Simpson Manufacturing Company, Inc.

Greetings. Welcome to the Simpson Manufacturing Co. Inc. Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, Kim Orlando with Addo Investor Relations. You may begin.

Good afternoon, ladies and gentlemen, and welcome to Simpson Manufacturing Company's second quarter 2022 earnings conference call. Any statements made on this call that are not statements of historical fact are forward-looking statements. Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties. Actual future results may vary materially from those expressed or implied by the forward-looking statements. We encourage you to read the risks described in the company's public filings and reports, which are available on the SEC's or the company's corporate website. Except to the extent required by applicable securities laws, we undertake no obligation to update or publicly revise any of the forward-looking statements that we make here today, whether as a result of new information, future events, or otherwise. Please note that the company's earnings press release was issued today at approximately 4.15 p.m. Eastern Time. The earnings press release is available on the Investor Relations page of the company's website at ir.simpsonsmfg.com. Today's call is being webcast, and a replay will also be available on the Investor Relations page of the company's website. Now I would like to turn the conference over to Karen Colonius, Simpson's Chief Executive Officer.

Thanks, Kim, and good afternoon, everyone. Thank you for joining us today. I'll begin with an overview of our second quarter financial results and performance drivers before turning to an update on our key growth initiatives and capital allocation priorities. Brian will then walk you through our financials and fiscal 2022 business outlook in greater detail. As many of you already know, we completed our acquisition of Etanco, a leader in fixings and fasting solutions. primarily for commercial building construction market throughout Europe, on April 1st. Since we announced the transaction back in late December, planning for and initiating the integration of Etanco has been our primary focus and it has been progressing according to plan. We pulled together a project management office that includes a leading, globally recognized external advisory consulting group, together with a multi-disciplinary team of key management from both Simpson and Otanko. Because of our complementary cultures and values, our combined team has been working extremely well together as we develop detailed plans for each of our specific integration tracks. Our approach has continued a high employee retention rate throughout the transition. After several months of hard work, we were very pleased to have found no material adjustments to our previously identified synergy opportunities. Although the realization of the full amount is subject to change based on current environment in Europe, with the groundwork we've laid so far, we believe we are still well positioned to capture meaningful benefits from those synergies in the coming years. We delivered strong financial and operational performance in the second quarter. Net sales of $593.2 million increased 44.6% year over year. Our sales growth was primarily attributed to our acquisition of Etanco, which contributed $80.3 million in sales. Our sales further benefited from product price increases we implemented throughout 2021 to offset rising raw material costs. Volume in North America was relatively flat, and was mixed across all of our distribution channels. Notably, volume in our home center channel, which includes both our home center and co-op customers, and is where we see much of our repair, remodel, and DIY business, was up slightly during the quarter. Softer volumes from our contractor distributor customers offset this increase. Our consolidated net sales in Europe for the second quarter were $133.2 million, an increase of 136.1% year-over-year, due primarily to the contribution from Otanko, as well as product price increases in response to rising material costs, which were offset by significantly lower volume overall and the negative effect from a strengthening U.S. dollar. Our second quarter consolidated gross margin was 43.7% compared to 47.9% in the year-ago period. Etanco contributed $19.2 million to our gross profit on its $80.3 million of sales, net of $9.2 million in purchase accounting adjustments, which reduced our second quarter gross margin by just under 160 basis points. Compared to the prior year and before considering the addition of a Tonko, our gross margin declined as expected as our average raw material costs began to catch up with some of our price increases. Ryan will elaborate on the key drivers of our performance as well as our margin expectations for the remainder of the year. I'd now like to turn the discussion on our five key growth initiatives. As previously discussed earlier this year, we realigned our sales team to more specifically concentrate on five end-use markets, residential, commercial, OEM, national retail, and building technology. This narrowed focus has enabled various new customer and project wins within each of our five growth initiatives. Here's just a couple of examples of what happened in the second quarter of 2022. In the OEM market, We were recently awarded the opportunity to supply our complete wood solutions, including specialty fasteners and other products for the construction of custom wood-based crates. Since the crates will be utilized for shipping high-value technology products, the structural integrity of the crates is highly important and is in direct alignment with our value proposition. We accomplished some key project wins within the mass timber space. Our solutions are now being specified to construct mock-up structures from coast to coast to serve as mass timber training course for union carpenters. In addition, our mass timber solutions are being utilized in the construction of a new home office for our large US-based company. Similar to the prior example, we were able to showcase our unique testing capabilities through our state-of-the-art test lab to demonstrate to the engineers that our products were suitable for their structural designs. We're also continuing to expand our offering in the commercial space. Our concrete solutions are being used in the construction of new graduate housing in Utah, as well as for our hotel in Florida. Our Simpson and Otanko teams also work together to sell products into a currently under construction venue related to the upcoming Olympic Games in Paris. Within the national retail market, we made strides in our R&R and DIY initiative as it pertains to the outdoor access. We now have several stores equipped with pergola displays with support from both the Home Depot and Lowe's. In addition, based on point-of-sale activity, we've been pleased to see our customers continue to add inventory on our top 25 R&R and DIY products. As we continue to make progress on our growth initiatives, we are confident we can continue our above-market growth relative to U.S. housing starts in fiscal 2022 and beyond. These select key examples further emulate our founder, Barclay Simpson's nine principles of doing business, and more specifically, the focus and obsession on customers and users. It's through these principles that BARC's legacy continues to live throughout our company each and every day. I'll now turn to capital allocation. Our priorities will continue to focus on bolstering our organic growth and returning value to our stockholders through quarterly dividends and selective opportunistic repurchases of our shares. As recently announced, we updated our capital return target to 35% of free cash flow versus 50% historically as we focus on repayment of the debt we incurred to finance the acquisition of Etanco. Key areas of reinvestment into the business will be supporting facility expansion to meet our growth targets, as well as in areas of engineering, marketing, sales personnel, and testing capabilities across the company. Throughout 2022, we have been reviewing the footprint for our U.S. operations with assistance from another globally recognized third party, in conjunction with the integration of Tonko in Europe. As a result, we identified facility expansions in the U.S. that will improve our overall service, production efficiencies, and safety in the workplace, as well as reduce our reliance on certain outsourced, finished goods and component products, and continue to ensure we have ample capacity to meet our customer needs. These investments reinforce our core business model differentiators to remain the partner of choice as we continue to produce products locally and ensure superior levels of customer service. Investments in these expansions have already started this year and will continue into 2024. Brian will elaborate on our capital expenditure forecast shortly. Lastly, While the integration of Atonco remains paramount, we are always evaluating potential M&A opportunities that would enable us to better provide complete solutions for the markets in which we operate through complementary products, especially in the areas that support our key growth initiatives. Before I conclude, I wanted to reiterate that all business activity in Russia and Belarus was suspended by halting all product sales and shipments to the region, We continue to estimate the revenue impact will be less than $5 million. The current energy situation in Europe adds a layer of uncertainty. At this point in time, we believe we will be able to secure access to the energy we need to run our operations. Our thoughts remain with all of those that have been affected by this war. In summary, we're very pleased with the significant progress we made integrating the Tonko, as well as advancing our key growth initiatives. Our excellent operational execution produced strong financial results. While the rapidly changing macroeconomic environment, including rising interest rates, inflation, and other factors continue to impact the industry at large, we believe Simpson is uniquely positioned to perform, giving our diversification strategy and strong brand reputation that we've cultivated over the past 66 years. We are optimistic we will achieve our company ambitions as outlined in our March 2021 Annals Investor Day by 2025. Thank you to all of our employees for your dedication and commitment to superior levels of customer service and most importantly to working safely every day. Now I'd like to turn the call over to Brian We'll discuss our second quarter financial results and our 2022 outlook in greater detail.