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

All right. Good morning once again, everybody. This is Dan Moore, Director of Research at CJS Securities. For those of you just joining for the first time this morning, welcome to our 25th Annual New Ideas for the New Year Conference. Our next presentation is from Simpson Manufacturing, it's my pleasure to introduce Mike Olosky, President and CEO of Simpson as well as Matt Dunn, Chief Financial Officer. We'll start with a brief 10-, 15-minute update and overview from management. Following that, I'll host a series of Q&A. As a reminder, please feel free to submit any questions you may have through the portal, and we'll do our best to make sure we cover them. With that, Mike, Matt, thank you very much for taking the time to be with us today.

Dan, thank you very much. We appreciate the opportunity. Do you want us to get started?

Please do, yes. Just give us kind of the high-level overview business and update, and then we'll jump into Q&A.

So Dan, we pulled 4 slides from our investor deck, just to give everybody a quick intro to Simpson. And let me start at the 30,000-foot level. So Simpson Strong-Tie, we are a leading provider of structural solutions for the building and construction industry. We basically have the metal that goes into the house. And Dan, when you look at our products, they typically are way less than 1% of the bill of material, but our products are very much critical to the structural integrity of the building that goes into. That's how they resist the earthquake. That's how they resist the hurricane forces is the structural content that we provide into those markets. So if you look at our go-to-market model, we've got 5 sales teams, Dan, that are organized by 5 end-use markets, and you can see it on the slide here. So our first market and the biggest share of our business is residential. So this is both single-family and multifamily homes. We believe roughly 50% of the total business is linked to U.S. housing starts. So we track that very closely, and that's our main benchmark. We also have a team completely dedicated to commercial. So here in this space, think retail, think office and think hotels, dorms, especially commercial buildings that are constructed from wood. That's a real good fit for us. Our third market-facing sales team is original equipment manufacturers, the OEM. So here, think about things that are made in the factory. So manufactured housing, sheds, tiny homes, similar structures where you have wood-to-wood connections. That's also a good fit for us. That's our OEM business. And the third one is national retail -- sorry, the fourth one is national retail. So this is the big box retailers. It's the same product line that we sell through our residential and lumber yard builders, that we're selling through the big box retailers. Here, we're going after the DIY space. And then the fifth market segment is component manufacturers. So here, think truss yards and a lot of those truss manufacturers are the same people that we supply through pro dealers to basically get to the home builders. So 5 end-use markets when you look at our business. And then we take basically 5 product lines to those end-use markets. And we think we've got the broadest, deepest and most innovative product line of structured solutions. And that really, Dan, makes us a one-stop shop for structural solution. So when people are in that space, they're thinking, how are they going to provide their structural integrity. We believe that they think about us first. So the specific products that are included in that, these are engineered, thoroughly tested, validated connectors in the connector market we developed, and we've got a 75% share there. It's fasteners, it's anchors, it's truss plates. But it also more and more, Dan, is becoming digital solutions. And those digital solutions help sell hardware, and we do over time, want to monetize that some of those digital solutions and provide some services around there. And we believe those digital solutions make us easier to do business with. It makes it easier for our customers to select, specify in designing our products, and it makes that whole relationship with them a little bit more sticky. So those are the 5 markets. Those are the main product lines, but what we think really makes us unique is our business model. And this business model has been developed over the last 65-plus years, and we think it is a driver of significant competitive advantage. And that starts with us having long-standing relationships with engineers and code officials. I mean our teams grew up with these guys. We've trained them. We provide continuing education credits. We spent a lot of time educating them on how to use our solutions and how they can design and build safer, stronger structures with a very broad range of innovative products on their end. So all that work with code officials and all that work with engineers, that creates specifications and that creates a lot of demand for our products. And then we pull through that demand by working with builders. And the same kind of thing, Dan, we're working with the builders to help them understand how our solution can help them design and build a safer house. And we have agreements with approximately 300 builders, representing roughly 50% of the housing starts, where those builders tell their supply chains, they want Simpson solutions. So that takes the demand created by the engineers and the codes and the specs and that really pulls it through to the end-use customer, which is the builders. And that creates, again, a part of a really sticky relationship. And then the guys that are in the middle, these are our channel partners. So lumber yards, pro-dealers, contractor distributors, they appreciate our hub developing the business. We have very good relationships with them. We provide great service. They place an order today, they hopefully get it tomorrow, the next morning. So that means they don't have to carry a lot of inventory. And together, we work to really develop the business. So if you take the code officials, the engineers, all the specs, you take the builders, training them, the builder agreements, the great relationships with the lumber yards, it creates a very, very sticky business model. And then we layer over the top of that, all the software and services that make us easier to do business with, and we believe that creates an even closer relationship with our customers. And what's the result of that? Well, it's this slide. If you look at Simpson Strong-Tie over the last 8 years, we've grown roughly 250 basis -- our North American business has grown volume roughly 250 basis points above U.S. housing starts. And we think U.S. housing starts is a very good financial benchmark for us. But over the last 2 years, we've really ramped that up. We've invested a lot in the business, the COVID supply chain problems really emphasize the need for service and reinforce a big part of our business model. That's helped us accelerate growth above the market, roughly 800 basis points the last 2 years. And so we've made really good progress in a declining housing market. And I think the declining economic housing market gives us a chance to really illustrate how we've developed the business over the last 4 years. So latest forecast official numbers aren't out for 2024 yet. But for the most part, we believe housing starts are going to be below 1.4 million units. The last time we were below 1.4 million units was in 2020. So just to kind of compare the financials from 2020 to 2024, roughly a flat market, less than 1.4 million housing starts. In 2020, we had a roughly $1.25 billion business with an operating income around 20%. That was a step-up from 2019 because of the COVID bump. So this year, 4 years later, again, roughly the same size housing starts. We have added roughly $1 billion on the top line and roughly $200 million on the bottom line. Flat market, plus $1 billion top line, roughly plus $200 million in operating profit. And we've done that through pricing. We've kept $450 million of pricing, and we believe we'll keep that going forward. We acquired a company in Europe, ETANCO, that's another $300 million. And then we've had $250 million in share gains that we believe we'll keep. So we've made tremendous progress, we believe, in a relatively flat market. Of course, we can always get better. We are working to make our business model even stickier and working to continue to drive that above-market growth. We are doing this with the belief that the housing market is going to turn around. Is it going to be the first quarter? Is it going to be midyear to be determined. But we do believe in the housing market mid- to long term because we think there's a housing shortage there, and we are going to be ready to support our customers as that market picks up and help them rock and roll going forward.

Perfect. Mike. Great overview and intro. I greatly appreciate it. Dovetailing on that, what are maybe the biggest company-specific milestones, catalysts, drivers that you're focused on this year to help you continue to drive that above-market growth that you've just described as accelerated over the last couple of years? And on the flip side, what are the biggest risks or things that you've got your eye on entering 2025?

Yes. So Dan, we're really focusing on the things that we can control. So it's all about driving above-market growth at a good profitability level. We've got very specific product playbooks. We've got very specific market playbooks. We know what our top opportunities are. We do a good job of cascading that down into the teams to make sure everybody is focused on the biggest and best opportunities. But the reality is we have a super fragmented business, 10,000-plus products, 10,000-plus ship to locations, no customer, no product over 10%. I think that's a great way to build the business, but it does mean we got to be really good at hitting a lot of singles and doubles. So just executing on those plans is -- we want to continue to get better at that. But when you look at the overall biggest risk, I mean, Dan, I think really, it's the market. I mean if we have a broad-based continued slowdown, that just makes it harder for us to hit the numbers that we want to hit. So I think the market is our single biggest challenge we got to work through.

Got it. And as you alluded to, no official forecast at this point. It sounds like you do expect some level of growth from a housing perspective. Do you see that a little bit more kind of back-end loaded as we enter the year, a little -- maybe a little softer as following Q3, Q4?

Yes. Good question. So when we were doing our budgeting fourth quarter, we were thinking market growth in the U.S. roughly 3% to 4%. And we were thinking market growth in Europe roughly 1%. And we were thinking that, that was going to be pretty even across the board. I think just given how interest rates have changed a little bit, there's some questions on tariffs and pricing. I personally think that's going to be a little bit back half loaded and more to come when we do our official 2025 guidance in a month or so.

Understood. Look forward to it. From a -- just high-level question that we're asking all of our companies, but in terms of the new administration, how are you preparing for shifting gears operationally for any of the uncertainty, be it tariffs, knock-on effects of immigration in terms of housing, et cetera. What's the biggest area of topic of conversation...

Yes, I'll take that one, Dan. This is Matt. Again, staying focused on what we can control. We've always believed in local manufacturing. That's in our DNA. We buy all of our U.S. steel for our connectors. So it's all sourced in the U.S. We make almost all of our connectors in the U.S. for our U.S. business. We do import some fasteners and anchors, but we have made a pretty significant investment in our Gallatin, Tennessee facility, where we're doubling the size of that to be able to onshore more of that. And overall, the imports aren't a significant portion of our overall business. So from a tariff standpoint, feel like there won't be a significant impact to the negative, potentially a tailwind depending on what competition does and what happens with pricing in the market. In terms of the administration change related to immigration, potentially some risk if the construction workforce were to be impacted by significant changes there. And then longer term, if there were significant immigration policy changes may impact housing formations, which wouldn't be good for overall housing market. But again, I think that's a bit of a longer-term play and again, remains to be seen what exactly happens with the new administration. So overall, I don't feel like there's significant headwinds in the short term and potentially some opportunity behind tariffs.

Got it. And how would you describe just your visibility entering into end market demand and how that might be impacting your planning and budgeting entering '25 relative to maybe the last couple of years?

Yes, a short answer, Dan, not great. And I think that was part of the challenge we ran into in 2024. The forecast, we're fairly optimistic. We go to the builder show in January. We hear from all the big production builders. Things are going to be good. We over -- it is a people-intensive business model. We over-indexed from an SG&A perspective, so that we're ready to support our customers they ramp up. And clearly, that growth didn't materialize last year. And that's why from a margin perspective, we're not where we want to be. When we do look at kind of our overall 2025 story, I mean, we get visibility in certain parts, but we don't really get one comprehensive holistic view except for the market prognosticators. So we get point-of-sale data, and we get some forecast from our national retail customers. Our larger production builders are giving us housing start forecast, we can use that. Matt mentioned earlier, we quote multifamily jobs. So that helps us kind of get a feel for that. I mean we're talking with our customers all the time trying to roll that up into one story. The reality is it's volatile. I mean, last year, we had a good month, followed by a bad month, followed by a good month. So we are taking a little more conservative view at least on the first part, but we do believe in the long term -- midterm to long-term market, and we're going to make sure we're ready for our customers when the growth story picks up.

Understood. And maybe switching gears a little bit, just update us on macro conditions in Europe, particularly in commercial construction in those geographies where ETANCO has the most concentration. And then longer term, in terms of offensive synergies from the deal continue to be pushed out a little bit, but are they intact? And what's the playbook for reinvigorating growth there?

How about I do the first half. Matt, you do the second.

Yes.

Yes. So Dan, we use EUROCONSTRUCT and just, again, same thing, a lot of input from our customers to get a feel from the market. Getting one kind of comprehensive accurate number that fits with the European multiple country scenario and the product mix we have in different markets is a little complex. When we look at last year that we think the market combined weighted for our mix in our products. So residential commercial, and a couple of other markets was down mid-single digits. And the residential field for the play areas we're in, it's probably down high single digits. So we believe our European businesses outperform the market. For 2025, most of the segments looking like low single digits. We've got modular construction, mass timber offsite construction that's maybe looking mid-single digits. But when you add all that up with our footprint and the commercial story, which is low single digits, we think total market kind of benchmark or setup for our footprint is roughly 1% for 2025. We do think that's trending up slightly. Again, we do believe in the European market, there's a housing shortage there. So we're hoping the midterm that we start to pick that up to mid-single digits. But 2025 market growth, our view on that is about 1%.

Yes. And just adding to that question on the synergies. So when we acquired ETANCO, we talked about $30 million in operating income synergies. About half of that was offensive and half of that was defensive. At the time, we are assuming low single-digit market growth, which, as Mike mentioned, we aren't seeing, so a little bit slower growth than what we expected. The defensive synergies are still on track. We're probably 70%, 75% of the way through those and a lot of the cost of those were in 2024, as we talked. We put a bit of a pause on the offensive synergies until the market bounces back a little bit. But from a big picture standpoint, our target for Europe in the midterm is to have above-market growth and get to a 15% operating income. So once that market growth kicks back in, that will certainly accelerate. But even the defensive synergy work that we've been doing is contributing to improving margins overall in Europe.

Perfect. Maybe this goes a little bit into dovetails with some of the tariff questions. But talk about the likely impact of steel pricing over the next several quarters, both from a revenue and margin perspective. If prices were to hold where they are today, and I know the futures are indicating a little bit of an uplift maybe in the back half of the year, your outlook?

Yes. So we've got about 150 different flavors of steel. So we're kind of looking at one indicator on like hot-dip galvanized doesn't tell the whole picture, but that is -- that price has come down a bit. But we do expect steel costs to come back up. And other costs are kind of increasing around steel costs, which is partially offsetting some of our productivity, but really keeping our sales team focused on our customers on value-added pricing kind of regardless of what's happening with the cost of steel. And generally, we think that gross margin in the mid-40s is a good number. So I think potentially, we'll have to see what happens with steel pricing with tariff, but I don't expect a significant change if steel prices stay where they're at today.

Understood. From an opportunity perspective, of your 5 targeted end markets for increased penetration, where are you seeing the most opportunities maybe top 1 or 2, and any tangible examples over the next 12 to 24 months?

Yes. Dan, we have each of those 5 markets focused on above-market growth. And each of the 5 have an independent benchmark that we're using. So for example, Dodge for the commercial business, Cleveland Research for national retail and then U.S. housing starts, obviously, for the residential part of the business. So we're expecting all 5 to grow above the market. When you add it up and you look at some of the biggest opportunities, we think component manufacturing is probably our top opportunity. And then we think just ramping up the new product development engine, getting new products out there and increasing the sales of that across all 5 market segments is probably our second biggest growth opportunity.

Really helpful. Appreciate that. As a reminder, if you do have any questions, feel free to submit it through the portal, and we'll try to get them covered. In terms of building codes and standards, which is for a long, long time, been a big driver and -- of your business, any latest trends, changes, both North America and Europe? Any meaningful tailwinds that you see on the potential horizon over the next kind of several years?