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

Great. Yes, we are live. So good morning, everybody. I'm Tim Wojs, I cover building products here at Baird, and we are delighted to have Simpson Manufacturing join us again this year at our Global Industrial Conference. Simpson is the largest manufacturer of structural connectors for residential and commercial applications in the U.S. From the company, on stage with me, we have President and CEO, Michael Olosky. We have CFO, Brian Magstadt, and then Matt Dunn is on the end here. He's the CFO elect and SVP of Finance. So I think we'll have a few overview and remarks from Mike here, and then we'll jump into Q&A. So...

Perfect. Good. So just real quick, a couple of slides 30,000-foot overview. Simpson is a leading provider of structural solutions into the building and construction industry. Our solutions are typically less than 1% of the building materials, but they're very critical to the structural integrity of the buildings that we go into. When you look at our business, we go into 5 end-use markets. The first one is the residential construction space, the single family, multifamily. We believe roughly 50% of the total business is linked to U.S. housing starts. So that is the biggest part of our business. Commercial construction, so here, think retail, think hospitality. So typically wood construction that is used in the commercial construction space. That's a good fit for us, and that's our commercial construction business. OEM, so this is component manufacturing, sheds, tiny homes, building construction type applications that are built in a factory. National retail, it's a big box retailers for us and then component manufacturing here, think trust manufacturers or people that are doing well or floor components. So 5 market segments. We believe we take the biggest and broadest and deepest product line of structural solutions to those 5 markets, making us a one-stop shop for structural solutions. And when you look at our 5 product lines, these are engineered, thoroughly tested, code-approved engineering report type solutions. So we have connectors, which is how the company started. We have engineered fasteners, anchors and truss plates to kind of round out the hardware part of our business. And then we also offer a broad range of digital solutions that help our customers select, specify, engineer and design in the right part and then in some areas, like component manufacturing, actually help them do the design part and run their business. When you look at our business model, we think this is the part that makes us pretty unique. We have long-standing relationships with building code officials and engineers. We work with them to help use our solutions for them to build safer, stronger structures. That tends to create demand for our products. So when you look at the prints, the Simpson name and the Simpson products are all over the prints as a result of that work. We also work with people that are the large homebuilders. So we have agreements with roughly 300 builders, representing roughly 50% of the U.S. housing starts, where they tell the supply chain. They want to use Simpson Solutions. So that pulls that demand through the channel. And then the lumber yards, the pro dealers, the contractor distributors, we provide excellent service for them. They don't have to carry 10,000-plus SKUs because if they place an order today, we ship it the afternoon, they get it the next morning. They also very much appreciate how we help develop the business for them. And that business model has really helped us drive above-market growth. So we benchmark ourselves against U.S. housing starts. And if you look at how we perform versus U.S. housing starts for the last 8 years, our volume of our North American business has been ahead of the housing starts by roughly 250 basis points. The last 2 years, it's roughly 800 basis points above U.S. housing starts. We are driving that above-market growth because of that strong business model, and we've invested a lot in people to help us deliver great service to our customers. So if you look at the housing starts story, again, 50% of our business linked to housing starts. We're going to have 3 years in a row, as you know, of declining housing starts. But just to put it in perspective, how we develop the business, this year, we're going to finish a little bit less than 1.4 million housing starts in the U.S. in 2020, also a little bit less than 1.4 million units from a housing start perspective. When we finished 2020, we had a $1.25 billion business. We're very close to 20% operating income. Fast forward 4 years, roughly the same size housing starts. We're adding $1 billion under the top line. So we'll be around $2.2 billion. We're adding a couple of hundred million on the bottom line. So we've really developed the business over the last 4 years, $1 billion on the top line, a couple of hundred million on the bottom line. Really 3 different drivers for that. We've net $450 million of price over the last 4 years. We implemented $500 million. We've kept $450 million of it. We had an acquisition in Europe, roughly added $300 million on the top line. And then share gains have added another $250 million, helping us progress the business top line by $1 billion over the last 4 years. Going forward, we are optimistic about U.S. housing starts. I know I've said this now a couple of years. Similarly, we're bound to get this one right. We are ready to provide great service when the market takes off, and we're going to be ready to provide great service to our customers going forward.

Great. Great. If you have questions, you can raise your hand or e-mail [email protected]. So Mike, maybe just on the share gain piece. So you've probably -- I think your slide is 250 basis points, that's accelerated, right, and over the last couple of years. So maybe just provide some context around why that acceleration has happened and kind of what you're doing internally to maybe not quite do 800 basis points of outperformance, but something that might be higher than the 250 you've done historically?

Yes. So service is one of Simpson's core values. And when we had the supply chain challenges that happened during the COVID time, it was a perfect opportunity to highlight the importance of service. So our competitors weren't able to keep up with the increased building rate. A lot of the homebuilders had a lot of different supply chain challenges. Simpson kept a very similar service level. So that helped everybody recognize that they want to partner with somebody that's able to keep up with that growth. And then we had very strong gross margins, and we invested a big chunk of that back into the business, more salespeople, more people who develop digital solutions, more people to help you take offs, more engineers to develop new products, emphasizing again, great service. And you combine both of those, Tim, that's why we think it's accelerated the last 2 years to 800 basis points. We think the right way to look at it is a 12-month trailing number because there are some puts and takes in the housing starts numbers, it's not always smooth. The last 12 months is 500 basis points above market. Going forward, when we look at the business, we are looking at those 5 market segments and those 5 product lines. We're looking at the TAMs of the intersections of each of those. We think there's a lot of opportunity to drive growth. The top 2 growth drivers for us are going to be in the component manufacturing space. We've made a lot of progress. We think we can make more. And then just accelerating our new product development efforts, we think we've got some ideas on how we can ramp that up. And those we believe will be the 2 big growth drivers going forward for us.

Okay. Okay. And I mean, you're positive on housing starts, hasn't necessarily come to fruition in the last couple of years, and it's actually going to be down this year again. So you've made incremental investments, assuming kind of a growth market. The market hasn't grown, that's created deleverage. I guess as you look into next year, how do you kind of manage those investments? And are you going to be pulling things out? Are you going to be kind of maybe slower to add investments as you kind of wait until maybe the market picks up? Just kind of talk about that and your comments on the call about wanting to be -- have EBIT margins above 20% next year, how you're going to manage to that?

Yes. I can take that one. As you said on the last call, we really want to be -- believe we should be at 20% in 2025. And so we'll talk about that when we give our guidance in a little bit. But what you're going to see going forward is just probably a little bit more cautious in adding any incremental SG&A until we get some of that leverage back and we get some of the tailwind from some of the housing starts. We believe most of the investments we made are really good, and they're the right longer term. So we're not going to pull out on those at this point. It's just going to be a little bit slower on the add as we kind of grow into it. So it feels like it's maybe just a little bit of a pause in incremental investment until we're -- we can digest it and then get it back above 20% and then go from there.

And as we think about it, a lot of those investments are people-related, product development, salespeople, engineers. And as we're sitting here a year ago, we're looking at maybe a housing market that's going to be up low single digits and when we go to the builder show, again, good enthusiasm. The first quarter was actually a pretty good housing start number for that. And then, of course, we've seen it slow down. So as we've built our plan out, as Matt noted, we will -- typically, we'll have an end-market view and figure out what our expenses are going to look like on a go-forward basis. We're going to be a little bit more cautious going into 2025.

Okay. Okay. And I guess one thing that maybe has gone a little under the radar is just you kind of restructured the internal organization. We've talked about this in the past of used to have connector people and fastener people. And so just -- it seems like now you have more of a kind of a cross-functional or cross sales opportunity. So just kind of talk through like how you're kind of thinking about your go-to-market strategy and how that's evolved.

Yes. Good point. So 2 years ago, we changed from a product-oriented sales team to a market-oriented sales team. The benefits from a product perspective is you have people that have deep expertise in that product. They know all the end applications. The downside is from an efficiency standpoint, we would have sometimes 3 or 4 different sales reps calling on a lumber yard, and in areas where we thought we could increase our attachment rate, for example, connecting our fasteners to our connector business, we maybe didn't have the fastener team in there as often. So by having a market-focused approach, we've trained up our team, so they also have a good understanding of our full product capabilities. But now they are a single point of contact for our customers in each of those 5 market segments that I went through. And I think that's part of the reason why we've been able to accelerate growth is because when we look at our lumber yards and our pro dealers, for example, we have a very clear view on how many of them carry our connectors, also how many of them carry our fasteners or anchors, and we think there's opportunities to grow that share and provide that complete set of solutions to those end customers.

And I would add that we're able to then focus on some of those other markets that we want to develop and grow like commercial, OEM, which in the past may have been -- if you can get to it, great, but the residential market was the biggest piece of the pie. So a lot of the focus was there. Now by having the teams solely focused on growing the OEM space or the commercial space or the other ones, and they've built playbooks on what they need to go in and gain share. Again, they're focused in their end market, whereas the team that's focused on the residential, the biggest piece of the pie, we think there's ability to grow there as well by a lot of the efforts that Mike had noted.

Okay. And then maybe just step back, just can you talk a little bit about your competitive advantages versus your competition? I mean, a lot of times we have a hurdle with investors where they look at your products and they're bent pieces of metal and -- bent pieces of engineered metal. So just kind of talk through the barriers or the moats around your business, whether that's sales relationships, distribution relationships, codes. And then how does that the same or different with the connector business and everything else you're trying to sell with the connectors?

Yes. So -- good question. If you come back to the business model that I talked about, we are working with building code officials and engineers. We've known them forever, provide great training to them. They are signing up for the legal liability of the building that they're designing. So they want to work with a trusted partner. Builders want to work with people that can also help them build the houses efficiently and provide good structural solutions and then the lumber yards in between. So if you kind of deconstruct that a little bit, if you happen to lose a couple of engineers, architects, they started designing competitive products. The reality is they're not going to be that widely available because our products are all over from a supply chain perspective. The engineers and architects want to specify stuff that's available, that's proven, we check that box. If you go to the builders and you say you go to a midsized builder and they want to switch for whatever reason, again, we're less than 1% of the bill of materials. So the saving is not going to be that significant anyways. They're going to go to their supply chain. For the most part, the supply chain carries just one set of connectors. So their product availability is not going to be there for them either. If you go to the lumber yards and pro dealers and if they want to carry a competitive product, and we have all these builder programs that are pulling it through, why would they do that either. So when you look at that, where -- if you're a competitor, where would you be looking at it. Okay, go to an area maybe in the middle of the country, where the building codes are relaxed. There's not a lot of content on the house, and there aren't a lot of big production builders, okay? There's not many spots like that in the country. So that -- taking care of the engineers, code officials providing training, long-standing relationships, the lumber yards, same deal and also providing support to the builders with the biggest sales team in the industry, the biggest field engineering team in the industry, that makes a pretty sticky interconnected relationship.

Product available in all parts of the country where we can get product to a job site in very short notice. And going back to the engineers, making sure they're specifying products tested in the environments that are designing to gives them a lot of confidence to specify a strong tie.

Okay. I guess in your fastener business, just how bigger fasteners today? And maybe what's that business growing at? And I guess how would you kind of say your fastener portfolio is different versus the -- maybe commodity-type fasteners that you might find in the marketplace?

So pretty large market share on the fastener space. We compete not in the commodity space. So it's structural, load-rated engineered fasteners that we can, again, display to the engineer, to the contractor, various attributes that are differentiated. So how they drive, how they tend to not split wood, things that just make ease of installation. And then again, the engineer showing the combination of a fastener, structural fastener combined with the connector and the combined load rating those get. So helping the engineer achieve a load that may not come with just the connector and a standard nail. Fasteners have been one of our largest growing product lines due to a lot of the things that we had talked about before around how we're going to market in those spaces. You may know we make a lot of our fasteners today in our Gallatin, Tennessee facility. We're actually greenfielding a new manufacturing site, they're close by where we can make more of what we sell in North America. We bring in a lot of fasteners today from Taiwan to complement what we make locally. It will be really interesting because that could potentially unlock some new markets for us where we can make something quicker to when it's needed on a job site versus having to bring that in with a very long lead time. So fastener has been a pretty large growth area for us in that strong tie, that differentiated service and engineering support helps big time with that product line.

And I mean, that part of the business does have a kind of an import component to it. So I mean, how do you -- with the election and kind of tariffs kind of swirling, I guess, a, do you have anything today that you're paying tariffs on? And I guess if there was tariffs put on imports, I guess, how would you guys kind of respond to that?

Yes. There are some tariffs and duties that come in our supply chain from various parts of Asia. As we think about additional tariffs potentially, it could be a bit of a tailwind for us, and it depends on the competitive landscape. But if we're seeing low price imports subject to tariffs, that potentially helps the domestic manufacturers who we compete against. So if that helps hold the price up, I think that's typically good. It could be a little short-term noise. So we'll have to see. But tariffs have been something that we've dealt with, whether it's on imported steel that we don't necessarily import, but we're competing against. It's been something that's been part of the environment for 10-plus years.

Okay. Any questions from the audience?

What portion of your products are [indiscernible]

No, no. Not a big chunk, [ actually ] 10-ish percent. So we really like to manufacture close to our customer base. It really helps us respond quickly. So in the U.S., our coiled steel, our flat steel is primarily sourced, I think, exclusively sourced domestically. And same thing with Europe, we want to supply or have suppliers that are close to our production facilities.

And that 10% is China or Taiwan?

China, Taiwan. So we've got a concrete, mechanical anchor manufacturing facility in China that is ours. They supply -- I think about 90% of their output is coming to North America, a little bit going into Europe. The Taiwan fastener supply, not our own facilities, so we're bringing those in from manufacturers that we've been doing business with for a while.

[indiscernible]

We don't think product mix is a big issue there. Part of it, Matt talked a little bit about around how we've added additional SG&A in light of a lighter volume market has gotten us to the point where we're guiding this year, 19% to 19.5%. If you heard our third quarter call, I'm not happy with that level, and we really want to get back to 20%. We do need the market to help a little bit there. But from a product mix perspective, as we're thinking about these are all value-added non-commodity-type products, they ought to be able to deliver a pretty good return to help us be at 20% and higher. One of the benchmarks that we look at is one of the elements is our proxy peer group. So companies that are building materials in a similar revenue size, maybe half our revenue, 2x our revenue. And the top -- the 25th percentile starts at about 21% operating margin. And that's a benchmark that we definitely like to be back within.

Maybe just on the truss business. Frankly, I thought that was kind of a lost endeavor about 5 years ago. Can you just maybe talk about some of the development activities there. I mean you won a top 10 kind of component manufacturer last year. And so just maybe give us a little bit of context in terms of kind of what's happened in that market and kind of what you need to do to kind of build out your capabilities to really go after some of the larger truss companies in North America.

So if you look at the truss and the wood connector market, we kind of combine all that together. You see in our investor deck, combined, it's about a $2.5 billion market. Half of that is truss plates, half of that is traditional connectors. If you look at the largest truss manufacturers, they are all the largest pro dealers, and we are working with them and they're very large customers for connectors, fasteners and anchors. So they know us, they know our service. We've got very good relationships with them. I think the part that has been different it was a couple of years ago, some of the supply chain challenges, again, our competitor put several customers on allocation. They had shortage issues, they had a lot of service issues. And then as part of their business model, they didn't allow them to go to competitors. So that created some additional [ angst ] that have made a lot of our customers realize that maybe having a single-source strategy in that space had some risks associated with it. In parallel, we've invested quite a bit into the development of digital solutions that have enabled us to bring a better truss software product to market. We picked up a top 10, as you alluded to, Tim, picked up a top 10 manufacturer. And that enabled us to prove that our design capabilities are good. We continue to build out our additional design capabilities and our production capabilities from a software perspective. And we're making good progress there. And then we've added Monet DeSauw and also part of that market, you come in with full solution. So the fact that now we can have a saw manufacturer that has a very good reputation in the market. They have a lot of customers that we don't have now that we're going to get, now we can leverage that relationship that just help kind of accelerate things. And we've seen the component manufacturer be a big growth driver for us the last couple of years. We anticipate all that being a big growth driver for us the next couple of years as well.

And what else do you need to build out on the truss side? Because I think sometimes it's just you think software and like somebody is putting some -- it's more complex than maybe what we would think about?

Yes. Good question, Tim. So when you look at the truss business, you need software that can design truss systems. So you're actually providing the design software to develop exactly what that truss system does and how it meets the industry requirements, the building codes and the load requirements. Then you also need to engineer that down into the wall panels and then into the floor panels to understand the total structural impact on that building. Right now, we have capabilities to do each of those 3, but they're in different systems. We are working via acquisition, CSD. It was one that we made a couple of months ago, and we've got a partner in Europe that's helping us with the wall panels so that we have one completely integrated design solution to do truss, walls and floors in one system. That is one area. Another area is a product that we call Director, and that helps them kind of manage the business, incoming angst, which projects are they going to do, who's doing what. We have some capabilities there. We think we need to build that out a little bit more, so we have some effort in that space. And then the other -- the area that's probably the biggest work for us is on our producer software. So right now, our customers can -- that are managing 1, 2, 10 different sites, they can use part of our solution and some of their current solutions to do that. But if you're managing a manufacturing supply chain with 100-plus truss plants, that gets pretty complicated. We've got development efforts going on in that space that can further help us and help our customers manage those larger networks of manufacturing supply chain activities around truss plate. So those are the 3 big components that we're working on. We've brought in some high-end product line managers, architects, software developers to augment some of the historical truss business that we have to really help us accelerate our growth in that area. And we're feeling pretty good about the direction of it.

And what's your -- so what's your market share in truss today?

Less than 10%.

Less than 10%. And so there's a pretty big -- you've gotten feedback from your customers that there could be a backlog here if you can build this all out.

People want to partner with us. People want to partner with us, yes.

Okay. Okay. Maybe on software. So you obviously have truss software, but there's all sorts of other software that's kind of being talked about in lumber yards, take offs, those types of things. So maybe just talk about where Simpson is positioned on the software side? Because I think that is another kind of dynamic that kind of flows into the radar with you guys. In terms of how big and how meaningful it is to your business?

So if you look at the residential space, for the most part, there aren't a lot of large players offering digital solutions to make that place more efficient. And as you probably read, in the building construction space, use of digital solution is not high. So we've got some really interesting tools that we think can help. One of the tools that we think is most interesting is our -- we call it our pipeline tool, and that has the ability to take a drawing, a 2D print and create a very accurate bill of materials. They can do the sticks, the 2x4s and do all the structural stuff, but it could also do tile, it can do site, it can do floors, it can do doors. I mean it depends to the extent to which our customers want to customize that. And so they go from having people that are using maybe spreadsheets or they're using kind of various hand calculation tools to being able to automate that. And so what does that do? That gives them a much more accurate understanding of the cost of bill of materials, the cost. And it also helps them better manage the waste because waste in the building and construction industry is also pretty high. And we have very good examples of where our lumber yards have done this. It's made them more efficient in their quotes and help them gain business. We've got builders that have implemented this. It's helped them reduce waste. And today, we monetize that a little bit. It mostly drives hardware sales for us, but we think there's an opportunity to accelerate the monetization of that at the lumber yards and also at some of the builders. And what we've learned is people who sell hardware every day maybe are not always good at selling a software solution. So we're investing now in a market-facing, customer-facing team that, that's all they do as they sell these digital solutions.

And who would you compete with, I guess, in this space? Or do you?

Yes. So a paradigm through BFS, and BFS is a wonderful customer. So they offer some solutions to their biller customers, and we partner with them on that. So they've got one option. There are a couple of small companies that have designs, sketch it up, design software. They offer a version of take-offs. We think we have a more complete solution in that. We've got a couple of other smaller players, but they're relatively small companies, Tim, that don't have the critical mass that we have.

Okay. Okay. And then maybe just kind of last question here, just maybe on kind of cost inflation and kind of pricing and those types of things. Maybe just kind of walk us through your kind of mentality or your thoughts on how you think about price because it does seem like you guys have a lot of levers where you could be putting through annual price increases. So I guess how do you think about price? How do you think raw materials kind of play into that kind of going forward?

Historically, a lot of our price increases have been tied to steel going up, and we typically like to -- if steel is going to go up a meaningful amount and it's going to be sustained, we'll put through a price increase. If it's going to kind of bounce around a little bit, we'll absorb that through cost of sales. But of course, we know other costs in the business are going up, labor costs, costs in the factory. So we're working on a way to have some pricing that's not tied just to steel. But as we think about where we sit today from an inventory perspective, we feel we're pretty well positioned to carry us at a good cost basis into -- deep into next year, maybe midway through next year, depending on volumes. So right now, we're managing the P&L based on how much headcount to add, if any, with the projects we're going to fund. Matt talked a little bit about how we're thinking about that on a go-forward basis to hit our operating margin ambitions. But -- so today, we don't have an annual price increase per se, but it's definitely something that we're thinking about just due to all the other cost pressures that we have in our business.

And I guess you kind of have an average cost kind of model. Steel has bounced around a bunch. Are you kind of starting to see what you would look at as a spot rate steel price? Is that kind of what is kind of going to start to go through your P&L at some point here?

Yes. still, from our perspective, ought to be pretty consistent on a go-forward basis based on what we have in-house. We are seeing other costs in cost of sales, going up labor, I mentioned. Some of our investments in the factory and in warehouses, a little bit of a headwind there as well. But we -- but those are all elements that we're working on to help us achieve that 20% operating margin floor that we want to get back to.

Well, we're out of time. So please join me in thanking the Simpson team for being here.