Greetings and welcome to the Simpson Manufacturing Company Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A 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 hand the call over to Kim Orlando with ADDO Investor Relations. Please go ahead.

Good afternoon, ladies and gentlemen, and welcome to Simpson Manufacturing Company's Third 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 04:15 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, 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 third quarter performance and updates on our end markets. Brian will then walk you through our third quarter financials and fiscal 2024 outlook in greater detail. Before we jump in, I'd like to take a moment to share our deepest condolences with all of those who were impacted by Hurricane Helene and Hurricane Milton this past month. It's unfortunate circumstances such as these that inspire our mission to provide solutions that help people design and build safer, stronger structures. In staying true to our founder's core values, we are pleased to be in the position to assist with the recovery efforts through donations to both the American Red Cross and Samaritan's Purse to help the affected communities recover and rebuild. While the storms are impacting our sales in the Southeast region, I'm pleased to report that none of our employees were injured in the storms and that our facilities did not sustain any damage. Our thoughts continue to be with all of those that were affected by these tragic events. Now turning to our results. Our third quarter net sales totaled $587.2 million, which was above the prior year quarter despite the housing markets in both the US and Europe remaining under pressure. Importantly, we continue to outperform the US housing market. Our trailing 12 months North American volume growth exceeded US housing starts by approximately 500 basis points as a result of our growth strategy. North American volumes for the third quarter were relatively flat with last year, which led to net sales of $461.4 million versus $456.8 million in the third quarter of 2023. This includes a…

Thanks, Mike, and good afternoon, everyone. Thank you for joining us on our third 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 third quarter of 2024, and all comparisons will be year-over-year comparisons versus the third quarter of 2023. And Mike, I appreciate your comments as it's been a pleasure to serve as the company's CFO since 2012. I made the choice to retire from the company at the end of this year, concluding a rewarding 20-year career at Simpson. Working for Simpson has been one of the true successes and joys of my life. Simpson's employees are some of the best people I have ever known. Throughout my tenure, I've seen the company experience tremendous growth in all aspects. I could not be more proud of all that Simpson has achieved and of our adherence to Barc's principles, which continue to guide us this day. Although I will be retiring, I intend to remain as long as is necessary to bring my successor up to speed and will remain a shareholder. Now turning to our third quarter results. Our consolidated net sales increased modestly to $587.2 million. Within the North America segment, net sales increased by 1% to $461.4 million. Wood construction product sales were up 0.6% and concrete construction product sales were up 3.1%. In Europe, net sales increased 1.8% to $121.2 million primarily due to higher sales volumes and the positive effect of $1.5 million in foreign currency translation, which was partially offset by price decreases in some regions. Consolidated gross profit decreased 2.8% to $275 million, resulting in a gross margin of 46.8% compared to 48.8% due primarily to changes in product mix, investments to help us provide…

Thank you. Ladies and gentlemen we will now be conducting a question-and-answer session. [Operator Instructions] And our first question will come from the line of Daniel Moore with CJS Securities. Please proceed.

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

Hello, Dan.

Hi, Dan.

And just let me start quickly, Brian. First, congrats to you, and thanks for all your help over the last 10 plus years. It's been greatly appreciated and wish you all the best. Hope, you have a chance to chat one or two more times officially at least.

Thank you, Dan. Appreciate that.

Absolutely. Let me start with just kind of Q4 and the outlook. How much of an impact do you expect the hurricanes to have on your Q4 sales and op income as it relates to the revised guidance?

So, Dan, it's Mike. So we've certainly seen our customers had some real slowdowns in the Southeast from both the hurricanes. We've got some customers that have had some of their facilities significantly impacted. As the hurricanes were coming in, and we saw a lot of slowdown before and then a bit of a slowdown afterwards. There's also a little bit of concern that the storms are going to take labor that would normally go to new housing starts and take that to the repair and renovation piece. So we haven't really dialed in the specific guidance and how that's going to impact us. But for our business that operates in that area, the forecast for fourth quarter is definitely lower than we thought it was going to be.

And, Dan, and it's Brian. So as we think about the fourth quarter, I would expect the gross margin pretty comparable, maybe slightly up from Q4 of 2023 and resulting operating margin a little better than Q4 of 2023 to get us into that 19% to 19.5% overall 2024 operating margin.

Understood. Helpful. And maybe turning to the outlook that you provided, start with the expectation of low single-digit growth in US housing starts as we think about '25. Maybe just talk about the key assumptions underlying that view. And is your longer-term target is to outpace by 250 basis points. You've obviously been doing better than that. So how do we think about your kind of expectations for growth above and beyond the market over the next 12 months or so?

So, Dan, we're getting input from our customers and then all the various forecasters. We use one group in particular because they can break down the market by regions, which aligns with how we run the business. And the feeling that we're getting is, it's going to be in the 3% to 4% housing start market next year in the US. Europe will probably be low single digits, 1% or 2% of the numbers that we're seeing from most of the forecasters. I mean there's still a lot of uncertainty. I think the general consensus is second half is going to be better than the first half. But as we've seen over the last the last six quarters, there's a lot of variability in how those housing starts ramp up and then ultimately slow down a little bit. I think the key point we want to emphasize is, we as a team, are not happy with our guidance of below 20% from an operating income perspective. We view 20% as the floor and we're going to do everything we can to get back there next year.

That's really helpful, Mike. And then I think you answered my next question about Europe. You indicated you didn't expect meaningful growth to come back until '26, but it doesn't sound like next year being down significantly either just flat to up slightly. Is that the way to think about your kind of near-term view?

Yes. So the governments in Europe and the Central Bank over there, they have started to lower interest rates. Housing starts across Europe is probably going to be down high single digits this year. So a bounce back to 1-ish%, 2-ish% growth would be a good thing. We are starting to see some increased activity just from a quoting perspective over there that we're feeling a little bit better on. The target there, really, though, Dan, is make sure that we hit that 15% operating income in the midterm and then really control costs until we see a significant jump up in the market over there.

Got it. And then it's been two or three quarters of modest retrenchment in terms of margins in Europe. Would you expect to start to see some improvement next year based on that forecast?

Well, a big part of that, Dan, is we're working on our defensive synergies over there and rightsizing our footprint. So Brian touched on some of those costs. Those obviously won't repeat. So we think that will help us lead to a better gross margin in Europe going forward.

Perfect. Very helpful. Maybe just quickly talk a little bit more about the acquisitions. I think Monet DeSauw and QuickFrames in terms of what they bring to the table, and then any trailing 12-month revenue EBITDA figures to give us a sense from a modeling perspective? Thanks again.

Yes. So if you look at Monet, Monet helps us offer a complete solution to component manufacturers and we had a big presence at the BCMC show a couple of weeks ago. That's the large trade show for truss manufacturers. We have a lot of really good feedback from customers of Monet that are not yet our current customers. And we had a lot of feedback from our current customers happy that we continue to expand our equipment offering. So we're pretty excited about that going forward. I think that's a fantastic company and Kevin who built that has done a wonderful job and by the way still with us. If you look at the combined revenue that we've had from those acquisitions in the US here in the US, it's less than $5 million impact in the quarter, Dan.

And, Dan, I would say on a go-forward basis, I would expect for at least how we're looking through the balance of 2024, a little less than $10 million in total revenue on those. We're not disclosing -- for those acquisitions.

And that's for the total '24 impact to your P&L as opposed to Q4, is that right?

No, no, no. That would be for the fourth quarter…

Okay.

…the amount that we're modeling for our numbers so that we get to the operating income guidance based on current expectations.

Okay. Combined revenue from both less than $10 million for Q4.

Right.

All right. I'll jump back into the queue. Thank you again.

And just to -- Dan, just to answer your QuickFrame piece that we're pretty excited about that because that gives us another tool to sell into the commercial space. So it's prefabricated structural support for things that go into the roof of commercial buildings. So it's a great fit for the business model. They've also built a good business. So we're pretty excited about that going forward as well. Okay. Operator, next question.

The next question comes from the line of Tim Wojs with Baird. Please proceed.

Hey, guys.

Hey, Tim.

Good afternoon. I'll echo my comments on Brian. Thanks for all the help. So we'll still talk, but I just want to acknowledge that.

I appreciate that, Tim.

Maybe just the first piece. So on the margin comments, I mean, I guess, Mike, kind of outlining that 20% margin is kind of the floor on an EBIT basis. I guess a) is that new because I want to say you said high teens in the past. And then secondly, I guess, how do you kind of get there next year? I mean, do you just kind of throttle back some of the investments and invest at a slower rate relative to the updated view on starts to get some benefits from raw materials? Are you actually going to cut investments? Just how do you kind of, I guess, adjust to this kind of lower level of market activity.

Good question. So as you know, Tim, one of our financial ambitions is to be in the top quartile of our proxy peer group. We think that the 21-ish% is right at that kind of top quartile range. And again, our view is 20% max. I mean we've got a great team. We've got a great business model. We need to be able to translate that into good profitability and 20% is good profitability. So anything below that, we are going to work to improve on. So the question then is how do we get there? So as you've seen from our SG&A investments the last couple of quarters, that's been well below our SG&A growth rates probably the last 18 months. So we will continue to dial that in. We're going to be even more selective on where we make investments and where we add both on the SG&A side and on the cost of goods side. The balance here is we want to provide great support to our customers. As you know, that's all part of being their supplier of choice and to do that is a people-intensive business model. So we need the investment and the cost of goods and we need it in the SG&A because they are, for the most part, single sourcing us, we just need to be more selective about making those investments, Tim.

Okay. So it's not necessarily a cutting of the base. It's just being more selective relative to the growth rate is the way to interpret?

More selective, yes.

Okay. Got you. Okay. And then second, just, Brian, can you help me with like the how to think about the gross margin sequentially because if I heard you right, it sounds like gross margins should be kind of flattish to maybe up slightly sequentially. I guess you have a lower revenue quarter. It sounds like you want to take some inventory down in the fourth quarter. So kind of what's the piece I'm missing there?

Yes. So when we look at the annual to get into that operating income guide. We would assume flattish to just slightly up gross margin from last year. So last year, 43.9% fourth quarter gross margin. We've got some, as a percent of revenue, modeling our slightly higher, factory and tooling as a percent of revenue kind of warehouse as a percent, relatively flat, potentially benefiting a little bit on the freight line. And then we think we're in a really good position from a material perspective and there might be a little help there. But all-in, it's pretty close to those are the puts and takes to get us to, again, a flattish gross margin in the fourth quarter of '24 versus '23.

Okay. Got you. Okay. I misunderstood a little bit of that. Okay. And then what was, in North America, what was the price mix kind of contribution in aggregate? Was it about flat in total?

Yes. So we had a couple of things there. So as we look at one of our key metrics that we follow, as you know, is pound shipped. That's how we measure our volume increases, but not every pound shipped is worth the same dollars. So as we compared this year third quarter to last year third quarter, just the slight change in the mix of products that went out the door, slight, a little higher dollar per pound shift. There was a bit of an offset there was the bigger builders are getting bigger. Same thing with some of our distribution partners and consolidation. And as more sales go into those larger customers as a percent of the total, a little bit higher of a rebate paid relative to if more, call it, smaller customers or a bigger piece of the pie. So those were kind of the two that nearly offset.

Okay. All right. Got you. And then I guess the last one I just have is, as you kind of bring on like the Columbus, Ohio facility. Is there a way to kind of talk about what the start-up costs for that might be or if there's going to be start-up costs with, I guess, that both coming online and then kind of Gallatin coming online later in '25?

Sure. I think we'll be part of our 2024 guide, sorry, our 2025 guide that we'll come out with the fourth quarter, we'll provide some additional details on how all that's going to impact that year's operating income. From a Ohio perspective, we're adding to the existing footprint there. So it's, I'm not sure that there would be a significant amount of OpEx. We're moving, we're adding on additional space under roof on our existing spot. Gallatin, a little bit different. That's a spot that's across town. I would anticipate some moving costs and the like, but right now, we'll provide that a little more granularity on that in February.

Okay. Understood. I'll hop back in queue. Thanks everybody.

Thanks, Tim.

Thanks, Tim.

The next question comes from the line of Kurt Yinger with D.A. Davidson. Please proceed.

Great. Thanks and good afternoon everyone.

Hi, Kurt.

Hi, Kurt.

I just wanted to start off on steel and maybe take it from two sides. The first is, I mean, just given what we've seen kind of on a year-to-date basis, maybe just talk about how that has impacted your maybe initial views on what gross margin could look like next year as we've gone through the last six months or so? And then on the other side, maybe more of a pricing conversation, have you seen any more kind of competitive actions out there? Maybe it's on the fastener side, where the competitor sets a little bit more fragmented or anything that would suggest that pricing and any declines there could be a conversation going into next year?

So from a steel perspective, Kurt, we're obviously keeping close track on that and we're feeling pretty comfortable with where we are cost-wise in that area. We are certainly seeing a lot of other costs go up to maybe counterbalance some of the stuff that you've seen from the steel market lately. But bottom line is, we feel, for the most part, the materials are going to our cost of goods, we're in a good shape on going forward. And then from a pricing perspective, again, Kurt, we're selling the value. We're less than 1% of the bill of material. We're bringing a ton of innovation. We're providing a ton of support to our customers. And so the emphasis is really on service. Of course, we get asked a lot about pricing and we try to emphasize the value that we're bringing to the table. At this point, we haven't really seen any significant moves from any of our competitors in this area from a pricing perspective over the last 6 to 12 months.

Got it. Okay. That's helpful. And then just going back to the commentary around operating margins and the 20% floor. I guess, considering the level of investment that we've seen and kind of the starts assumption for 2025, is there a good framework to think about if starts are up low single-digits, do you expect to outperform that on the top line, that you think you can lever operating expenses still or I guess how would you have us frame that?

So if you go back a little bit, fourth quarter 2023 housing starts were up 4%. We go into the first quarter. We've got the Big Builders show. Everybody is pretty optimistic. All of the big builders are feeling really optimistic. Still a slight increase, 2% and then all of a sudden, second quarter, the housing starts kind of fell through the floor for lack of a better word and they were down 7%. So when we were going into this year, we were certainly assuming a lot better market scenario. And we just kept assuming it was going to pick up based off a lot of feedback from our customers, frankly. And you see the Big Builders do well, but it's the smaller builders in the multifamily that are not doing well. So when we look into next year, we are really trying to and we're not going to give guidance now, but we're really trying to make sure that we're at that 20% mark from an operating income level. And we're still working through the details and more to come when we announce our fourth quarter results.

Got it. Okay. And then just lastly, wondering if there's any implications risks or opportunities around the true value bankruptcy filing and any exposure you might have there?

Yes, Kurt, it's Brian. So we have sold to true value in the past and we're evaluating the potential buyer that they've announced who we sell to and have a really good relationship with. Of course, we need to see that transaction come to fruition. The revenue to true value itself, not a material amount for Simpson, but they have been one of our co-op customers in the past. So we'll continue to evaluate how that news is coming out as far as do we put them, do we extend credit, do we how are we selling to them. Those are conversations we're having right now.

Makes sense. Okay. Appreciate the color guys. Thank you.

Thanks, Kurt.

Thanks, Kurt.

Thank you. This concludes today's question-and-answer session and this will also conclude today's conference. You may disconnect your lines at this time and thank you for your participation.