 and then a little bit forward there. Fast forward a year, we’ve seen a much more robust market in Simpsons performance relative to that. And as we look at, again, those forward years in an equity award, we have to take that expense in the period. So just in the fourth quarter equity comp compared to fourth quarter of 2022 was over $4 million different. Now, digging in a little bit to the specifics that you set around trajectory on SG&A, we would expect it to be pretty in line with volume growth this year. One of the things that we really look to drive our business decisions are how much we’re making those investments, as Mike noted, relative to our forecasts and projections. And today we would expect SG&A dollar growth to be pretty close to be in line with our revenue growth, our volume growth. But that’s something that we pay a lot of attention to, and if we see things slowing down, we don’t want to do the things that impact us over that medium- to long-term. As Mike noted, we do see that fundamental shortage in housing, but we also want to make sure we’re not taking our eye off the ball from an SG&A perspective. So we spend a lot of the time updating our forecasts and our internal plans, and as Mike noted, when we started to see a little bit more volume, a little bit more gross margin, we took that as an opportunity to invest in 2023, because we think that’s ultimately going to be one of the things that helps us win in those areas that we are operating in. Again, our ambition to grow above market and to grow above our longer term average currently.

Were there any other items in your question that I missed?

No. You covered it. That’s very helpful. Appreciate it again. We’ll take any further offline.

Thanks, Dan.

Thanks, Dan.

Thank you. Our next question comes from the line of Tim Wojs with Baird. Please proceed with your question.

Hey guys. Good afternoon.

Hi, Tim.

Maybe just to start off on gross margin. I guess how would you frame the kind of price cost expectations that you’ve kind of included in the guidance? And I guess is any of the modest compression that you’re seeing there just driven by the new capacity and some higher, I guess, labor and distribution costs?

Yeah. Tim, this is Brian. So it would be just a modest, small pullback in gross margin for 2024 relative to 2023 for those items that you mentioned, additional warehousing costs, additional labor costs, factory and tooling costs. One of the things that is, part of our overall manufacturing operation is as we bring new equipment online, we will take a fair amount of depreciation expense in the year that comes online, and when they come online in the fourth quarter, it’s a little bit more of an impact. But as we look at the major elements of our cost of sales, I’d say, raw materials are relatively flat as a percent of revenue. The other drivers are going to be the labor and the factory tooling and then some warehousing costs.

Okay. Okay. That’s helpful. And then just on the investments, I mean, would you characterize some of the higher SG&A spend in Q4 as kind of an acceleration of some of the investments? And was it anything specific or is it just generally, you thought it was an advantageous time to pull some of that into 2023?

Well, as we look at a lot of the investments we’re planning for, in particular, we’ve got some investments we’ve made in the technology space to be able to help us win business. I mean, that was one of the big contributors for us, not what we spent in Q4, but in general, technology helped us win, top 10 component manufacturer in 2023. And it’s those types of investments that we’re looking at that is helping pave the way for future market share wins and gains. When we look at product development, we’ve noted record number of products that were launched and we need to keep that in 2023. We need to keep that trajectory in order for us to hit our ambition of continuing to achieve that above market growth. We also had some customer conversions and sometimes we’ve got to buy back competitive product to get our product in there, because we want our product in on the shelves as soon as possible. So there’s a number of areas that would contribute to that. And we want to get to the end of the day these customer end market wins as soon as we can, and if that means getting software development done quicker or sooner, getting some of these products launched and the activities associated with those done sooner. We want do that, we want to make sure we’re positioning our teams to be able to go after and win in those key end markets.

Okay. Okay. All right. That makes a lot of sense. And then just the last one on revenue growth, just want to make sure I understand it. So if the expectation now is for low single-digit growth in kind of the consolidated North American end market and you’ve outgrown that by 250 basis points. Are you saying that you should at least grow the revenue in North America by mid-single digits, is that kind of what you would tell us?

Yes. Yes. Market assumption, low-single digits and we want to continue to be at least 250 basis points above the market.

Okay. Okay. Very good. Awesome. Thanks for the call guys. Good luck on 2024.

Thank you.

Thanks.

Thank you. And our next question comes from the line of Kurt Yinger with D.A. Davidson. Please proceed with your question.

Great. Thanks, and good afternoon, Mike and Brian.

Hello, Kurt.

Hi, Kurt.

I mean, it sounds like warehouse -- the new warehouses and distribution hubs that you guys opened will be a little bit of a gross margin drag in 2024. But I guess longer term, how do you think about the opportunities from some of those investments on the gross margin line, and as you look across your North American footprint, I mean, are there more opportunities for you to take some of that business in-house and is that something that’s going to drive, I guess, increased capital spending levels going forward or how are you thinking about that?

Good question, Kurt. So real tangible example, Kurt, as you know, we’re moving away from two-step distribution across the Board and moving that needle in the West is kind of the last part of that process. And now as we start to go to our end channel partners or our distributors, we can have interaction with them, we can explain the whole product line, we can tell them everything we’re doing to drive specs, we can tell them everything we’re doing with builders to pull things through, and by having now access to a couple of these distribution customers, we’ve been able to make some really nice gains. And one in particular, there was a customer, I think it was mid-single-digit number of stores, they actually didn’t carry any of our product line. We went in and we started telling them everything we can do to help them and help their end customers. Not only did we pick up the connector business, Kurt, we also picked up the fastener and the anchor business. And that’s exactly why we want to go direct and to be able to service and support that, we need the warehouses close to our customers to provide that fantastic service level. Ideally, we want to be within one-day shipping of all of our end customers and right now we’re pretty close to that, but not exactly there. As we shift away from the two-step distribution, we need those sites to provide that customer service. We’ve got a couple more that we think we can do to provide good support. That also enables us to provide some same day support via local windows and a couple of other things. So we continue to do that, we think that helps us pick up share, and then the margin, obviously, that we had with our two steppers, that part goes away. Some of that we get on the topline and some of that we say, we invest, because we need to provide the service to be able to support that.

Got it. Okay. So it’s more of a customer service, hopefully some share gains and then an opportunity to maybe reinvest any sort of margin uplift associated with that. So it’s not a huge gross margin driver over time. It’s more of a competitive positioning strategy. Is that the right way to think about it?

Yeah. Yeah. Help us better serve and support our customers and help us drive more growth.

Got it. Okay. Makes sense. And then, in terms of new residential construction, it’s kind of a tale of two markets between single-family and multifamily. Could you maybe just remind us, content per single-family versus multifamily unit on average and how you think about, the growth on the single-family side, perhaps being, dampened or offset by weakness in multifamily or whether, the backlog of units under construction, you think can carry you kind of through 2024. How do you think about that dynamic?

Yeah. So on average across the U.S., Kurt, we think our content on multifamily is similar to the average content in single-family, on average. Obviously, on the West Coast and in the hurricane areas, there’s more content per house, less maybe in the Midwest. But if you look at multifamily, since they tend to be multi-stories, they tend to have garages below them, there’s more engineering. So there’s more hardware in general on those, kind of balancing out what we typically see extremes. And multifamily, I mean, a single-family on the West Coast, Southeast versus Midwest. The summary of that is relatively consistent content-wise. Now, from a multifamily perspective, depending upon how the different markets talk about it, it’s roughly 30% of sales -- of a total single-family sales.

Sorry, total starts.

Total starts, sorry.

Multifamily.

Yeah.

Right.

Roughly 30% of total starts. If you look at the multifamily segment, we think about one-third of that is predominantly wood construction, where we would have that apples-to-apples comparison. The other two-thirds could be steel or concrete construction or maybe our applications on those wouldn’t be nearly as high as they would in -- from a wood construction perspective. So long story short, the mix between single-family and multifamily, we don’t expect to be a huge driver one way or another over the last couple of years. We’ve kind of seen that balance out and we think we’ll see that again this year.

Got it. Okay. That’s helpful. And then just lastly, I guess, not to get too far ahead of ourselves, but spending related to Columbus and Gallatin $120 million this year, how much kind of carry over into 2025 do you think would be associated with those projects specifically?

Shouldn’t be too much. So we’re expecting to complete Columbus in 2024, have that opened up, it’s not the end of this year and early next year. Then on Gallatin, we are breaking ground now. I would expect about $50 million -- $40 million, $50 million spent this year. Then a balance of that spent next year.

Yeah. And that’s actually something to note. So when we talked about the $200 million in total CapEx, that is actually the total for Gallatin, some of which will be spent this year as noted and then carried over in the next year.

Got it. Okay. And then, I guess, just lastly on ETANCO, any sort of metrics, whether it’s kind of backlog or visibility you guys have, just in terms of kind of the near-term outlook for growth for that business, and I guess, and how you’re thinking about 2024 as a whole?

So, Kurt, I was just over there a couple of weeks ago and similar to our business in the U.S., they’re not getting long range forecast from their customers. So it tends to be they work on projects, they get an order and they try to ship it out within the next day or two. So we don’t have a great view into the backlog. Overall French business, we continue to believe that that particular segment’s doing okay. As we said in our prepared remarks, the business was flattish with prior year in a negative market. So we’re pretty pleased with that. We’re pleased with the gross margins over there. We continue to think it’s a good business model. And again, the more and more energy regulations come into place that require people to increase the thermal efficiency of residential and commercial buildings, the more we think that business is going to grow for us and that particular segment of the ETANCO business was up about 10%, 15% over prior year, the facade business. So again, not great visibility from a backlog perspective, because that’s just the way it operates. But again, we’re pretty happy with that business model going forward.

Got it. Okay. That’s very helpful. Appreciate the color guys and good luck here in Q1.

Thank you, Kurt.

Thank you. And we have reached the end of the question-and-answer session. we also -- this also concludes today’s conference and would you may disconnect your lines at this time. Thank you for your participation.