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

All right. Good afternoon, again, everyone, and thank you for joining us today. This is Dan Moore, Director of Research at CJS. Our final presentation of the afternoon is from Simpson Manufacturing. And before we start, just a reminder, if we can help follow up on any of the companies you met with or heard from today, please do let us know. With that, it's my pleasure to introduce Mike Olosky, President and Chief Executive Officer 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 ask a series of questions. Feel free, as always, to submit any questions you might have through the portal, and we'll do our best to see that we can cover them. With that, Mike, Matt, thank you very much again for taking the time to be with us today, and the floor is yours.

Dan, thank you very much for including us. I appreciate it. And this is Mike Olosky. I'm the CEO of Simpson Strong-Tie. And I'm going to start with a company overview and Dan, I'm going to do this at a 30,000-foot level, then we'll kind of drill down a little bit more of the details again, the next 5, 10 minutes. So if you look at Simpson Strong-Tie, we are a leader in structural solutions for the building construction industry. Typically, our solutions are less than 1% of the bill of material. So relatively small spend in the total construction cost, but our solutions are critical to the structural integrity of the building. If you look at our go-to-market approach in our North American business, we go to market with a broad product line. We believe we've got the broadest and deepest product line in the industry. That starts with our wood connector product line. This is the industry that our founder developed approximately 70 years ago. He developed that product line, and that's developed into a fantastic franchise for us. That is our leading product line. We also have a product line of component manufacturing systems. So these are truss plates and the software that supports that industry. We also sell into the commercial building industry, and we provide a broad range of fasteners and concrete connections to be able to do that. So if you look at our product line, the main product lines are connectors, fasteners and anchors. We also provide a broad line of digital solutions that help our customers figure out how to identify and specify and select those correct products. But it's the broadest and deepest product line in the industry. We take that product line into 5 main market segments. So the first one is the residential business. And we believe that the -- our total company, roughly 50% of the business is linked to U.S. housing starts. This is the largest part of our business. So this will be lumber yards, pro dealers and builders. We also sell into the commercial construction industry. Predominantly, this would be stick-built houses. We do have some applications for steel construction, as you see in this slide. Here, we are selling also connectors, fasteners and anchors. The major part of the commercial construction business that we're focusing on is -- would be things like strip malls, hotels, dorm rooms, again, areas where it's typically stick-built construction. Our OEM business, these are things that are made in a factory. So these would be areas where it's wood to wood, wood to steel connection, wood to concrete connection. So very similar applications. Example of this would be post frame houses, tiny sheds, pole barns and again, areas that are typically manufactured in a production type environment. National Retail would be other business. So this would be the typical big box retailers, again, selling fairly similar product line into that space. And then the last segment will be component manufacturing. So the end market is residential housing, but these will be people that make truss systems, floor systems and wall panels. If you take a look at -- I think what really differentiates Simpson it's really all about our business model. So again, we take the broadest and deepest product line of structural solutions into the industry, and we start by taking that broad and deep structural product line to building code officials. And we help the building code officials write codes that result in safer, stronger structures. We've been doing this with the building code officials for decades. We also provide continuing education credit to the building code officials, and we've got a deep relationship with all the people involved in writing the codes. We then take those building codes and all the engineering training documentation for our products to the engineering and the architecture community. We talk with them about how to use our solutions to meet those codes. We talk about how to use our solutions to create these big indoor/outdoor living spaces, big window areas, large garages and all the structural work that they need to do around that. That results in our product being specified. So when you look at the blueprints for single-family, multifamily homes, commercial jobs, you're going to see the Simpson product line specified all over in the place on it. That creates a demand for our products. We then take that product line to the -- really the end users, so that would be the builders themselves. And we work with the builders to get our products specified in their builder programs and where they tell the supply chain, for example, that they only want to use Simpson connectors on their homes and on their jobs. And what that does is that pulls through those specifications through the supply chain into the builders. Then we go to all of the pro dealers, contractor distributors, lumber yards in between and explain to them how we are developing the market with building codes and with engineering specifications. We talk with our lumber yards and pro dealers about how we're pulling that through with builder agreements because all those builders are contractually obligated to buy our connectors and then talk with those pro dealers and contractor distributors about how they don't need to carry a ton of inventory. And we've got that broad -- big, broad, deep product line. They don't need to carry a lot of that inventory because if they place an order in the morning, we're going to ship it in the afternoon and they're going to get it the next day. We also do a lot of training with our pro dealers, helping them and their sales teams go out and identify these applications to make sure, again, we're getting as much content on the house as possible. Then over the top of that business model, we layer a broad set of digital tools. So we have 50-plus digital tools that help all different types of customers identify, specify and engineer in the right product. In the cases of component manufacturing, we also have digital tools that can help them run their business. And that business model really has helped us make significant progress in a flat market. And Matt, do you want to talk a little bit about this?

Sure. Thanks, Mike. Looking at our progress in what's been a flat market over the last, call it, 4 years, you can see there at the bottom, U.S. housing starts roughly at the same level in 2024, our most recently completed fiscal year as they were in 2020. But during that time frame, we roughly added $1 billion in revenue. You can see the big drivers there, $450 million of net pricing. This was as steel prices were significantly ramping up in '21 and '22. We acquired ETANCO, which essentially tripled the size of our European business. And we did have about $200 million in incremental revenue from share gains. We tend to look at our performance in volume versus U.S. housing starts as a key metric, and that led to several hundred million dollars in net revenue growth from 2020 to '24. If you kind of look at the next slide, some of the things that we're proud of that drove that. You see it there on the slide we were just on, but on operating income, in addition to that $1 billion of revenue, we added about $180 million of operating income during that same 4-year period. Looking at some of the things that drove that, we strengthened our market position in connectors and improved our share in fasteners and anchors. We're clearly the market share leader in connectors, but have significantly improved our share on those other categories over the last 4 years. We did shift to a market-focused sales team. So we used to go to market very much product focused, and we shift that more to a market focus about 3 years ago, where kind of leveraging the strength of the connector business to kind of grow our business and cross-sell in the other categories. We've made a lot of investments in talent, both internal potential promotion of strong internal candidates as well as a couple of key adds from the outside on our leadership team. We did transition away from direct sales in the last remaining part of our business that was 2-step distribution. That was in the Pacific Northwest. Other than that, we are already direct for 99% of the country. We've been growing the European business, adjusting the footprint. Certainly, the last few quarters that we've released earnings over the course of 2025. We've had good progress in improving the operating income in Europe as well as we saw organic volume growth in Europe during Q3 for the first time that we announced on our last call. So good progress there. And we've made a lot of footprint investments in our manufacturing and logistics, 2 facility expansions, one in Gallatin, Tennessee, that makes fasteners and expansion of our Columbus facility in Columbus, Ohio, where we make connectors for that region of the country as well as significant investments in software development. And then on the logistics side, we've added some additional warehouses that were related to that transition from 2-step distribution to direct sales. So a lot of great progress from 2020 to 2024, and we're proud of that in what's been a pretty flat market across that time period.

Over to you, Dan.

Perfect. Appreciate the overview and update. I'll start with a couple of macro questions and then drill back down. But from a 20,000-foot perspective, housing starts for multiple years have been below trend. We've been in the structural housing deficit for years. It's -- what are the kind of missing components in the equation? Is it a shift in demand toward multifamily? Is it simply affordability? What are the keys to closing the gap from your perspective?

Yes. Good question, Dan. So yes, 4 years of a declining market. The market forecast for 2026 are flattish. And if you look at kind of the story, I think on one end, you have general consensus from everybody in the industry and all of the local politicians that, hey, we need more housing and there's a housing shortage. But you also have a scenario where you definitely have an affordability issue. And that affordability issue can be partially helped by interest rates. If you look at the big builders and how they've been talking about demand on their end, they are already offering interest rates in that 3% to 4% range. And when they go into that -- the low side of that range, it's not driving a lot more traffic. So I think they would say interest rates is one component, but not the only component. The other one is just the fact that the prices themselves are high relative to people's income and then also the fact that there's some just general economic uncertainty. So at the end of the day, though, Dan, what we're doing is we're focusing on the things that we can control. We're not assuming that the market is going to take off. So we've made some good investments in the business over the last couple of years in a flat to down market. If the market takes off, we're ready for it, but we're going to be conservative in our investment until we really see the market pick up. And in the meantime, again, focus on the things we can control, and that's making sure that we're taking great care of our customers. We're developing new products. We're developing new applications. We continue to try to drive more content on house, make sure that we're delivering great service and doing everything we can to help our customers get more productive, which ultimately helps them address that affordability issue.

Really helpful, Mike. And following Q3, you gave a sort of a preview for thoughts on '26. And looking at housing being down maybe low single digits. You've been outpacing meaningfully over the last several years and still have that kind of goal of 300-plus basis points. So talk about your ability and expectations of continuing to outpace by that level? And is that outlook a bit similar today as it did maybe 60 days ago?

Yes. So we want to -- I mean, at the end of the day, Dan, you look at our 3 financial ambitions. We want to drive above-market growth. We want to be at a 20% plus operating income, and we want to drive EPS ahead of revenue growth. And so as we think about that and in a relatively slow growth environment, we need to make sure that we're driving those growth opportunities internally. So we've got playbooks by each of those market segments that I went through. We've got playbooks by each of those product lines that I went through. We've identified new product opportunities, new application areas, ways to get more content in the house, ways to help our customers win in the market. And we think as a result of that, we hope that continues to drive that above-market growth. Now Dan, not every year is up. If you look at the last 10 years, a couple of years where we weren't driving above-market growth because different growth initiatives have different cycles. And -- but when we add it all up over the long term, we do believe that we can continue to drive above-market growth, and we certainly want to beat that historical average. I think one thing to keep in mind is not all housing starts are equal, and that does have an impact in our ability to grow above the market. Certainly, the fact that the market in the West where we -- there's a lot of seismic activity has been declining in the market in the South, Southeast, where there's a lot of hurricane activity, that market has been declining. And as you know, Dan, content on a house that has codes associated with seismic activity or content on a house, I mean, Simpson content on a house that has to resist a hurricane, it could be 10x the amount of content we put on a house that has pretty simple codes in the middle of the U.S. So the fact that the housing market in California and Florida has slowed significantly, has probably created a couple of hundred, 200 to 300 basis points headwind just from our ability to grow above the market, but those are things we think that we need to power through and we need to continue at the end of the day, drive above-market growth independent of some of these macro trends.

Understood. Maybe talk about some of the targeted growth markets. You pointed to them earlier overall and then specifically truss, it's been an area of increased focus for several years. What gives you more confidence now in your ability to accelerate penetration versus, say, where we were maybe 3 years ago?

Yes, Dan, this is Matt. As we mentioned earlier, we feel like we have growth opportunities in each of our 5 market segments and with each of our major product lines. So we kind of look at the matrix of those and have playbooks where we have goals and targets and strategies around winning in each of those kind of intersections. Our business is built on lots of products, lots of SKUs, lots of applications, lots of customers. So it's not too focused on any one of those. To use a baseball analogy, like it's a lot of singles and doubles, right? There's not a lot of home runs out there for us, but that's how we like to build a business. When you roll it up, probably the 2 largest growth drivers over the next near midterm horizon are in trust and then ramping up our new product innovation. Trust is roughly $1.5 billion market. And so every share point is roughly $15 million. We've said before, Simpson is less than a 10% share today. So we feel like there's pretty significant dollar opportunity there for us. Getting specific on Trust, component manufacturing has been one of our faster-growing segments for the last couple of years. We are continuing to win and gain new customers. We have invested a lot over the last several years. We brought on new talent. We've invested in software that we're developing internally. We really feel like we have a better mix of people that not only know component manufacturing and trust design, but people that know how to develop top-level enterprise-wide software. And so we're pretty happy with the targets that we have internally, although we haven't said specifically externally what those targets are in trust. But we talk about them internally all the time, and they're aggressive. And so when we talk to other people in the industry, customers, people that are building trust us today, maybe with a competitor's product, they want to have another option in the space. They want us to win. They work with us every day on the connector and fastener anchor business that we do with them. And so they're pulling for us. And so we believe there's a right to win, and we're closer than we've ever been all the while we're continuing to add customers and grow share while we get ready for some of the bigger wins in the future.

Excellent. Appreciate it. Shifting gears over to Europe. You mentioned ETANCO. How do we think about kind of the growth outlook entering in '26? And what are the steps you can take to enhance growth should those markets remain stagnant over a longer period of time?

Yes. I'd say on Europe, we're pleased with how the business has developed throughout the course of 2025, at least what we've shared so far on our year-to-date earnings. It's been a challenging market, but they've done a good job of managing costs at the same time, growing slightly above the market is kind of the directive that we've given them on our European team there. If you look at our last couple of quarters of European results, the operating margins have been probably 2 of the highest that maybe we've ever had. We actually saw organic growth in third quarter on a volume basis in Europe. So that was good to see as well. The market forecast for Europe for '26 is actually a little bit more optimistic, again, talking from a market standpoint than it is in the U.S. So we've been in a situation where Europe had been growing slower than the U.S., at least the forecast for next year, when you kind of look at our business and where it lines up from a market perspective, there's actually a little bit of optimism that it might be up -- the market might be up a couple of points next year. But really, for us, it's continuing to increase the profitability and maintaining or slightly growing share in Europe, while we wait for the market to get a little bit better and we get some tailwinds.

Appreciate that. Kind of dovetail a question that we have from the audience with one of ours that we have that's a little bit more general. But the biggest macro trends that you're watching, let's start with kind of federal relaxation of regulations, proposals that you're hearing from the current administration. What are you seeing or hearing that could have an impact as we look at '26 and beyond?

Good question. So Dan, I think anything that can help the affordability story will be good. And I personally think that, that's going to be more on a local level because one of the biggest drivers of the affordability challenge is the cost to develop a lot. And how when our builders go out to develop new subdivisions, they push them out pretty far out. They got to run sewers, water, electrical, they got to build schools. They have restrictions on how many houses they can build on a lot size. All that really contributes to anywhere from $70,000 to $90,000 of cost just to develop a lot. So anything that the government officials can do to address that, I certainly think it's going to help. The interest rate story, as we talked a little bit about, that will help. I think the multifamily space and small builders that can't afford to subsidize interest rates. I think that's good. I don't expect any changes on building codes. There's a lot of examples of where hurricanes have come through Florida and neighborhoods that have been built to the higher codes have gone through those -- managed through those hurricanes with relatively little damage. Right next door, they have homes built with the older building code that had significant damage. So I wouldn't expect anything in that area to really to have an impact. It's just trying to drive down that lot cost and anything again that can help us with the affordability story.

Understood, Mike. I think it's this week, you're cutting the ribbon on the new facility in Gallatin that you mentioned earlier in the presentation. Just remind us of how that new facility will impact capacity in what areas as well as your ability to source and produce product locally here in the U.S. that maybe you had to source from China or elsewhere previously?

Yes. We're cutting the ribbon actually tomorrow on our facility in Gallatin, Tennessee. We had a previous facility about 5 miles down the road in the same city that was smaller. It was out of space, kind of an older facility that we had acquired 20-plus years ago as part of an acquisition, weren't able to do all steps in the process of making fasteners, which is what we make here in Gallatin. And the new facility opening really gives us the opportunity to do the entire process in-house, specifically around heat treating and coating of fasteners. So we used to make fasteners in our Gallatin facility and import some fasteners from Taiwan and then send them off to a different third party to do the heat treating and coating and then bring them back to our warehouse in Gallatin and then ship them out to our other warehouses in the country. So pretty inefficient from a freight and handling standpoint. We've invested some CapEx in machinery as well to make that process more efficient inside of our facility. The attractive -- one of the other attractive things about Gallatin is it unlocks some opportunities on revenue that we were probably frozen out of before because of lead times. So our current fastener business today, prior to the opening of this facility, we made about 1/3 of the fasteners that we sell in the U.S. or in North America in our Gallatin facility, and we acquired about 2/3 of them from a third party in Taiwan. That's going to shift a little bit more 50-50 as Gallatin is up and running. But importantly, on some key market segments, particularly the mass timber segment that requires some pretty heavy-duty fasteners for the construction of those buildings, the lead times are often -- we need those that fastener package in the next 3, 4 months. And when you're buying it from Taiwan, it's 6 months or so to get that in-house. And so we're going to be able to do that -- make that product in our new Gallatin facility to be able to quote those jobs and win more jobs. And those individual mass timber jobs can be pretty significant. An individual job could be $0.5 million worth of fasteners. So it's pretty sizable, and this kind of gives us that unlock to lower the lead times and do it in-house. And it also gives us the capacity to grow into the future. So the facility we're in today certainly has room to expand over time. So we're leaning in on the space. We were out of space in the previous site, but really gives us a long runway of ability to continue to grow our fastener business, which has been one of our better-performing product segments over the last few years.

And Dan, just to give a little bit more color on our fastener business. The U.S. part of that business is a couple of hundred million dollars and the gross margins are in line with the overall company gross margins. So it's pretty attractive for us. It's been one of our fastest-growing product lines. And we're really focused on that construction load-rated engineered specified type fastener applications. We have roughly 180 patents, global patents on our product line. We've got a bunch of different code reports covering our products. It all leads to a pretty differentiated product line, and we're also developing application tools that can help increase the install speed of fasteners and increase the new applications for them and subfloors or docks or decks. There are, we believe, still a lot of ways to help us further differentiate this product line and continue the good growth. And the new facility here is certainly going to help us do that.

Excellent. Talk a little bit, one of the 3 goals or initiatives that you mentioned was the 20% operating margin target. Talk about what drove the recent decision to target an additional $30 million of cost savings? And how do we think about kind of the cadence of that over the next to 4 quarters?

Yes. So Dan, that starts by us going back to those financial ambitions that you talked about. We have a very, very good business model. We have a very, very strong market position. We've got a very strong team that knows the industry and is committed to helping our customers. All of that needs to translate into good financials. And in a slow to flat market, we think 20% operating income is the right level. And after talking about a 20% operating income for a couple of years, looking at '26, maybe being another slow year, we thought we needed to do some things to give us a better chance to reach that target.

Yes. And as you think about how that $30 million is going to play out, I mean, most of the activity that we did was kind of in September and October. So we're seeing a little bit of benefit of that in our 2025 Q4 results, and it's included in the guide. But of that $30 million and then the full $30 million being achieved in 2026. So incremental, some portion of it, but a run rate $30 million. And really, we want to get to that 20% operating income even if the market continues to be flattish, right? We weren't in a position to continue to wait for the market to take off and felt like we needed to take some action. We've made a lot of investments, as Mike said, over the last few years in what's been a down market, and that's paid dividends for us in terms of market outperformance and share growth. We believe we can continue to maintain that, but we did feel the need to take some cost action to set ourselves up well for '26 to be able to achieve those ambitions. And we'll give formal guidance on that when we do our Q4 earnings release here next month.

Perfect. Looking at trends in steel prices, just talk about kind of level set or remind us where we've been from a COGS and inventory perspective over the last few quarters and both from a revenue and margin perspective, if prices hold where they are today, how should we think about that rolling through into '26?

Yes. So we're obviously tracking the steel prices. They have upticked a little bit over the last 4 to 6 months. And as a reminder, Dan, we buy 150-plus different flavors, size, thicknesses, coatings, types of steel. So we're buying some specialty stuff anyways. And we typically -- we buy on -- we have spot buys. And so in general, we're pretty happy with the way that we've been purchasing steel and the steel partners. We're not anticipating any significant additional increases in steel through 2026 at this point.

Yes. And we took a price increase earlier in 2025 on our connector business after not taking any price increases for 3-plus years or so, given that we expect steel to kind of remain at similar levels, although it's maybe uptick a little bit, but I don't foresee us needing to take a price related to that unless there's a significant change in steel prices, we should be in pretty good shape.

Excellent. Another question come in from folks participating. Just how are things tracking so far as it relates to software and ERP initiatives?

So Dan, is that implying all things trust? Or is that on the internal side?

It's more all things trust. I think what are you hearing so far from customers, what the feedback you're getting and main priorities you're focused on as it relates to that software to drive increased penetration in trust?

Got it. So the component manufacturing business for the last couple of years, Dan, has been one of our strongest growing market segments. We continue to pick up new customers. That's good. We've invested significantly in the business. Matt's touched on that a couple of times already. When I look at -- when we look at the trust business, there's 3 areas we really need to develop. We need to make sure that we've got on the cloud design tool, and we've been developing that for a while. We hope to launch that sometime in the fall. We've had our leading customers preview that. We're getting a lot of good feedback on it, and we're pretty excited about the progress that tool has made. We need to be able to do a director tool when that basically helps our customers manage the projects. That's also in progress. We're feeling pretty good about the development of that area. Again, good feedback. And then recently, we launched the producer part of the suite. So you need to be able to provide a tool that helps them manufacture the trusses, the tool that helps them manage the projects and then a tool that helps them do the design work. This producer tool, we launched late last year. We've got a couple of customers on it now, getting good feedback that's opening new doors for us. So we can -- there's a lot of work to do, but we believe we've got the right team in place with the right plan, making good progress, and we continue to get good pull from our customers.

Really helpful. Switching gears with a couple of minutes that we've got left. M&A, can you just talk about areas you're most focused on from a product or geographic perspective and remind us kind of key criteria of multiples, IRR, how you think about accretion, et cetera?

Yes, not really any significant M&A in the current pipeline. I mean we continue to evaluate tuck-in opportunities, I'd say, focused on North America. So focused on getting the operating income up in Europe with the ETANCO acquisition that we did a number of years ago. So not looking to add any more acquisition pressure there. Generally, we look at acquisitions to deliver returns above our weighted average cost of capital and be at least accretive to our corporate average gross margins. Those are kind of the key criteria. But like I said, there's not going to be -- at least what we see today, there's not going to be significant large M&A, just more tuck-in variety going forward where it's filling out a portfolio product gap or something that has IP that we don't want to design around. We'd rather acquire something like that.

Yes. Dan, as you know, we're in a super specialized business. So there just aren't a lot of opportunities. And the fact that we feel like there's plenty of growth opportunities in our current markets with our current product lines has us focused on driving organic growth. There is 0 effort to look at anything out there from a 2- or 3-step adjacency. We're just simply not interested in that because we're focused on the core business.

Got it. And maybe just talk about working capital and then you've had pretty significant CapEx in terms of the new facilities over the last year or 2. Kind of what's the outlook for '26 and beyond in terms of CapEx and how that translates to free cash flow? And beyond the projects that we put in place, do you see others down the pike? Or should we get to kind of a more normalized level of CapEx over the next 2, 3 years?

Yes. We're coming off of a pretty high CapEx period here for the last 3 years, including 2025. That's going to normalize in 2026 because we're done with the expansion in Gallatin -- or sorry, the expansion in Columbus and the new facility in Gallatin from a CapEx standpoint. I'd anticipate that CapEx is going to return to kind of a more normal run rate level starting in '26, which is probably in the $75 million, $80 million range rather than the $160 million plus that we've been for the last couple of years. We did just refinance our term loan and revolver in December. We didn't take on any more debt. We moved some from the term loan to the revolver. So hope to pay that down here as we go a little bit. Share repurchase remains a key priority. We did announce the $150 million repurchase approval for 2026, which I believe is the highest single year in the history of the company. And so in terms of capital allocation priorities, continue to support organic growth, share repurchase. We do pay a dividend. CapEx will be less than it has been in the last few years, but still a significant use of that $75 million, $80 million, paying down some debt and then strategic M&A, if it arises. But I think based on where we are and kind of how we've performed generating cash, should have plenty to do the things we want to do from a capital allocation standpoint and still return cash to shareholders.

Very good. Well, I think you just answered my last 1 or 2 that I had there, all in one, Matt. So with a minute to go, I will say thank you very much for joining us. Remind folks that if there's anything we can do to follow up or help on Simpson or any of the other companies you heard from today, please let us know. And I'll turn it back over to you, Mike and Matt, for any closing remarks.

We appreciate this, Dan. And as I said earlier, we believe in the housing market in the mid- to long term. In the short term, we're going to be conservative in our investments. We're going to be focusing on driving above-market growth. We want to get to that 20% operating income, and we want to make sure we're driving EPS growth ahead of revenue growth. And to do that, we're working on taking great care of our customers so that we're a partner of the choice, driving innovation and making sure we're taking great care of our team. That's the plan.

Fantastic. Thank you again. I look forward to seeing you tomorrow in Gallatin, and have a great afternoon.