Greetings and welcome to the Simpson Manufacturing Company’s Second Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kim Orlando with ADDO Investor Relations. Thank you, Kim. You may begin.

Good afternoon, ladies and gentlemen, and welcome to Simpson Manufacturing Company's Second Quarter 2024 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 make here today, whether as a result of new information, future events, or otherwise. On this call, we will also refer to non-GAAP measures such as adjusted EBITDA, which is reconciled to the most comparable GAAP measure of net income in the company's earnings press release. Please note that the 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 Mike Olosky, Simpson's President and Chief Executive Officer.

Thanks, Kim. Good afternoon, everyone, and 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 second quarter performance and updates on our end-markets and capital allocation priorities. Brian will then talk you through our second quarter financials and fiscal 2024 outlook in greater detail. Our second quarter net sales totaled $597 million, which was in-line with the prior year quarter in housing markets that continue to be challenging in both the US and Europe. Nevertheless execution against our growth strategy to drive new customer wins has enabled us to continue outperforming a declining US housing market, by mid-single digits on a year-to-date basis. While we remain optimistic in longer-term growth prospects of the US housing market, our expectations for modest growth this year have been extended into 2025. I'll discuss our outlook in greater detail shortly. Turning to trends in our end-use markets. North American volumes for Q2 were relatively flat compared to last year, producing net sales of $463 million versus $465.5 million in the prior year. To further break-down our North American volume performance, we achieved mid-single-digit growth year-over-year in both our OEM and component manufacturer markets. We have continued to identify new use cases and deepen our relationships with OEMs, so it remains a relatively small contributor to our revenues. Simpson is continually improving our software offerings to component manufacturers and leveraging growth from prior new business wins. We also modestly improved our volumes in the commercial market, while the residential market remained relatively flat as improvements in single family were offset by double digit declines in multifamily housing compared to the prior year quarter. The national retail market saw low single-digit declines due to a combination of weather, timing, and…

Thanks, Mike, and good afternoon, everyone. Thank you for joining us on our second quarter earnings call today. Before I begin, I'd like to mention that unless otherwise stated, all financial measures discussed in my prepared remarks refer to the second quarter of 2024. And all comparisons will be year-over-year comparisons versus the second quarter of 2023. Now turning to our second quarter results. Our consolidated net sales remained relatively consistent at $597 million. Within the North America segment, net sales modestly declined by 0.5% to $463 million on relatively flat sales volume and pricing. In North America, wood construction product sales were down 1.6% and concrete construction product sales were up 6.3%. In Europe, net sales increased 1.6% to $129.9 million, primarily due to modestly higher sales volumes, particularly offset by the negative effect of $0.7 million in foreign currency translation. Consolidated gross profit decreased 3.1% to $278.5 million, resulting in a gross margin of 46.7% compared to 48.1%. This gross margin is approximately 70 basis points above our historical average Q2 gross margin since 2018. On a segment basis, our gross margin in North America decreased to 50% compared to 51.2% primarily due to changes in product mix in addition to higher warehouse and freight costs as a percentage in net sales, which were partially offset by productivity improvements. Our gross margin in Europe decreased to 35.4% from 37.4%, also primarily due to higher labor, factory, overhead, warehouse and freight costs as a percentage of net sales. From a product perspective, our second quarter gross margin on wood products was 46.5% compared to 48.4% and was 47.5% for concrete products compared to 45.9%. Now turning to our second quarter costs and operating expenses. Total operating expenses were $145 million, an increase of $4.3 million or 3%, primarily due…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Daniel Moore with CJS Securities. Please proceed with your question.

Thank you. Mike, Brian, thanks for the color and taking my questions. Start with -- I missed the commentary around national retail accounts. Can you just repeat that? And how much of an impact, if at all, was inventory management or destocking in that channel? Is that a headwind either in the quarter or on a go-forward basis for the next quarter or two for you?

Yes. So good question, Dan. So we continue to be really pleased with the work that our national retail team is doing. Quarter-to-date volume was down 3.3%. Really the biggest driver in that was comps. Last quarter, we had picked up a whole bunch of business with some of our customers, and we were loading in the shelves last year. So that made the comp a little bit more challenging. Year-to-date, volume for national retail is up about 3%. We continue to be quite pleased with our Outdoor Accents growth there. So that's the black hardware that's used on decks and pergolas. We're also quite pleased with our growth of our fastener business in that segment as well.

Very helpful. Appreciate that. And then -- you talked about obviously, I appreciate the color, updated view around US housing starts where you see them coming in for the year. You continue to outpace by close to mid-single digits above that 250 basis point target. Is it your expectation to continue to outpace by at least kind of low to mid-single digits as we look to the balance of the year? I think you said moderate volume growth is sort of your expectation. I just want to make sure that I heard that correctly.

Yes. So as you know, Dan the last eight years, we've outgrown the market by about 250 basis points. Clearly the market is not helping us a whole lot recently. So if you look at US housing starts, it's down six out of the last eight quarters. We had a really big swing from Q1 to Q2 of this year. Q1 was up a couple of percent, Q2 down 7%. And if that kind of holds true, that forecasted level, Dan the market will be down now basically down to flattish for three out of the last four years, and we'll finish the year with housing starts kind of somewhat similar to what we had in 2020. And then just to put that a little bit into context, if we finish this year with housing starts similar to what we had in 2020. Back in 2020, we had a $1.25 billion business with about a $250 million our operating profit. With that same market size, 1.4-ish million housing starts, we will have added $1 billion onto it. So that $2.25 billion range. And we will add an additional $200 million in operating profit basically with the same size market. So we are pleased with how we've developed things over the last four years. But clearly, that's been a headwind, and we want to continue to outgrow the market, and our target is to do that at least 250 basis points going forward.

Really helpful. And then from the outset of this year, you've sort of described '24 as being an investment year in terms of personnel, service capacity, so that you can sustain that outperformance on a go-forward basis. Looking to 2025, if housing does reaccelerate toward the mid-single-digit growth as you expect and you continue to outpace. How do we think about SG&A growth from the elevated base in 2024 -- in other words, how do we think about kind of potential operating income margin uplift in that type of environment?

So Dan, we’ve been over the last couple of years because we've had strong gross margins, we've really been reinvesting back into the business. So warehouses to provide better service and be closer to our customers. SG&A in terms of software engineers, salespeople, a lot of investment into the digital tools. So we believe we've got a lot of that foundation set going forward. We do think there are a lot of additional growth opportunities to invest in, in the future. But as long as we see the short-term housing market, kind of be in this flattish range, we think we can dial back cost a little bit and be even more cost conscious than we have been in the past.

Yes. So Dan, it's Brian. So as we think about going into next year and as we are evaluating those opportunities as Mike noted, to continue our above-market growth outpace housing. We're looking at what it's going to take to develop those products, those solutions, have people in the field supporting our customers, whether it's field salespeople, engineers and of course, there are many things that go along with bringing those products out. We do -- as Mike noted, we are very closely monitoring our end-markets and making decisions on what we are spending and hiring for on a go-forward basis. So although we are not yet prepared to come out with what our 2025 operating margin guidance would be. And we do have a company ambition to be in that top quartile of operating margin, and we are not quite there, but that's part of what he's guiding, how we make decisions on the programs and other items that we are funding and making those investments in.

That's really helpful. Last one and I'll jump out. But you mentioned in terms of capital allocation, you mentioned M&A opportunities. Are you looking mostly a tuck-in similar in that $10 million, $20 million plus range, just kind of in terms of size of deals. That's one. And then two, you bought back $50 million worth of stock in the quarter, shares looking to open a little bit below the $176 average buyback price. Are you likely to continue to be opportunistic at a similar or even perhaps a higher rate in terms of buybacks as we look forward? Thanks, again for all the color and answering the questions.

You welcome Dan. So from a capital allocation perspective, as we noted, we've got some big investments we are making in our business to support our manufacturing and distribution footprint. Now that being said, we did complete a transaction in the quarter. We are evaluating other opportunities that would be consider the tuck-in type acquisitions that you mentioned, I won't comment on size of those, but it is -- it would definitely help us accelerate our strategic ambitions in going after some of those key markets. From a share repurchase perspective, we'll continue to look to be opportunistic. But with the capital allocation plans that we've got laid out, we are balancing all of those various uses of capital.

Very, helpful. I’ll hop back, many follow-ups thank you.

Thanks Dan.

Thanks Dan.

Thank you. Our next question is from Tim Wojs with Baird. Please proceed with your question.

Hey, everybody. Good afternoon.

Hi, Tim.

Hi, Tim.

Hi. Maybe just to start. So if your guidance before was low single-digit kind of starts growth this year, and now you are kind of guiding flat to down. I guess what's kind of changed in the market for Simpson's business? Is it just -- or in the market in general. Is it just -- is it weaker multi-family? Or is the single-family market also maybe not as strong as you thought?

Yes. So Tim when we came into 2024, we thought the market was going to be flattish from all of the indications we've had from our customers and the market analysts. When we got into first quarter, we saw a 2% -- we saw 2% of market growth in housing starts for the first quarter. We hear from our customers, things are going to be a little bit more optimistic. And then April was a pretty slow April -- then the second quarter came in, we started to see things really slow down. April had an initial indication of being pretty good and then it really slowed down. And so based off of that and everything we are hearing from our market and the fact that the housing starts were down 7%. That's why we think best guess, flattish which we still think is above what we are hearing from some of the market forecasters, but we do think things are going to pick up a little bit in the second half, and that's what's driving our guidance.

Okay. Okay. That's helpful. And then mix was – there is a bunch of mix issues that kind of created some headwinds last quarter to sales, especially in North America, but it doesn't seem like much of that has kind of impacted this quarter. Does that kind of suggest some of the things that happened in the first quarter kind of went away? Or is that still kind of a lingering kind of concern for issue?

Tim, it is Brian. No issue there in the second quarter. We were looking at volumes that were flattish as we called out. And as you see the net sales similar. So the first quarter items that you noted did not repeat.

Okay. And then just another question just on the investments. I mean it sounds like you guys are pretty active in kind of how you're thinking about kind of making incremental investments relative to sales I guess what are the biggest levers you could pull if the top-line did kind of come in below your expectations over the next, say, 18 months to 24 months?

Yes, so Tim, let's say, we are assuming that the housing market is going to pick up because of the shortage that we all know. So if that is the case, we would really be focusing in on things like T&E and travel, making sure any hires are critical to the current role and directly impact revenue in the short-term. We've had a hard time finding people, both in our manufacturing facilities and our sales teams and our engineering teams. We want to make sure we keep the teams in place. And so when the market picks up, we are ready to take advantage of it. So that means anything in the short-term of revenue comes in a little bit lower than we were hoping. It would be expense control, consulting, marketing, travel that type of stuff.

Okay. Okay. Got you. And then I want to sneak one more in. So Brian, you said gross margins, I think as a percentage of sales, are supposed to be down a little bit this year. Does that bake in any sort of benefit in the back half of the year from potentially lower raw materials?

Not necessarily. It is pretty. No. It is -- may get a little bit of help there offset by some of the higher costs that we are seeing in the factory -- I'm sorry, in the warehouse, we're seeing freight increase costs. So there are different puts and takes on the gross margin line feeling good about our inventory position and material to carry us through to meet our forecasted production and demand expectations. But I guess, some of the headwinds would be in -- mostly on the freight and logistics categories within gross margin – within cost of sales.

Yeah, now I understand. Okay, good. Thanks for the time guys. Talk to you soon.

Thanks Tim.

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

Great. Thanks and good afternoon everyone.

Hi, Kurt.

In terms of, I guess, the gross margin on a year-over-year basis, I mean, how significant of a headwind would you kind of consider the new warehouses as part of the path to market initiative. And I guess as we look into 2025 and think about the Columbus expansion going live and Gallatin at some point as well. How would you have us I guess at this stage, think about kind of the cost implications of that whether it be on the COGS line or operating expenses and just some initial thoughts on how that might impact margins?

So as we are thinking about the new satellite warehouses that we've put in place and Kurt, I think as you know we've done select regional satellite warehouses throughout our operations. We really feel that is a competitive advantage for us, gets us closer to our customers really helps us deliver on that value proposition of very high customer service from a getting product to a customer's location or to a job site. As we look at the warehousing costs, the freight costs relative to prior year from a dollar perspective, they are up a little bit. As we look at going forward. We feel we've pretty much fully absorbed those although we would expect to continue to drive additional revenues through those -- locations because we feel that, that customer service really does help us differentiate. Part two of your question would be on the additional expansion in Ohio. I'll pick the Gallatin in a moment. But with that one, we feel that for us to continue our above-market growth. That facility needs to be bigger because a lot of the growth that we have seen has been east of the Mississippi and for us to be really effective in producing and then distributing out of that hub operation there for the Midwest and Northeast -- we believe that will help us continue to grow. It will come online mid-to-late next year. So I wouldn't expect a huge dollar impact in that regard. From a Gallatin, the new fastener production, that's more late '25 early '26. Yes, there will be additional depreciation associated with those facilities, especially as we are ramping up, getting Gallatin fully converted over from our current site and then adding in the additional activities that we'll do at that location, as we vertically integrate some of our processes there. So potentially a little bit of headwind for a year or so, but I wouldn't expect it to be a significant driver of reduced gross margins. If anything, it is going to take us a little bit of time to fully absorb all the operations, but we still really feel really comfortable and with the additional opportunities, both of those facilities bring.

Got it. Okay. Thanks for that Brian. And then can you maybe just talk a little bit more about the Calculated Structure Design acquisition? I mean how might that integrate with some of the existing kind of software offerings? And is that something that you'll kind of go-to-market with on a stand-alone basis or wrap into what you are already offering? Any color there?

Yes. So Kurt for us to offer a comprehensive solution for the component manufacturing industry, we need to have software that designs trusses, wall panels, and engineered wood products. So basically, the truss, the wall and the floor and the largest truss manufacturers, the component manufacturers typically make all three of those products. So if we don't offer -- have that complete solution, we're not able to go after those customers. So the CSD component, which is something we've been licensing and using anyways now we kind of vertically integrate that. They are the EWP solution. And so now that, we own them, we’ll be able to fully integrate that into one seamless way to design trusses, walls and floors to be able to go after some of the bigger component manufacturers out there.

Got it. Okay. And that kind of dovetails on my last question, which is I guess, just from a software offering perspective, I mean do you feel like you are at that complete state to where you can service the largest of players and everything they're doing? Or is there still some work to go in that regard?

Still some work to go. So we need to have the truss, the wall panels and the floor panels all fully integrated into one seamless solution. And we are working on that, but we are not there yet. And then we also need production management capabilities to be able to run their manufacturing facilities. We have some solutions in that space, but we have a little bit more development to go there as well. So we believe we are making good progress with the people that are a good fit for our software. We continue to emphasize the whole business model and surface aspect with those customers. So that's helping us quite a bit. But we still have a little bit of work to do to be able to go after the very largest component manufacturers.

Got it. Make sense, thanks for that Mike and good look here in Q3 guys.

Thanks Kurt.

If I could real quick, Mike. Tim was asking earlier about our flat-to-down guide on single-family multi-family housing. One thing, I did want to add is July, what we are seeing from a billings in July month to-date versus last year. We are kind of mid-single digits company-wide in North America, up low double digits from a revenue perspective in July. So like Q2, the Q3 quarter is starting off relatively strong compared to July last year. So Tim, if you are still listening, I wanted to make sure I covered that as well.

Thank you. There are no further questions at this time. This does conclude our Q&A session and our call. You may disconnect your lines at this time. Thank you for your participation.