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

Great. Good morning. Thanks for joining us. I'm Tim Wojs. I cover building products here at Baird, and we're happy to have Simpson Manufacturing join us again at our Global Industrial Conference. Simpson is the largest U.S. manufacturer of structural connectors and related products for residential and commercial applications. From the company, we have President and CEO, Mike Olosky, and we have CFO and Treasurer, Matt Dunn. We're going to start with a few prepared remarks from Mike, and then we will hop into Q&A. So I'll...

Okay. We take 5 minutes just to level set a little bit on Simpson Manufacturing. So we are a leading provider of structural solutions into the building and construction industry. Our products are typically less than 1% of the bill of material of the house, yet critical to the structural integrity of that particular structure. We go to market with 6 product lines, but our 3 main product lines are connectors. These are engineered stamped steel components that have been thoroughly tested, validated and developed over time. This is a market that our founder started a little bit less than 70 years ago, and we have a very strong position in that space. Fasteners is another area for us, same thing, engineered construction grade code reports. We have roughly 180 patents on our fastener business and then anchors. These are large screws that embed things into concrete. So we're looking at connecting wood to wood, wood to steel, wood to concrete, all things structural connections. We go to market in 5 end-use markets. So the residential business, that is our biggest business. We think out of the total company, roughly 50% of our revenue is linked to U.S. housing starts. Component manufacturing is the second one. So this also is going into the residential market. So think truss, walls and floor systems. Third one is our commercial business. So again, typically stick frame construction, think strip malls, houses, hospitals, dorm rooms, retail. And then national retail, that would be our R&R business and then OEM. And this would be a small but fast-growing part of our business. This is typically where we're going after areas of structural connections but made in a factory, think tiny homes, think sheds, think manufactured housing, think structural crates where again, you're using wood to wood, wood to steel type connections. And the piece that I think makes Simpson unique is really our business model. So a one-stop shop for structural solutions. We take what we believe is the broadest and deepest product line in the industry to building code officials to help them learn how to do building codes that create safer, stronger structures. We spend a lot of time educating building code officials and doing a lot of tests to help the building code officials write codes that will help withstand seismic and hurricane events as an example. And we take all of that technical know-how when we go to the engineers and architects, we train them on how to meet the codes. We also train them on how to use our solutions to build these beautiful big safe buildings that can withstand hurricanes and seismic type events, and that creates demand for our products. So we are specified through the engineers and architects, I would say, on almost every print. Then you go to the builders, and we have agreements with builders. We have rebate programs with the builders where they tell the supply chain that they only want to use Simpson Connectors. So that pulls the demand through the channel. So we work with our channel partners and talk to them about how we're creating demand via building codes and specifications. We talk with our channel partners about how we're trying to pull that demand through the channel with the programs that we have for builders. And then we provide great service to these lumber yards, pro dealers, contractor, distributors, so they don't have to carry all 10,000 of our SKUs. Typically, they place an order in the morning, we ship in the afternoon, they get it the next day. And then over the top of that, we continue to layer digital solutions and services just to make us easier to do business with, to find the right product, to make sure you engineer it in, to design custom products on the web, to check order status. We believe those digital solutions help strengthen that business model. And as a result of that, we made some pretty good progress over the last several years.

Yes. I think the market has been largely flat. This is 2020 to '24, roughly a little less than 1.4 million housing starts. And in that time period, we've added roughly $1 billion in top line and almost a couple of hundred million dollars in operating income. Significant pricing behind the steel cost increases that happened in '21 and '22, did make an acquisition in Europe, ETANCO, roughly $300 million add, which essentially tripled the size of our European business. And then we did grow roughly $200 million in share in the market. And that's really one of our key metrics is looking at how we perform on volume versus U.S. housing starts. And a lot of things we're proud of here, certainly, the things we talked on the last slide, but I think just positioned well in the industry for when the housing market comes back a little bit, give a bit of tailwind, I think, will give us even better outlook. So...

Great. Okay. Well, thanks, guys. Thanks for that. If you have any questions, you can raise your hand or e-mail, I don't know which one is [email protected]. So maybe just start -- you mentioned just kind of the housing market, when things get better. Just as you look into next year, kind of what are you preliminarily hearing from builder customers about single-family demand next year, maybe multifamily demand? And I guess, how are you guys kind of planning for that type of environment into next year?

Yes. So we're hearing very much a mix story, as you can imagine. So we use Zonda for all of our forecasting tools because we can get a regional split and our business is very regional. So the Zonda housing starts number for next year is a little bit above flat, 0.4% is I think, what they're saying. And when we're talking with the bigger builders, their view cautiously optimistic. From a bigger builder perspective, they believe more in consumer confidence needs to ramp up before they see a significant improvement in sales because they're already subsidizing the rates. And a lot of the bigger builders, their customers are getting interest rates in the 4%. Where we think that will help is in the smaller to medium-sized builders where maybe they don't have the balance sheet or the P&L to be able to subsidize the loans. We're a little bit more optimistic on that area. And then if you look at multifamily, we believe that's going to ramp up a little bit because, again, lower interest rates will be able to help that out. But add it all up after 4 years of a down market in the U.S., we're probably going to be slightly above flat-ish in that kind of range. That's what we're planning at this point from a market standpoint market standpoint, yes.

Market standpoint. Okay. And I guess when you look at one of the things that was kind of incremental coming out of the quarter was you've taken some actions internally. And one of your targets has been for the last few years, a 20% plus EBIT margin. So maybe if you could talk about the actions you're taking to kind of get there? And then second, why is 20% plus EBIT margin the right margin for Simpson...

Can you talk about the actions...

Sure. Yes. So we were above a 20% operating income for a couple of years. We were below it last year, and it's at the top end of our current guide for this year. Some of the actions that we took in late third quarter, early fourth quarter, expect to deliver about $30 million or more in annualized savings in 2026, really a combination of restructuring and reduction in force from a people standpoint as well as a couple of businesses that just weren't delivering on the returns that we expected and the levels we've been investing. So smaller businesses, innovation that we had launched maybe a few years ago, they were still investing heavily, starting to wind some of those businesses down and kind of reprioritize the resources. But big picture from a people standpoint, in addition to winding down those businesses and the people that go with it, did some spans and layers work kind of looking at teams and making sure we were at management levels and everything were appropriately categorized there, ultimately to give us the ability to deliver a 20% operating income in 2026 even if we get that flattish market that we talked about.

Yes. So then to your point about why 20%, we've got a great brand, very good market position, I mean a very, very good business model, great team, all that needs to translate into very good financials. And so when we look at the overall industry, 20% is above average in our space. And we think that, that is a good level that enables us to invest back into the business to drive that above-market growth and then also deliver a good return to our shareholders.

Okay. I guess if you would see, at some point, volume pick up, would you -- in that case, would you get a good healthy 30%, 35% incremental to kind of drop down? Or would you manage it to that like low 20s type EBIT margin with -- kind of as you get back to like more normalized volume activity?

Yes. At this point, all about hitting the 20% to prove that we can do that. When we get back to a more normal market growth rate, 3%, 4%, 5%, and we continue to outperform the market, we certainly do believe we can expand our margins.

Okay. All right. And then I guess when you think about some of the structural advantages that you guys have, I guess, how does that kind of create -- like what -- when you look at the moat that you have, you clearly have a moat in connectors. How translatable is that to other parts of the business like fasteners or anchors or some of the truss and component software? I think that's a hurdle that people have kind of had historically.

So I think a good way to think about that is when you look 3, 4 years ago, we went from a product-focused sales team to a market-focused sales team. So before, we had people that just sold the connectors, people that just sold fasteners and anchors, the fastener and anchor business, smaller businesses, so smaller sales teams. And we didn't leverage the relationships and the know-how and all the know-how we had on the total building systems. So now just sticking with our residential business, we send somebody into the builders and we send somebody into the lumber yards that are representing our complete product profile. So now they're leveraging the relationships they have, all the knowledge they have about that lumber yard and all the knowledge they have about those particular builders, and that helps us cross-sell. And so when you look back at the business, our fastener and our anchor business have been the fastest-growing parts of our business. We do make good margins on those. That helps us provide that complete solutions set to our customers. So I think that's a good example of how we can leverage that franchise connector business and help us grow other adjacent product lines.

And even in the fastener line, we're focused on delivery systems as well. So just making that total installed cost advantageous for whoever the end consumer is. So on our Quik Drive products, being able to stand up and drive deck screws or subfloor screws, things like that. We think that sort of makes us unique in that spot and kind of creates that value for the end user.

And have you been able to fold some of that into the end spec? So I think you said like 25 or 26 of the top 30 builders are in your builder program. Have you been able to put anchors? Have you been able to put fasteners into that program as well?

So the focus on the builder program is predominantly around our connector business, okay? But then from a specification standpoint, another example from a fastener perspective is we just came out with what we believe is really the only fully comprehensive tool to help engineers specify the correct fastener for the right application. So more and more, we are seeing fasteners and anchors called out on the blueprints, and we will continue to do that going forward.

Okay. Okay. Can you just talk a little bit about the -- like the software aspect of your business? Because it feels like there's multiple things on the software side that you're trying to do. And can you just kind of elaborate on what you're providing to customers?

Yes. If you look at all things digital, and let me start with an industry perspective. Most of our customers are really focused on getting one ERP system so they have a view into the inventory. So as an industry, I still believe there's a lot of opportunities for us to use digital tools to drive productivity and also to help address the affordability story. So from a Simpson perspective, we think these digital tools can help us do some of those things, address the productivity opportunities, but also just make us easier to do business with. So we have 50-plus digital tools that help our customers do a wide range of things. It could be selecting the right product for the right application. And when you have 10,000 SKUs going into a lot of different applications, that can be kind of a complex story. We have tools that plug into CAD programs that help make builders more efficient or help engineers call out the particular product. We have tools that can help somebody design a deck or a pergola system. And then it creates all of the -- it creates the bill of materials and talks about all the specifications that, that deck or pergola need to make. And we think those digital tools just help us, again, make that business model stickier. We also believe on the -- on our portal, there are tools that can help somebody come in and create a custom connector. They can visualize it, helping improve the accuracy of that particular part for the end application. They can see things like order and delivery details. All of that makes it stickier. On the component manufacturing end, that's a different story because the business model there as you develop software that helps them design the component, manufacture the component, manage all the projects associated with that, you give that software for free in exchange you charge an inflated price for the plates. So here, we've made significant progress in that area. We've got -- that's been one of our fastest-growing segments. We believe that's one of our best growth drivers. We've invested heavily in that area. And a lot of that know-how, we think can translate into other tools, as an example, takeoff tools that help a lumber yard better quote a builder. So a builder will come into a lumber yard, present a 2D drawing and they need to quote that particular project to the builder. So there's a lot of manual work there. We have tools that can automate that work, and we have AI tools that can really automate it, like do it in less than 10 minutes so that the builder can spend -- I mean, the lumber yard can spend more time selling to the builder, more time out in the field, less time doing all these manual calculations to try to come up with an accurate bill of materials.

And maybe just from a -- just give us some perspective, like how sophisticated are your customers with software? Because it seems like there's a varying degree of -- I mean you still talk about guys going to lots and drawing like manual drawing specs, right?

Yes. Again, I would -- kind of going back to what I said earlier, we have a productivity challenge in our industry. We have a lot of people that are still new to the digital tools. So that's why we think there's an opportunity. There really aren't a lot of players that are bringing these tools into the residential space. If you step back and you look at construction tech, there's a lot of start-ups that are going after this space. We're looking at a couple of start-ups to help us partner in takeoff areas. We're looking at a start-up to help us in the development of multi-trade wall panels. So we think that's a good way to kind of get into these areas. So a lot of investment in construction tech and I think a lot of opportunity for the overall industry in general to move forward.

Okay. I guess on the truss business, that's something that has kind of been a part of Simpson for the last 10 or 12 years. But it's really changed over the last, call it, 4 or 5. I guess what has happened and what has really opened that market up for somebody like you to kind of enter in a much more meaningful way?

Yes. So a couple of things have happened. One, when we went through all the supply chain challenges from a COVID perspective, I think a lot of customers realized that they need to make sure they're partnering -- they're picking the right partner of choice going forward. So that opens some doors because there were a lot of supply chain challenges there. Second, a lot of these customers are buying from us anyways. They're buying a lot of our connectors, fasteners and anchors. We've had long-term relationships with us. They know and love the service from Simpson. They bought into that. In parallel, we've invested significantly into the business. We've upgraded the team. We've got people in there that now not only know the component manufacturing space, but they know how to develop world-class enterprise-wide software. And putting those 2 pieces together is something that we needed to develop over the last couple of years. So add all that up, we are very excited about our road map for the component manufacturing software that continue again as one of our largest growth drivers the last couple of years, and we think that, that's a big opportunity going forward for us.

And you mentioned -- I mean, there's been stages of software development. So you mentioned on the call that CS producer got kind of introduced. But is that the piece that you needed to get some of these larger truss operations to kind of convert to Simpson?

I mean there's really 3 components to kind of truss software. There's the fully encapsulated design tool to do roof trusses, walls and floor panels. We have those kind of individual today, but one of the big pieces that we're working on is getting those all together in kind of one app, if you will. The other 2 are called director and producer. Director essentially is think of almost like a project management software. So if you're running a truss yard, how do I decide what I make when and where. And then producer is the actual software that runs the equipment that's manufacturing the trusses. And so kind of those 3 pieces, we launched CS producer earlier this summer, good reviews, good feedback at BCMC. That's, I think, unlocked some opportunities for us to pick up some additional customers. Director will soon follow. And then ultimately, the design tool will be ready essentially around this time next year at BCMC is what we're targeting.

Okay. Okay. And then how are those customers set up from a, I guess -- like these are like ERP -- this is like basically an ERP system for like a truss operation -- so I guess if you look at some of the builder -- the bigger truss operations, do they have a sole-sourced operation today where they're using just kind of one software platform across all their truss operations? Or is there a bunch of piecemeal type software? And I'm just trying to think about how like hard it is to convert some of these larger customers?

So most of the pro dealers have built up their network, a combination of organic and inorganic, a lot of acquisitions. So then as you can imagine, that leads to kind of a fragmented footprint. And most of the time, truss software is on-prem. So that means that when they start looking at upgrading, there's a whole set of activities around that. Now whether they upgrade to our competitor or they upgrade to us, the fact that they're on-prem and eventually, we believe the industry is going to move to the cloud, I think, presents an opportunity for us. The idea for us is the technology we have today, the software and the services we have today, very good fit for medium and small truss manufacturers. Some larger ones, also a good fit for. The fully integrated package that Matt is talking about, we believe, opens up an opportunity for more. We believe that would probably start in a pilot phase with some of these larger pro dealers to prove it out. So we're going to take a super measured approach because we want to make sure this is a fantastic experience, and we will ramp that up slowly over time.

Okay. Any questions from the audience? I guess one of the things that you've talked a little bit about over the last, call it, 6 months is just you have a lot of content in places like Florida, in places like California relative to a place here. So I guess, could you just talk a little bit about the variance in that content and kind of what that does to your growth rate if something would slowdown in the South and not slowdown in other places?

Yes. So a house built in a seismic or hurricane area today probably has 10x the content of a house built in Chicago or Milwaukee where you are. And that's the reason why now when a hurricane goes through Florida, you look at some of the older neighborhoods versus the newer neighborhoods, the newer neighborhoods for the most part, withstand those hurricanes fairly well versus the older ones. So 10x is a pretty significant deal for us. And if you look at just the basic census data, the West and the South, housing starts wise, although they drive a lot of starts, they are negative versus the Midwest and North, Northeast. If you look at California, last 2 years, California houses, they're going to build roughly 16,000 less over the last 2 years than they did in 2023. Look at Florida at that same time frame, roughly 30,000 houses. So our best estimate, California home, $3,000 to $4,000 of the content, Florida home $2,000 to $3,000 because there's some concrete construction there. So multiply that out by 45,000 houses over the course of 2 years. I mean, that's at least a couple of hundred basis points headwind.

And you're still -- but you've still been able to kind of grow...

Yes, we've been -- grown through that.

Despite that -- so you've seen some of that headwind already. You wouldn't necessarily say it's on -- it's as ahead of you.

It's not new, right?

Yes. Yes. We've been able to push through that for the last 2 years, exactly right. And just so we're clear, the visibility is not great because the channel partners to all of our different end markets are, for the most part, the same and the product lines are very similar as well. So when we try to get visibility on an actual residential development, hard for us to see that because it is going through our lumber yard partners through multiple different channels.

Yes. Okay. I mean as you think about -- I mean, the business was kind of started in California because of earthquakes, that's migrated to Florida. Do you see any sort of chunky opportunities for the building code to get more stringent? Or is this a local-by-local type of thing that just takes a long time to develop?

I mean building codes changed fairly slowly over time, right? I think if you look at -- even if you look at Florida, you don't necessarily see building code changes year-to-year. But if you look across the decade, you can see a significant difference, right? And so like when we see a hurricane go through a neighborhood that was built in the last 5 years compared to one 40 years ago, it's a totally different outcome in terms of the structural damage and things like that. So we continue to focus at the local level to kind of educate like we've done for 6 or 7 decades as a company to help people build safer, stronger structures. I think some other things that aren't necessarily seismic or hurricane, but some of the trends in big open floor plans and big garages and cantilevered outdoor living spaces, things like that, that require a lot of structural connectors. I mean, office is focused on that as well, which is a bit more universal geographically.

Okay. Okay. Retail has been a nice growth driver for you over the last 5 years. Like how much opportunity is still left on the retail side. Maybe just talk a little bit about what you're doing to invest in that business from a rep perspective and a product perspective.

Yes. We're optimistic. So we're in a very good position with the 2 major national retail customers. They are all -- they're both less than a 10% story here. We think that there's opportunities to continue to expand our product lines. A specific example would be outdoor living solutions. So hardware that can do a deck or a pergola, decorative hardware, it's painted black. So it looks kind of meaty and chunky. We are looking now at some of the influencers that the national retail customers are using and talking about how can we better integrate into what they do. And I've met with several of the influencers. I mean, a good example, a typical influencer crafts their project, puts up some video and then gets 100 e-mails on how do I do that? And they don't have instructions, they don't have design tools. They don't have a bill of materials. We think there's some opportunities for us to maybe put a little bit of a back-office engine to that, again, creating more specific designs, creating more opportunities to spec our content in so that ultimately, our end national retail customers get a bill of material that helps them drive their business as well.

Okay. Any questions? So maybe just on pricing. I mean, it's been a pretty dynamic environment over the last few years with just a lot of material inflation and things. I think you put through kind of a -- like, I would say, kind of an inflation-based kind of price increase this year outside of tariffs. That's probably the first time I've seen Simpson do it without a direct kind of correlation with steel. So I know there's a lot of kind of cost inflation in the market and things. But is that a change in terms of how you guys are thinking about the pricing power or the pricing opportunity within the business? Or is it just that was required because we just don't have material inflation, but we have other ports of inflation?

I mean if you step back, we took roughly $500 million of pricing in '21 and '22 as steel prices were going almost 4x up in terms of price. It did come back down a little bit, and we gave back some pricing in late 2022. And then we hadn't touched any pricing in all of '23, all of '24. While steel had been largely flat, I mean, labor, freight, utilities, all those things have gone up pretty significantly. And we pride ourselves on customer service and being able to deliver that customer service for our customers. And so just really needed to take some actions on that pricing because we hadn't really touched the pricing button in 3 years. Tariffs added some additional complications, which kind of came out around that same time. So the price increases that we took earlier this year were a combination of inflationary on kind of U.S. sourced goods and then inflationary plus tariff-related cost increases on fasteners and anchors that we import from Asia. So it's about $100 million cost headwind on an annualized basis from tariffs that we're seeing on the anchor bolts that we import from our factory in China as well as the fasteners that we import, although we make some domestically in Gallatin. And we've priced essentially $50 million on imported items. So we haven't covered the full tariff impact even on a dollar basis. And then we said on the call a couple of weeks ago, in total, our pricing is about $100 million. That leaves about $50 million related to that inflationary pricing that we to see on an annualized basis. So in terms of is it a change in strategy, I think we're -- it's difficult in this environment with affordability of homes being a challenge, the volume starts being down. So we're absolutely focused on delivering the service that we need, but recognizing that there are definitely challenges there. So it's hard to say, is that going to be a change or more regular, but certainly, we're focused on maintaining the gross margins that we have and the service levels that our customers expect.

Okay. And I guess just your channel is kind of -- your channel is consolidating. You have -- I mean, you've seen Builders FirstSource get bigger. You've seen QXO enter the market, HD is buying a bunch of this stuff, your builders are getting bigger. I guess how does Simpson fare kind of in that environment? Like what do you -- what are kind of the positives and negatives of that consolidation for you guys?

So when bigger builders buy smaller builders, it just reinforces the fact that they're going to use Simpson connectors. When bigger pro dealers buy smaller lumber yards, if we don't have them already, generally reinforces them converting over the Simpson product line. So there are some positives from that perspective. The negatives of the larger customers are on larger rebate programs. Our pricing approach is they have a standard list price to be consistent from a pricing perspective in the market. And then we differentiate on the back end with volume discounts. So when those bigger guys are getting bigger, that does result in larger volume discounts. Yes.

Okay. Okay. I guess your CapEx is set to kind of step down here. And you've added a new facility in Gallatin, you've expanded Columbus. I guess maybe just talk a little bit about where your kind of fixed cost capacity is right now in terms of any sort of incremental CapEx you need to make there? And then I guess if you do start to see more cash flow, is there any kind of priority that you have in terms of how to allocate that?

Yes, we've been in a pretty heavy CapEx cycle for the last couple of years with those expansions that you mentioned. We're not giving formal guidance yet, but we expect that to come down to kind of more normal CapEx range, which is probably $75 million, $80 million if you kind of look back at where we've been and what these expansions have cost the last couple of years. From a footprint standpoint, I think in terms of capacity, we're in a good spot. There's always optimizations to make things in places that are more affordable or closer to the customer, things like that. So we're always looking at those opportunities and continue to invest the CapEx within that range that we talked about on things like productivity. But in terms of capital allocation, we just upped our share buyback amounts for end of 2025 as well as a stepped-up number for 2026. So that continues to be a key focus for us to return cash to shareholders. I think from a CapEx standpoint, it's going to come down. I think we have a little bit of debt, roughly $350 million from the ETANCO acquisition. So in a pretty good spot from an interest rate standpoint there, but definitely want to pay that down over time. And then M&A is still opportunistic for us, although there's not a lot of sizable targets out there that would be of interest for us. So very focused on the core. And I think that just leaves a lot of free cash flow to continue to fuel the organic business, but also to return to shareholders.

Great. We're out of time. So please join me in thanking the Simpson's team for being here.

Thank you.