Simpson Manufacturing Co., Inc. (SSD) Earnings Call Transcript & Summary

Good afternoon. Thank you for joining us at the UBS Global Industrials and Transportation Conference. I'm Lauren Sclafani, UBS' Head, Global Corporate Access. I'm delighted to introduce the management team of Simpson Manufacturing. Joining me today are Karen Colonias, President and CEO; and Brian Magstadt, CFO and Treasurer of Simpson Manufacturing Company. Simpson Manufacturing Company is headquartered in Pleasanton, California, and through its subsidiary, Simpson Strong-Tie Company, the company designs, engineers and is a leading manufacturer of wood construction products. Karen and Brian will walk you through their business in more detail via their presentation. We can then open up for Q&A session. Please use the text box if you'd like to submit any questions. And our Q&A will be moderated by their Investor Relations team. As a reminder, the presentation is being displayed, and all listeners can flip through the slides to follow along. With that, I will turn it over to Karen.

Thanks, Lauren. Appreciate it. And thank you, everybody, spending some time with us this afternoon. I'm happy to be here at the UBS Global Industrials and Transportation Conference. So I'll give you a little update on Simpson. Of course, the safe harbor, everybody is very familiar with this slide, so we'll continue on to the next one. So on Slide 3, we've shown you some of our highlights, and I'll really spend some time today talking about what makes us an industry leader in wood design, construction connectors for that 4-story and 5-story multiple wood projects. The things that we've done over 65 years to be able to gain and be the most trusted provider of [ products and services ]. We'll also spend some time, and Brian will talk about our financials, our gross profit, operating margin, that operating margin being one of the highest in the construction industry, and we'll talk a little bit about how we get to that position. So if we can go to the next slide. I really like to talk about our culture, the thing that really makes Simpson stand out, I believe, from other building material suppliers. And if you look at our mission to provide solutions that help people build, design safer, stronger structures, a keyword there is solutions. So we not only provide products, and you'll see some follow-up slides of all the products that we provide, but we provide service, and we provide software solutions. So a complete package for the building industry to be able to not only specify our product, find where to acquire our product and then software solutions that can help you design with our product. Our founder, Barclay Simpson, put in what he called the 9 principles of doing business. And today, these are the cornerstone of our secret sauce our company values. And if you look at number one, relentless customer focus, you could talk to any of the 4,000 Simpson employees, and they would be able to tell you that this is the #1 value and that every single one of those employees can help to continue to create that relentless customer focus, whether it's an inside salesperson who's taking that customer order, an outside salesperson who's helping an engineer specify what the best product would be, our unbelievable quality of our products and our manufacturing, the technical support that we provide, all of those customers, all of those employees feel that they are tied to those customers directly, and that is the key element that makes Simpson very, very different. Item number five, everybody matters. We are a pretty flat organization. We like to have the best ideas come to the surface, and those are the ones that we will be able to incorporate. We are not a top-down management company. We are a very collaborative type of business. We bring in ideas from our engineering team, from our sales team, from our people on our production floor. And we find that those best ideas are really what help us become a very big innovator in this business model. And another one that was really key for Barclay was to give something back, and that's a key value for all Simpson employees. We are a corporate sponsor for Habitat for Humanity. Their mission is to provide affordable housing. Our mission is to provide solutions to help build safer, stronger structures. So it's a very nice marriage when we look at the Habitat for Humanity. And when we give back to habitat, it's not only from a standpoint of dollars and product, but what's key is we really require and want all of our Simpson employees to work on a habitat project. It gives us that opportunity of connecting with our communities, gives employees the opportunity to understand our Simpson products. There's nothing more interesting than a finance person understanding how we install some of our hold-downs, help a structure be earthquake resistant. So it's a great team building, and we really enjoy being the corporate sponsor for habitat. But beyond habitat, we promote and we ask our employees to find charitable organizations that they're interested in, and we'll match any time and effort in dollars that they'll spend in those organizations. So we've been a very, very successful company. Barclay was a very successful businessman, and giving back to the community is a key tenet of our company values. With that, let's go to the next slide. You see here a 27-year history of how our company has progressed, and just I'll hit on a few of these points. We became a public company in 1994. You see there the stock price was $11.50. Some key points. In October of 2017, if you look at that point, we announced our 2020 plan. And you see the stock took a pretty significant jump when that plan was announced. That plan was really looking at strengthening our core foundation. We worked on reducing our SG&A while still increasing our top line revenue. We did some organizational changes from not only employee standpoint but also from the standpoint of where we're doing business plans. We increased our profitability in Europe. We increased our return on invested capital and, of course, we increased our operating income. So that was a foundational plan that was put in place for areas that needed some focus. We completed that plan very successfully at the end of last year. Surprisingly, during the COVID pandemic, we were able to still be very successful in our building industry. You certainly see there in March of 2020, the dip, the COVID-19 pandemic. We actually left our offices on March 13. And in some places, we're still not back in our office. However, we were able to continue production, considering that we were considered an essential business. And so all of our facilities were able to continue producing products, continuing to meet our customer needs. And then you see there, just about a month ago, we hit a new high of $118. We were over $118. We've hit a little higher since then. But it's been a very nice journey from Simpson's standpoint as we -- from the time we put our IPO out until where we are today. Next slide. So what is it we do? How do we become the market leader? How do we have north of 75% market share in the wood construction industry? And we look at this as that focus on our customers. So if we look to the left, we -- these are all our customers. We start with the engineers. The key for us is to get our product specified on the blueprint. So when you look at a blueprint or a wood structure, whether it's a residential house or it's a condo or it's a Holiday Inn Express or whatever that wood structure will be, you will most likely see Simpson Strong-Tie product called out in model name and, obviously, manufacturer. And we do that by working with the engineers. The engineer has the complete responsibility for the structural integrity of the building. The weakest part in the building is the joints, and that's exactly where our products are installed. We bring the strength back into that building. We make that building meet the code requirements. In the United States, we have one model code. That means, all wood structures must be designed to the minimum of that model code. If you're in an earthquake area, we'll have higher requirements. If you're in a high wind area, there'll be higher requirements. But the engineer is responsible to design into that model code and for the structural integrity of the entire building. Again, the joints are the weakest point, and that's where our products are installed. So we do a lot of work with our engineers and specifiers. Other people we're working with, the code officials, the builders. We want to be sure that the builders know that the products are available. If you see some of our customers there, lumberyards, home centers, pro dealers, once the product is specified, we want to ensure that it can get to the job site, that it's available to those builders to be able to meet that engineer's blueprint. A lot of work spent talking with engineers and being sure that we've got solutions for their needs. If we think from the next standpoint about the innovation, we've been building with wood for probably 80 years. And yes, there has been a lot of innovation as to how we can make those structures stronger. We have our own testing labs. We can test full-size structures and ensure that our product, along with the rest of the panels in that structure, can meet the loads that we're looking for. We have technical field support. So all of our engineers, if you call up for a technical question, you'll get a Simpson Strong-Tie engineer who will be able to answer those questions for you. We spend a huge amount of time and effort on training. We not only train our Simpson employees, our salespeople, our inside sales, all of our employees, but we also train the builders how to use the product and install it correctly. We have training seminars for the engineers. What is the code talking about and how does our product fit into those code requirements? And certainly, we have training for all of our customers who are distributing our product. Which is the best product to use? What product should I bring into my market? What are the products that are being specified on those plans? So a lot of effort is spent on training. We want to be sure the right product is picked and the right product is installed correctly. And then of course, availability. We are currently, as I mentioned, the market leader with north of 75% market share in the wood connector space. These again are used on residential buildings or any wood structure. In the United States, you're able to build a wood structure up to 5 stories; in Canada, up to 6. So any of those types of structures will have our product on it. We are specified in 98 of the top 100 builders that are designing those structures to be resistant to those natural disasters, again, earthquakes, high wind. We got about 14,000 different products. And the reason is, the construction methods are different across the U.S. The load requirements are different across the U.S. And all those products again are available through the distributors, the product specific to that market area. So it's a complete approach. Again, I will reference back to relentless customer focus. Once the product is specified and the engineer is confident in the performance of our product, the builder needs to know the availability of the product, and the distributors need to ensure that they've got their product in the inventory so that we're not holding up any job sites. Next slide. So I'm on Slide 7. Again, our multilayer approach. We've talked about innovation. You see we have a lot of patents. Code reports are important. We not only have our own testing labs that we test full-size samples and wall panels and floor panels, but we also have third-party code reports. So third-party industry comes in to validate our testing and to, again, be that confidence for our specifiers that the products we're providing, the loads we're providing have been not only tested and verified by Simpson but have been validated by a third party. You see technology. I mentioned one of the changes that we have certainly seen since the 2008 downturn is construction, light frame construction, using technology more to be more cost effective in their projects, to be more efficient in their projects and to help the design. And we certainly complete that loop when we talk about product, service and software to complete -- to be the complete solution. You see from technical support, it's important that we are able to answer not only the engineer's question but the contractor or anyone who's at the job site. We have our own engineers on a global basis. We have our own field sales reps who are only focused on providing that customer service to those end users. We talked about training already, but let's focus on product availability. In North America, we have a 98% fill rate, and that's a key differentiator for us compared to our competitors. And another key differentiator is this 48-hour turnaround time. We can make a special design for a customer and design it, manufacture it and get it to their site in a 24- to 48-hour time frame. This is key as, again, we do -- we never want to be anyone that's holding up a project. So I'm hoping that you're hearing the things that are differentiating Simpson. We are not just a material supplier. We are an engineering firm that supplies building materials and manufactures building materials. And that's a key differentiator from our competition. Next slide. So let's talk about our addressable markets. We talked about the wood design. Again, wood connectors where the joints are, the truss where the roof is. The global addressable market is $2.5 billion. Today, we've got about a 36% share. That's in the global market. In the North America market, we have that north of 75% share, so still room to grow in this space. When you look at the fasteners, you see the market size of $5.8 billion, but yet our addressable market is $1 billion. We want to be able to provide to our salespeople tools to sell and differentiate a product, and that tool is not price. So whenever we go into a market, we want to be sure, number one, ideally, we can get the product specified on the blueprints; number two, that we have a differentiated product. Maybe it installs faster. Maybe it has the best corrosion resistance. But we want to have a differentiated product so that we have given our salespeople tools to sell this product on, features and benefits and not price. So we take that $5.8 billion market size, and we look at the addressable market for Simpson is $1 billion, where we can differentiate our product. Today, we have about a 19% market share. Same process in the concrete market. $15 billion market, but our addressable, $1.3 billion. And again, today, we have about a 14% market share there. So differentiated products, specification, means of features and benefits in which we can provide a solution to the engineer or the builder that creates that safer, stronger structure. Next slide. So we mentioned our 2020 program and how that foundationally put us in a very good position to grow, getting our SG&A in good alignment, continued growth in our core areas, doing some adjustments in a couple of our market spaces. So now as we look to grow, these are areas where we think that we can continue to grow as a company. And we can continue -- as we look at these, again, we have products. We have code testing and code reports. We can differentiate these products, keeping that same model in place that we did with our wood connector model that we've had for 65 years. Same model, taking these products, providing a solution to our customers and providing relentless customer focus. So we think the OEM market, original equipment manufacturing, whether we're delivering fasteners to put wood down to a truck bed, fasteners on automatic system to make crating and pallet racking, if we think of all these tilt-up warehouses that are going in place, they all have racking that needs to be bolted down to the concrete slabs. We have anchors that can do that. They all have electrical boxes and plumbing and wiring that needs to be attached to walls. We have fasteners that can do that. So we will be focused on going more aggressively after the OEM opportunities. The R&R and the DIY market, we certainly saw in the downturn -- or excuse me, not the downturn, in the COVID pandemic, a lot of people spent their money on remodeling houses, maybe building outdoor structures such as decks and pergolas. We see this as a great opportunity for us to focus more and get more of that market space. We have software. We have connectors. We have fasteners. And we'll talk a little bit more about that particular market, but this has been a nice growth market for us. And we certainly already have the distribution footprint in the 2 big boxes as well as our co-ops to be able to get these products out to end users. Mass timber is something that's coming from the European market and growing very fast in the U.S. As I mentioned, wood structures typically can only be built to 5 stories. Mass timber allows structures to be built. There's one right now in the U.S. that's 12 stories. And in Europe, they've built over a 20-story wood structure using mass timber. So a different building material that still requires fasteners and connectors wherever you have those connections. And so we will be focusing on this market. In the concrete space, we certainly have a full line of stainless steel products, which can be used for wastewater treatment in all those areas where stainless steel. But we really have a big push on our carbon fiber product. Concrete is really only designed to last about 40 to 50 years. I'm sure if any of you drive home today, you'll see concrete spalling. You'll see rebar is spalled, concrete is popped, whether it's a bridge or a roadway or a building. You'll see throughout the entire United States a lot of concrete infrastructure that needs to be repaired. Our carbon fiber product we have can not only repair that structure but can increase the strength of those structures. So certainly, some great opportunities in the concrete space. And then structural steel. This is a new market approach for us. We have, typically, these connections where the beam and the column come together are welded. There's a big shortage of welders just as there's a shortage of labor in many of the construction industry. We have bolted connections, which are higher in strength, can be easily installed in the field. And so we are now pushing our product line from both the connectors and some fasteners into the structural steel market. So just as a wood structure, the joints are always the weakest part of the connection. We get these products specified, quality of design and get them out to the job site. Next slide, Kim. So let's talk a little bit about our software solutions. Certainly, as you look, we start in the middle with the engineers. We talked about getting the specifications. We spend a lot of time with our engineers, providing them tools to specify our products. When we talk about lumberyards, builders, their key is they want to be able to do an accurate takeoff, and we have a software application that can help them and allow them to do that accurate takeoff. Component/truss manufacturers. This is an outside manufacturing facility that builds floor, roof and wall systems and delivers them to job sites. We have software that will help design those floor, roof and wall systems. And then on the DIY and R&R, as I mentioned, we have a deck and a pergola software. So you as a consumer can not only design your deck and see it how it would be attached to your house. After you designed it, you'll get a full design package. You'll get a set of blueprints. It will be designed to the load requirements in your region. You can put in your ZIP Code and find where to get these products. You'll get a 3D print of it. Well, of course, all of it will have Simpson Strong-Tie products specified, our connectors, our fasteners and our anchors. So again, all means of providing that complete solution of product, service and software to make using our product the easiest as possible. And with that, I'll turn it over to Brian.

Thank you, Karen. And I'm starting on Slide 11. So here, you see the recent history and the breakdown of our business, both between our geographic segments, which is North America, Europe and Asia Pac; and our product categories, our wood and concrete products, of course, as well as our trends within EPS and dividends. Just to note there, in 2020, about 87% of our revenues were in North America. And then between wood and concrete products, about 85% wood and 15% in concrete. On the next slide, on Slide 12, you see a trend here. And what we like to show is that U.S. housing starts are a leading indicator for, we think, about 50% of our current global consolidated business based on housing starts. And you see here, there's a direct correlation between our sales, represented by the orange bars, and U.S. housing starts, as shown by the black line, over time. One of the things that we're -- we've been focused on is mitigating our exposure to the cyclical U.S. housing market over time. And to better respond to the needs of our customers, we've been looking at increasing our market share in -- market share and profitability in Europe. Karen talked a lot about a variety of our product categories. Growing our concrete -- growing in our concrete space and our fastener space has also helped us to be less dependent on U.S. housing. The -- as you've heard, we're continuing to focus on diversifying that portfolio. Karen just a moment ago talked about those adjacent markets. We're investing in those. And of course, we're looking to, again, further limit our exposure to U.S. housing starts. Jumping to the next slide, Slide 13. Here, you see our industry-leading operating margin compared to the average of our proxy peers since 2006. And we've consistently outperformed that peer group over that period, that 15-year period. And much of that is attributed to, again, a lot of the things Karen talked about, that long-standing and trusted brand reputation, which we've built through proprietary testing capabilities, those deep industry relationships and, we think, superior customer service, allowing us to properly price for the value that we deliver and serve. In addition, over the last few years, we've diligently focused on improving our operating leverage and working capital management. Karen talked a little bit about our 2020 plan that just wrapped up. We've seen that strength in operating margin performance reflected via disciplined expense management, looking to -- we had reduced some inefficiencies in our business, all with the goal to have that consistent, industry-leading operating margin performance. And we're going to continue to be disciplined in those areas to look at becoming more efficient and better utilizing our working capital and diligent expense management. One thing to note, though, we did state on our first quarter 2021 earnings call, we expect operating margin -- operating income margins to be in the range of 19.5% to 22% in 2021. Our gross margins in the first half of 2021 are reflecting an average cost of steel that were sourced prior to or early into this current surging steel market. Together with steel, we have purchased more recently at substantially higher prices. As we work through our on-hand inventory and continue to buy raw material at these higher prices, our anticipated cost of sales and -- are expected to increase in the latter part of fiscal 2021 and into 2022 even if prices for raw material begin to decline. We do carry a fair amount of inventory, one, to make sure we've got product on hand to support that goal that Karen noted, that 98% delivery that, we believe, helped lead to that differentiation. But we would expect some pullback next year as our inventories more reflect current higher price of steel. Now looking ahead a few years to 2025, we would expect our operating margins to expand from our historical average and align closer to that high teens range well above our proxy peer group average. Jumping to Slide 14. Here you see, as depicted on this chart, our current position within the top quartile of peers for return on invested capital. And of course, we intend to keep it that way even as we continue to invest in those growth initiatives. One question we often get is a key element of management compensation is -- associated with long-term incentive programs is both revenue growth and return on invested capital, we think, highly aligned with creating shareholder value. You see in that year here that we're showing, 2020, at a 20% rate reflected a lot of those things that we had put in place as part of our 2020 plan as well as the year where Karen noted we saw a lot of revenue growth associated with people -- consumers investing in homes and, let's say, were sheltering in place, working from home, educating at home, et cetera. If we go to the next slide, Slides 15 and 16 here talk a bit about our deployment of capital. Here, we're showing that deployment over the last -- since 2017. And we generated a fair amount of cash, as we see here, $692 million in cumulative operating cash flows. Roughly 70% of this has been directed toward stockholder returns in the form of both share repurchases and common stock -- of common stock and quarterly cash dividends. Since 2017, we've repurchased over -- or about $317 million worth of our shares and paid out about $158 million in dividends. And we remain committed to providing consistent returns to shareholders, stockholders to continue to maximize value. You also see on the bottom of the slide here the SG&A as a percent of revenue. Again, part of that 2020 plan was focused on making sure our cost structure really was looking at supporting our business and investing in those growth initiatives. 2020, a bit of an anomaly, of course, because a lot of activity that we would normally see, trade shows, travel, were curtailed as we and other companies sheltered in place for a lot of the year as well as a pretty strong revenue growth here in 2020. We jump to the next slide. Again, just a reminder of what I just mentioned, that breakdown on shareholder return, CapEx and acquisitions relative to the $692 million that we generated in the operating cash flow for the year. And then on the next slide, our use of cash priorities. Here, our strong cash flow generation and access to capital provides us with the flexibility to allocate capital, to support our growth through CapEx and acquisitions as well as to return value to our stockholders through those dividends and share repurchases I've just noted. Here, we're noting our cash priorities. First, in regard to our growth, we'll continue to make investments to support those key growth initiatives, including in the areas of engineering and innovation, people and our testing capabilities. We may also opt to achieve growth via strategic acquisitions, which I'll talk about here in a moment. As it relates to dividends, we've consistently maintained our quarterly cash dividend and raised it many times over our history without having to reduce it. We want to -- we view that as committed capital. And then of course, share repurchases I've just talked about. So on the next slide, let's look at our acquisition strategy. So here, I'd like to further hone in on what we're looking for moving forward. So in alignment with our ambition to be the partner of choice, we will continue to evaluate acquisitions in the building material space to help strengthen our value proposition. We want to expand our innovative product lines and develop complete solutions for the markets in which we operate. Our goal is to continue improving our market share and our growth initiatives and to be the innovation leader in the markets we operate. And we strive to improve our manufacturing capabilities and efficiencies to reduce lead times and bring production and product closer to our end customer. In order to execute on these goals, we're leveraging venture capital expertise to help identify potential strategic acquisitions or investments, including innovative technologies of interest in the building space. We believe this approach will help provide us with real-time market access to latest industry technology, trends and innovation in the building space. From a metrics standpoint, we evaluate various different measures with internal thresholds for items such as return on investment, payback, IRRs, NPVs, price to earnings, among others. So from a quantitative and qualitative perspective, we evaluate these opportunities. And with that, I'd like to turn it back over to Karen.

Thanks, Brian. So just a couple of things to wrap up. Certainly, we are very much engaged in ESG programs. We just issued our first ESG report in 2019, and we gave some update on our metrics in 2021. We are working with an ESG analyst, and we've also have an ESG Steering Committee to help us figure out what are the best things we can do. We do a lot of recycling right now of our steel, our cardboard, our plastic, but what more can we do from a sustainability standpoint? So there will be more to come. We also have launched our diversity, equity and inclusion programs, working with consultant there and certainly focusing to make sure that everyone at Simpson is clear. Again, our fifth goal was everyone matters, and we want to ensure that we are continuing down and giving opportunities for our employees to go to various roles within the company. And as always, and it certainly became very clear, we are very concerned about the health and safety of all of our employees. Certainly, in the COVID-19, we did -- our crisis management team and our safety teams put great things in place to ensure that we could really make sure we had a safe working environment. So if we go to the last slide, a little bit of a wrap-up. Again, I think the key thing I started out with is our values-based culture. It is really the foundation that this company has been built on and that will continue as we continue to grow. When we talk about being the partner of choice, we mean in every aspect, from having product availability to being able to meet customer needs, delivery on time, even to the point of making it easy to do a transaction from an electronic system with us. We want to be sure we're continuing to grow above the housing starts. We think our adjacency markets, none of those, by the way, were really tied to U.S. housing starts. So we believe our adjacency markets will continue to help us grow above U.S. housing starts. And we want to continue to increase our operating income, our return on invested capital and really remain in that top quartile of our peers. I appreciate everyone's time. And I think we are out of time, so if you have questions, you can e-mail those, and we will definitely get back to you. But thank you very much for your attendance and look forward to the opportunity to speak with you. Thank you.