Simpson Manufacturing Company, Inc.

Greetings and welcome to the Simpson Manufacturing Company third quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A brief 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kim Orlando with Addo Investor Relations. Thank you, Kim. You may begin.

Good afternoon, ladies and gentlemen, and welcome to Simpson Manufacturing Company's third 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.censusmfg.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, and thank you for your participation on today's call. I'm joined today by Brian Magsad, our Chief Financial Officer. Before I begin, I want to comment on our announcement last month regarding Simpson's succession plan. After much consideration, I've decided to step down as the Chief Executive Officer at the end of this year, after 38 amazing years with the company. I'm thrilled that Mike Olasky will be succeeding me as Simpson's CEO effective January 1st as a result of a strategic succession plan with our board of directors. Mike has been directly involved with helping lead Simpson through its next phase of growth since joining the company in 2020 and has done a tremendous job. It's been a great pleasure to work alongside him, and I'm confident that Simpson's employees, customers, and stockholders will be in great hands. To assist with the transition of my responsibilities over to Mike, I will assume the role of executive advisor until my retirement on June 30th, 2023, and will remain on the board until the 2023 annual meeting of stockholders. I'm honored to have led Simpson as its CEO over the past decade, and I'm extremely grateful for the opportunity to have helped strengthen our values-based culture and value proposition to our customers over the years. I'd also like to take a moment to recognize all of those who were impacted by Hurricane Ian last month and to send our deepest condolences to those who have suffered personal losses from this tragic event. It is unfortunate events like these that have inspired Simpson's mission to provide solutions that help people design and build safer, stronger structures. As the affected communities recover and rebuild, We hope to be at the forefront to provide support at the local level, as well as to identify product development opportunities to improve building performance. I'll detail more of our involvement in these areas later on in the call. While Hurricane Ian impacted certain of our operations in Florida during the third quarter, I'm pleased to report that none of our employees were injured in the storm and our facilities did not sustain any damage. I'll now turn to an overview of our third quarter financial results, as well as an updating you on our capital allocation priorities and key growth initiatives. Brian will then walk you through our financials and update you to fiscal 2022 business outlook in a greater detail. Solid operational execution against our strategic plan during the third quarter led to continued strong financial results. despite the challenging macroeconomic background. Net sales of $553.7 million increased 39.6% year over year, primarily driven by product price increases that we implemented throughout 2021 to offset rising raw material costs, as well as our acquisition of a Tonko, which contributed $67.5 million to our top line. Volume in North America was up over the prior year quarter and was mixed across our distribution panels. 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, increased over the prior year quarter, which, as you may recall, was impacted by a releveling of inventory by our customers. Volumes from our contractor distributor customers were down slightly as a result of softer housing starts, which was offset by improving volumes from our dealer distributors. Overall, volumes in Europe benefited from the addition of the Tonko, which was offset by significantly lower volume in our other European operations, as well as product price increases in response to rising raw material costs resulting from uncertain macroeconomic climates. coupled with the negative effect from a strengthening U.S. dollar. In Europe, third quarter sales totaled $111.9 million, up 104.1% year over year. While the environment in Europe remains challenging, as of today, we still believe we are able to secure energy that we need to run our operations, although at a higher cost. Since acquiring Etanco on April 1st, the integration of its operations and employees has been progressing well and on track with our internal plan. To facilitate the process, we developed a project management office comprised of key executives from both Simpson and Etanco. Also paramount to our success has been blending of the highly complementary corporate cultures of both companies. We believe we remain well positioned to capture meaningful benefits from our previous identified synergies in the years ahead, subject to changing macroeconomic circumstances, which we expect will delay some of our synergy opportunities. Our consolidated gross margin for the third quarter was 44.2% compared to 49.9% in the prior year period. Itanko contributed $19.4 million to our gross profit on its $67.5 million of sales, net of $2.9 million in purchase accounting adjustments, which reduced our third quarter gross margin by approximately 210 basis points. Compared to the prior year quarter and before considering the addition of Etanco, our gross margin declined as expected as our average raw material costs caught up with the price increases we enacted and also partly due to higher factory overhead and labor costs. Brian will further elaborate on the key drivers of our performance, as well as our margin expectations for the remainder of the year. I'll now turn to our capital allocation priorities, which are primarily focused on organic growth opportunities while simultaneously returning value to our stockholders through quarterly dividends and selected and opportunistic repurchases of our stock. Our capital return target remains 35% of free cash flow, which will enable us the flexibility to repay the debt we incurred to finance the acquisition of Betanco. While the integration of Betanco remains our priority, we are also continuing to evaluate potential M&A opportunities that would align with our value propositions for the markets in which we operate, especially in areas that support our key growth initiatives. In regard to organic growth, we are prioritizing facility expansions to ensure we have ample capacity to meet our customer needs, as well as to improve our service, production efficiency, and safety in the workplace, while reducing our reliance on certain outsourced finished goods and component products. We are progressing forward with the expansion of our Ohio manufacturing and distribution facility. and are continuing to review our footprint for other expansion opportunities to continue to deliver best-in-class customer service. Other key investments into the business will be in the areas of engineering, marketing, sales personnel, and testing capabilities across the company to strengthen our business model differentiators and to remain the partner of choice. I'd now like to turn to a discussion on our five end-use markets, residential, commercial, OEM, national retail, and building technology, which encompass our key growth initiatives. We've made solid traction throughout the third quarter in a challenging economic environment, beginning with the residential market. As I alluded to at the beginning, with adverse weather events like Hurricane Ian, we have been involved in efforts to increase awareness of the importance of building resilience. including building beyond building code standards to achieve higher levels of structural integrity. We conducted extensive training both in person and virtually to educate engineers, homeowners, and communities about safe building practices and are involved with many local and regional disaster preparedness organizations as well as FEMA to assist with post-disaster building assessments. We are pleased to be in the position to assist with recovery efforts following Hurricane Ian to help those communities build back stronger. In the OEM space, we made more headway on our mass timber initiatives. Our strategy of training and educating engineers and contractors has resulted in more specifications on new jobs and has led us to broaden our mass timber product line to appeal to customers in both the United States and Europe. For instance, we were specified on mass timber jobs during the third quarter, including for a manufacturer in Austria, as well as for the construction of a project near Seattle, Washington. Within national retail space, we've been focused on innovations to best service the R&R and DIY market segment and to be the partner of choice for our customers through elements such as e-commerce technology, associate training, display innovations, and cross merchandising programs. We're continuing to invest in our retail sales team to expand and build relationships at all levels. In building technology, we focused on creating solutions to help make our customers more efficient. We updated our online customer portal during the quarter to enable online ordering for configurable products versus traditional, more time-consuming foam order methods. Further, we were pleased to have been selected by a regional building supply company in the southeastern region of the United States to provide their customers and sales associates with the ability to design decks, pergolas, and fences using Simpson's full outdoor living solutions software platform, where customers can obtain a complete bill of materials for the purchase at the local store. Lastly, our technology platform was adopted by a highly regarded regional builder during the quarter to help them automate workflows, options, automatic pricing management for broad changes, and to transition away from inefficient paper processes. As we have mentioned in the past, we anticipate our structural steel initiative will take longer than the other initiatives as we continue to build the market. As part of our progress on this front, we held a customer demo day during the quarter at our Stockton facility centered on this particular initiative. Through this educational event, we hosted various industry professionals ranging from design engineers to steel fabricators along with Simpson employees from around the country to educate them on our highly engineered and tested structural steel product solutions aimed at converting traditional weld connections to bolted connections to improve productivity. In summary, we are extremely pleased with our strong third quarter financial results and continued execution on our strategic plan. Despite factors such as rising interest rates, inflation, labor, and supply chain constraints that continue to impact the industry, I believe the company is well positioned to grow and thrive in the years ahead, giving the strength of our people, culture, and our values, as well as our diversified portfolio of solutions for our customers. I am confident we can continue our above-market growth relative to U.S. housing starts in fiscal 2022, and that we can achieve our 2025 company ambitions even when considering softer market forecasts for housing. The integration of Otanko is going well, and we remain focused on investing in our footprint to support future growth and adherence to our superior customer service standards. Now I'd like to turn the call over to Brian, who will discuss our third quarter financial results and our revised 2022 outlook in greater detail.