Greetings and welcome to the Simpson Manufacturing Company Incorporated Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kim Orlando from Addo Investor Relations. Thank you, Kim. You may begin.

Good afternoon, ladies and gentlemen, and welcome to Simpson Manufacturing Company’s third quarter 2020 earnings conference call. Any statements made on this call that are not based on historical facts 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 SEC 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 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 President and Chief Executive Officer.

Thanks, Kim and good afternoon, everyone. I’m pleased to discuss our results with you today. I’ll begin with a high level summary of our third quarter results. And we’ll then turn to a more detailed discussion on our key performance drivers and initiatives. Brian will then walk you through our financials and updated business outlook in greater detail. We delivered strong third quarter results, with our sales increasing 17.5% year-over-year to $364.3 million on significantly higher volume. Compared to the second quarter of 2020, our sales increased 11.7%. Further, we achieved a considerable improvement in our gross profit margin to 47.6% from 44.4% in the prior year quarter, primarily related to lower material and labor costs. To strengthen our gross profit margin, combined with our efforts in expense management and reduce costs from travel and other restrictions, as a result of the COVID-19 help drive a 49.8% year-over-year increase in our income from operations to $91.3 million and strong earnings of $1.54 per diluted share. I'd like to sincerely thank all of our employees for their perseverance and support through these unprecedented times. At Simpson we value our employee’s health, safety, and well being as our top priority and strive for continuous improvement to ensure our company remains a safe and rewarding place to work. Our diligence, including strict adherence to protocols to help minimize the spread of COVID-19, has enabled us to continue operating our business with minimal disruptions from the pandemic. In regards to the recent hurricanes and wildfires, we are incredibly thankful that none of our employees or locations in the affected areas were negatively impacted by these disasters. We are prepared to play a key role in the rebuilding efforts with our mission of helping people build safer, stronger structures. Getting back to our results, the…

Thank you, Karen and good afternoon everyone. I'm pleased to discuss our third 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 third quarter of 2020. And all comparisons will be year-over-year comparisons versus the third quarter of 2019. Now turning to our results. As Karen highlighted, our consolidated sales are strong, increasing 17.5% to $364.3 million. Within the North America segment, sales increased 19.4% to $316.9 million, primarily due to the return of a home center customer in increased repair and remodel activity, as well as from other sales distributor channels, which experienced increased new housing starts and repair and remodel activity. In Europe, sales increased 6% to $44.8 million, primarily due to higher sales volumes. Europe's sales benefited by approximately $2.1 million of positive foreign currency translations resulting from some Europe currencies, strengthening against the United States dollar. In local currencies, Europe net sales still increased. Wood construction products represented 85% of total sales, compared to 84%, and concrete construction products represented 15% of total sales, compared to 16%. Gross profit increased by 25.9% to $173.2 million, which resulted in a strong gross margin of 47.6%. Gross margin increased by 320 basis points, primarily due to lower material and to a lesser extent reduced labor costs, which were partially offset by higher warehouse and shipping costs. As we continue to purchase steel to support heightened demand levels, we would expect our consolidated gross margin to normalize back down to a more appropriate run rate, which I will discuss in greater detail in our outlook shortly. On a segment basis, our gross margin in North America improved to 48.9%, compared to 45.6%. While in Europe, our gross margin decreased…

Thank you. Thank you. Our first question is from Daniel Moore with CJS Securities. Please proceed with your question.

Thank you, Karen and Brian. Good afternoon and thanks for taking the questions as always. Maybe for starters, is it possible to quantify the revenue impact of the inventory sell at Lowe's during the quarter? How much do we expect is less and you know, kind of the full-year 2020 impact so we kind of think about that as we start to think about modeling 2021?

Sure Dan. The sell end for – in the Lowe’s in Q3 was – we did a little bit in Q2 on fasteners and anchors, but that was more of those product lines which is, you know are smaller sets than the connector line. And then just Karen noted there was a little bit sets in those lines done in Q3. Combined for the quarter, the home center customers, Lowe's and Home Depot were up 125%, compared to last year. So, as we're still getting a good idea of what the re-sell or the sell-in will be going forward, compared to the initial load-in of those sets during Q2 and Q3, we'll be able to provide a little more information there, but – just a little later, but just from that compatibility perspective, those home center customers were up at 125%.

125 in Q3, correct?

Right.

Okay. And, you know, I guess just, what are magnitudes? More than half of that kind of, you know, view it as a load in or is that, you know way too high a thought process?

For Q3, no. It was not that extensive. Again, as I mentioned, the load in on the fasteners and anchors for those are smaller sets.

Okay.

One thing I should mention would be the, as we look at revenue growth for the company or for North America, for both of those, without Lowe's, the company during the quarter and North America for the quarter would have both exceeded Q3 of 2019.

You would have been up year-over-year is what you're saying, without Lowe's, correct?

Correct.

Okay, okay. Either of the two small tuck-in acquisitions contribute any revenue to the quarter and/or meaningful revenue on an annualized basis?

No. We did those actually. Well, one, the software application, no real meaningful revenue there. It's, again, just a software application to be able to use with our builder customers. And then the, small European acquisition was actually done at the very beginning of October. We would expect about a $3 million to $3.5 million annual revenue from that particular acquisition. But, but that had zero impact in Q3.

Got it. Okay. And maybe just elaborate, Brian, on your final comments prior to – in the prepared remarks. I think you said as we think expect gross margin and operating margins to pull back as we exit 2020, is it mix? Is it specific discrete investment? What is it that you know, obviously, you've got some difficult comps, but what is it specifically that would cause margins to pull back and magnitude?

Yeah. Sure, no, 2020 obviously being a very interesting year with travel restrictions. Being able to do some of the customer engagement efforts that we do large meetings, us attending trade shows and the like, I think those we’re expecting to ramp up next year. And don't have the magnitude on that for you yet. And then also, as we think about growth initiatives and the like, we'll be taking the balance of the fourth quarter to come up with our business plan and then be able to share that, but there may be some – there will likely be some of that as well, as we look to grow in other areas.

Got it. Okay. So, all of those more on OpEx as opposed to gross margin commentary, at least it would appear.

Correct. Although there may be a little bit in the gross margin area there as well.

Okay, and last one, and I'll jump back in queue, the applied Q4 guide given the full-year revenue outlook, but maybe just talk about revenue trends thus far in October, what you're seeing terms of cadence, you know, what does that look like as far as growth on a year-over-year basis, and your expectations for Q4 more generally?

Sure. So for the guide for the year would imply about a 3% Q4 growth over Q4 of last year, and we're about on pace with that so far in October.

Okay. I'll jump back with any follow ups. Thank you.

Thanks.

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

Guys, nice job on Q3.

Thanks, Tim.

Maybe just kind of dovetailing on the on the last question. You know, if I kind of go through, could you just maybe elaborate how trend kind of paced through the quarter because it's, if I recall, revenue is up, maybe 10% through kind of the early part of July, you obviously did, you know call it 17%, 18% here, which should imply that things accelerated through the quarter. So, just want to make sure that that 3% number is a year-over-year number, you know, like comparison to last year in October, so I just want to make sure we have the same number?

Sure.

And what would be driving that.

Okay. Yeah Tim. That 3% is Q4 2020 versus Q4 2019 in order to hit both the midpoint of that revenue growth guide for the annual period. So, if we're taking the year-to-date number and then growing Q4 by about 3%, we would hit that net revenue guide. And so far in October, it's right on that number. So, yes, you noted that Q3 when we were commenting about the quarter during the Q2 earnings release at those early July days were a little bit different, compared to what we're seeing for October. I think it's just seasonality. There may be a little bit of that. Oh, Karen, do you have any other thoughts there?

Yeah. I think, as you mentioned, we're tracking pretty well – to what we did, the fourth quarter we always have winter conditions, we always have, some of our customers actually closed down for some of the holidays, whether it's the Thanksgiving or Christmas time. And you know, as we've always said, our fourth quarter and first quarter are typically are weaker, compared to second and third. So, I think we're just sort of seeing a, what we would consider more of a normalized fourth quarter.

Okay. Okay. I mean, are still up double digits in most of your regions, and you're still seeing some pretty good R&R activity, right. So, I'm just trying to understand what might have driven that type of, I guess, deceleration versus the last couple of months?

Yeah, you're right Tim. I mean, if you look at the start numbers, but if you remember, what we've always said is, we tend to trail that start number anywhere from two months to four months, and that really puts us right in that winter type of season. So, we're still seeing nice numbers from the R&R standpoint, but again, we've already got places where we've got snow on the ground. So, it's just really a function of the seasonality from both the winter and what we see from those holidays.

Okay, okay. And I guess as you look at your distributors, how would you kind of characterize their inventory versus normal ?

We're not seeing any increases or decreases. We're seeing our distributors pretty much normal type of ordering pattern.

Okay. Okay. And then I guess on the home center side of things that the 125% number that you quoted is there any way to think about what POS was in your home center channel, just to maybe reconcile what sell-in versus sell-out looks like?

Well we do get those POS numbers, but it's a little bit early, especially as we look at the Lowe’s coming on as the new customer. So, it’d probably be something that we would have a little bit better idea as the year ends.

Okay. Okay. And then the last one I have is just on pricing, as you think about 2021, you've seen decent demand here, you know sports activities picking up, you know we have seen a little bit of an uptick in steel, how would you think about pricing expectations for next year?

Yeah, we mentioned this in the past, you're correct; we are seeing a little bit of an increase in steel pricing. And if we think there's some stability and consistency in that, then we would take a look at where we might need to do a price increase. At this point, we do not estimate doing a price increase throughout the rest of this year. But as we noted, you know, material is a key element in our cost of goods sold, and we continue to track that.

Okay, sounds good. Thanks, guys. Good luck on the rest of the year.

Thank you, Tim.

Thanks, Tim.

Thank you. Our next question comes from Steve Chercover from D.A. Davidson. Please proceed with your question.

Thanks. Good afternoon, everyone. So, forgive me if I was multitasking and I missed it, but obviously, you know, you did exceed your expectations in Q3 from what you were predicting at the end of July, and that goes to not just sales, but also margin. So, don't think I'm being critical, but, you know, were you just too conservative, like, what – were you surprised? And did the margins just flow from the operating leverage?

Well, part of that, Steve, I think is, there's – the continued strength in that repair and remodel business that we're continuing to see. We know that that’s definitely been a trend this year, as people have been improving their homes and backyards, and outdoor living spaces and indoor living spaces, but it was, you know, to the extent. And then just going back three months, just the amount of uncertainty that we're experiencing, whether it be another wave of COVID-related restrictions, or what have you. So, I think that was part of it. And then as we have been busier with more products running through, the factories running through, the steel that we have on hand, better factory utilization, and continuing to on the OpEx, or I guess even a little bit on the cost of sales, you know, the reduced travel and other expenses that we would have, normally as people are out more, that's sales people per se, because we've got sales people out on the road visiting customers, but trade show attendance and other meeting attendance we've just been leading virtually many of us have been working virtually remotely from – from not at our offices. So, but I would call it the volume on the – through that home center, and you know, repair remodel type of products that have continued to be very strong.

Okay, and I know it's early days, you'll articulate your 2021 objectives in due course, but, you know, as you listen to the homebuilders, and you know, get feedback, even if it's from virtual meetings from your customers, it sure seems like, you know, suburban low density living might actually be a long-term beneficiary from COVID, you know, kind of snatching victory from what we thought was increased urbanization. And presumably, that would be very good for you. So, any comments on that front? I mean, are you starting to see that maybe the tide is turning in terms of high density back towards low density living?

Yes. Steve when you obviously look at the housing starts, you see an increase in single family starts and a decrease in multifamily. So, we've clearly seen it from those numbers. We've also, as we mentioned in the last quarter, hearing from some of the larger builders that they are seeing some of their first time homeowners, being those people who are moving from the city out to the suburban area because they want more space. So, a couple indicators there that would that would tell you that single family homes again. And as we mentioned, we put our product in both single family and multi-family, but on a per unit basis we’ll typically put more content in single family. So, I think just the shift you see in the start would indicate that that is what we're seeing that that moved from urban high density out to suburban.

Alright, well presumably that bodes well for you. And then finally, fastener company, I mean, if it's $3 million worth of sales, should we think of this almost just you know, taking out a competitor? I can't imagine there's a lot of accretion.

Yeah, I say, connector – yeah, it's a connector company, not a fastener company. So, we'll gain some market share there, and also be able to run that production through our facilities. So, a little bit help on absorption.

Got it. All right. Best wishes just for the rest of the year. Thank you.

Thanks Steve.

Thanks Steve.

Thank you. Our next question comes from Julio Romero from Sidoti & Company. Please proceed with your question.

Hey, good afternoon. Hope you all are well?

Thanks Julio. You too.

I guess if I could ask about the European business, you know, you did see operating margins improve despite gross margins down year-over-year, which is excellent, but maybe just talk about what's working well there, and do you see that strength kind of continuing into Q4?

Yeah, as we mentioned, you know, Europe had a little bit tougher return from their first wave of COVID-19. Unlike the U.S., where housing and construction materials were considered essential, that was not the case in Europe. So, not only was our UK and France facility closed down, many of our distributors were closed down. So, the picking up or the picking up of the business took a little bit longer than we saw in the U.S. I think in the third quarter, they were doing a nice job of kind of getting back to a more normalized rate for them. We've done a really nice job; the management team there's done a great job and is continuing to work on reduced OpEx helping that bottom line. And certainly, as we mentioned, we had a little bit of a strategy change to get our sales force focused on those customers of ours that are looking to sell our entire breadth of line. So, the connectors, the fasteners, and the anchors, and they're doing a good job of executing on that strategy. On the negative side, it looks like and we're certainly hearing news reports as a potential second wave of COVID-19 in Europe. We've already seen some countries that have put some restrictions, not as steep as they were in earlier in the year, but we don't quite know what will happen as far as those operations, but we're certainly seeing an uptick of COVID-19 in those in those regions.

Got it. And I believe I asked this last quarter, but any update on the effects of lumber? Have you seen any issues at all related to your customers and tightness or the cost of lumber on your customers and how that affects Simpson?

Well, from a standpoint of affecting us directly, obviously, we have a wood wall product that we make, but that's not what I would call stick, you know, . So, we haven't been impacted by our supply needed for that particular product. From our customer standpoint, obviously, if wood prices are going up, or availability is reduced, that creates some slowdown. And I've certainly heard issues of housing prices going up. The latest I've heard is that that pricing on lumber is kind of coming back down again. So that will certainly help as far as the cost of the house, but I haven't heard concern as far as shortage more of just the price being pushed up and pushed on to the consumers. So, again, I think in this back half year, we're seeing those prices drop down a little bit. And that will help as far as the portability issues from the housing standpoint.

Got it. Maybe last one for me is, you know, would you expect cash flow to be up year-over-year in the fourth quarter?

I don’t think so. I think that – yes, our general expectation right now. Is that would be the case.

Great. Thanks very much.

Thanks, Julio.

Thanks, Julio.

Thank you. Our next question comes from Daniel Moore from CJS Securities. Please proceed with your question.

Sorry, , thank you, again. Just pulling on the string a little more, sorry to be redundant, you're targeting 25% to 26.5% OpEx this year now as a percentage of revenue, given the initiatives and some of the expense normalizations is within that range and regional thought process for as we think about 2021 or are you kind of signaling that OpEx as a percentage of revenue is likely to rise next year as well?

Okay. Yeah, go ahead, Brian. We can both chime in on this one.

I’d say they’re expected to likely rise in 2021.

Got it? That's helpful. And then one more capital allocation priorities shifting the focus back to M&A a little bit obviously, if you said this, and I missed it, I apologize, do you still plan to stick to the goal of returning at least 50% of cash flow to shareholders that you had previously? How does that sort of factor in on a go forward basis, given where we are now with the pandemic?

Sure. One thing that we definitely want to do is, is get the remaining balance on the line paid down. We'd like to get that done by the end of the year. And then, as we take a look at the other cash – returning cash to shareholders in addition to the dividend, we’d evaluate, share repurchases, but as we're thinking about it, today, get that line paid down, and then, you know, evaluate from there. We're still evaluating the 50% of cash flow from operations return to shareholders. On a go forward basis beyond 2021 or beyond 2020, certainly would like to put that to use in acquisitions that help us fulfill our company's strategy, and other internal investments that help us make us more efficient, more profitable, help us serve our customers even better. But so that's where we're at today as far as that particular goal.

Okay, and is there a range or sweet spot of acquisition size that you generally would be targeting?

You know, I think, certainly a large acquisition is just as complicated as the smallest position. We're really looking Dan, for something that's in the building material space, we've talked about this, we'd be very interested in manufacturing and extending our manufacturing capabilities and market share in the fastener space. You saw we did a couple of small bolt-ons, those are pretty easy to incorporate and to negotiate. So, I don't think we have a sort of a set price. We're more looking to what fits our strategy and why is Simpson the natural owner of whatever the company might be. What is it that we can do? And why would we be that right – why would it be the right acquisition target for us?

Okay. More to come, obviously. Thank you for comments. And again, congrats on a, obviously really strong quarter and operating leverage.

Great. Thanks Dan.

Thanks Dan.

Thank you.

There are no further questions at this time. This concludes today's program. You may disconnect your lines at this time. Thank you for your participation and have a great day.