Simpson Manufacturing Co., Inc. Q4 FY2020 Earnings Call

Greetings, and welcome to the Simpson Manufacturing Company's Fourth Quarter and Full Year 2020 Earnings Conference Call. I would now like to turn the conference over to your host, Kim Orlando with ADDO Investor Relations. Thank you. You may begin.

Good afternoon, ladies and gentlemen, and welcome to Simpson Manufacturing Company's Fourth Quarter and Full Year 2020 Earnings Conference Call. Any statements made on this call that are not based on historical facts 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.

Thanks, Kim, and good afternoon, everyone, and thank you for joining us today. I'll begin with a summary of our full year 2020 results before turning to a discussion on our key fourth quarter performance drivers and initiatives. Brian will then walk you through our financials and fiscal 2021 business outlook in greater detail. I am extremely proud of our strong financial and operational performance in 2020, which we delivered in a highly challenging operating environment amidst the COVID-19 pandemic. Our net sales improved 11.6% over 2019 to $1.28 billion, the highest in the company's history, driven by strong sales volume. As a result, we generated record earnings of $4.27 per diluted share, up 43.3% over 2019. These results would not have been possible without the hard work and dedication of all our Simpson employees. Their diligence, including strict adherence to protocols to help minimize the spread of COVID-19, has enabled us to continue operating our business with minimal disruptions from the pandemic. On behalf of the entire Simpson management team, we applaud them for their tremendous efforts. The health, safety, and well-being of all our employees remain our number one priority, and we will strive for continuous improvement to ensure Simpson remains a safe and rewarding place to work. Our record 2020 results were further supported by our commitment to position Simpson for long-term sustainable and increasingly profitable growth. In October of 2017, we unveiled a three-year 2020 plan with aggressive targets to maximize our operating efficiencies and drive long-term shareholder value. Since then, we've made significant progress against our goals, some of which we updated in July of 2019 to reflect changes in the macroeconomic landscape. While we elected to withdraw these financial targets in April of 2020 due to the significant level of uncertainty surrounding COVID-19, we continue to execute based on the same underlying principles, focusing on operating efficiencies and cost savings to guide us through the COVID-19 pandemic.

Thank you, Karen, and good afternoon, everyone. I'm pleased to discuss our fourth quarter financial results with you today. Before I begin, I'd like to mention that unless otherwise stated, all financial measures discussed in my prepared remarks today refer to the fourth quarter of 2020, and all comparisons will be year-over-year comparisons versus the fourth quarter of 2019. Now turning to our results. As Karen highlighted, our consolidated net sales were strong, increasing 12% to $293.9 million. Within the North America segment, net sales increased 9.8% to $249.1 million, primarily due to higher sales volumes in our Home Center distribution channel, which includes our home center and co-op customers. Sales volumes were supported by the return of Lowe's, along with increased repair and remodel activity. Our net sales further benefited from other distribution channels, which experienced increased demand from new housing starts and repair and remodel activity. In Europe, net sales increased 24.9% to $41.8 million, primarily due to higher sales volumes in local currencies. Europe's sales benefited by approximately $2.5 million of positive foreign currency translations, resulting from some European currency strengthening against the United States dollar. Wood Construction products represented 85% of total sales compared to 83%, and Concrete Construction products represented 15% of total sales compared to 17% last year. Consolidated gross profit increased by 12.4% to $123.7 million, which resulted in a stronger Q4 gross margin of 42.1% compared to last year. Gross margin increased by 20 basis points, primarily due to lower material and warehouse costs, which were partially offset by higher labor costs. On a segment basis, our gross margin in North America declined to 43.2% compared to 43.9%. While in Europe, our gross margin increased to 35.3% compared to 29.9%. From a product perspective, our fourth quarter gross margin on Wood products was 41.8% compared to 40.8% in the prior year quarter and was 39.6% for Concrete products compared to 43.7% in the prior year quarter. Now turning to our fourth quarter costs and operating expenses. Research and development and engineering expenses increased 10% to $12.9 million, primarily due to personnel costs, stock-based compensation, product testing, and cash profit-sharing expenses. Selling expenses decreased 1.2% to $27.8 million due to lower travel and entertainment, and advertising and trade show expenses, partly offset by higher personnel costs, cash profit sharing, sales commissions, and stock-based compensation expense. On a segment basis, selling expenses in North America were down 2.1%, and in Europe, they were mostly flat. General and administrative expenses increased 10.9% to $43.6 million, primarily due to increases in cash profit sharing, stock-based compensation, and software subscriptions and licenses. Total operating expenses were $84.3 million, an increase of $5.1 million or approximately 6.5%. As a percentage of net sales, total operating expenses were 28.7%, an improvement of 150 basis points compared to 30.2%. Our solid top-line performance, combined with our stronger Q4 gross margin and diligent management of costs and operating expenses, helped drive a 7.8% increase in consolidated income from operations to $39.5 million compared to $36.6 million. In North America, income from operations decreased 1.8% to $36.1 million. In the fourth quarter of 2019, North American income from operations included a $5.6 million gain on the sale of a selling and distribution facility. In Europe, income from operations increased 145.8% to $1.3 million, primarily due to increased gross profit. On a consolidated basis, our operating income margin of 13.4% decreased by approximately 50 basis points. Our effective tax rate increased to 25.6% from 22.3% due to the release of foreign valuation allowances in 2019. Accordingly, net income totaled $29.6 million or $0.68 per fully diluted share compared to $28.1 million or $0.63 per fully diluted share. Now let's turn to our balance sheet and cash flow. Our balance sheet remained healthy with ample liquidity to operate our day-to-day operations. At December 31, cash and cash equivalents totaled $274.6 million, an increase of $44.4 million compared to December 31, 2019, after paying down the remaining $75 million on our revolving credit facility during the quarter. As of December 31, 2020, the full $300 million on our primary line of credit was available for borrowing. Our inventory position of $283.7 million at December 31 increased by $23.6 million from our balance at September 30, as we continue to see higher levels of construction activity, along with the unprecedented demand we've experienced through the pandemic. We continue to be highly selective in regard to inventory purchases, through careful management and purchasing practices, along with maintaining our high levels of customer service and on-time delivery standards. As a result of our improved profitability and effective working capital management, we generated strong cash flow from operations of $77.5 million for the fourth quarter of 2020, an increase of $21.1 million or 37.4%. For the full year of 2020, we generated $207.1 million of cash flow from operations, which increased nearly $1.5 million. During the fourth quarter, we used approximately $17 million for capital expenditures. For the full year of 2020, capital expenditures were approximately $37.9 million, in line with our reduced expectations as a result of our focus on cash preservation in mid-2020 due to COVID-19. We were also pleased to have paid $40.4 million in dividends in fiscal 2020, including $10.2 million in the fourth quarter. In addition, we repurchased approximately 1.05 million shares of our common stock in 2020 at an average price of $72.33 per share for a total of $76.2 million. This includes approximately 151,000 shares of our common stock that we repurchased during the fourth quarter at an average price of $89.49 per share for a total of $13.5 million. As our authorization for repurchases of common stock expired at year-end, on December 16, our Board of Directors authorized the repurchase of up to $100 million of our common stock, which went into effect on January 1, 2021, and runs through December 31, 2021. In addition, on January 22, our Board of Directors declared a quarterly cash dividend of $0.23 per share, which will be payable on April 22, 2021, to stockholders of record as of April 1, 2021. Before we turn the call over to questions, I'd like to discuss our 2021 financial outlook. Based on business trends and conditions as of today, February 8, we are initiating guidance for the full year ending December 31, 2021, as follows: operating margin is estimated to be in the range of 16.5% to 18.5%; the effective tax rate is estimated to be in the range of 25% to 26%, including both federal and state income taxes; and capital expenditures are estimated to be in the range of $50 million to $55 million, including approximately $10 million to $13 million, which will be used for maintenance CapEx. As of today, the magnitude and duration of the COVID-19 pandemic and its impact on general economic conditions remains uncertain. It's important to note that the potential economic impact related to COVID-19 on our operations, raw material costs, consumers, suppliers, and vendors may have a material adverse impact on our 2021 financial outlook, should conditions materially change from the current environment. We will continue to monitor the impact of COVID-19 on our operations, which were not significantly impacted in the fourth quarter of 2020. In summary, despite the COVID-19-related challenges in the marketplace and ongoing uncertainty, we were very pleased with our fourth quarter financial results and operating performance. I'd like to once again thank all of our employees who are dedicated to working safely and supporting our customers during these difficult circumstances. Our industry-leading position, geographic reach, and diverse product offerings, combined with our strong balance sheet and liquidity position, gives us confidence in our ability to maintain operational excellence and support current and future demand trends. As Karen mentioned, we look forward to updating you on our go-forward business strategy in 2021 and beyond during our Virtual Analyst and Investor Day on March 23. Thank you for your time and attention today. At this time, I'd like to open the call up for questions.

So before we go to questions, I need to make a correction. In my script, I stated that our 2020 revenue was $1.28 billion, the corrected number is $1.27 billion. Thank you, operator.

I'll start with the guidance for '21. The operating margin range implies a fair bit of compression. You clearly signaled some higher G&A investment spend and a little bit of gross margin. So the direction is not a surprise. But maybe just what level of OpEx growth do you anticipate this year? And can you give us a sense for what type of revenue growth ranges and gross margin ranges are sort of implied or contemplated at the low end or the high end of the range?

Sure, Dan. So let me walk through some of that. Our guidance does include that gross margin headwind with higher OpEx relative to 2020. We spoke last quarter, there were some growth opportunities we'd be looking to fund. We do plan on going into further detail on those growth opportunities at that Investor Day. We do have both some gross margin compression and the OpEx as a percent of revenues, increasing to reflect, I guess, both of those conditions. And when looking at SG&A, we're expecting at some point in 2020 that certain activities will resume, such as travel and trade show activities. And we'll have some higher OpEx relative to 2020 in regards to those general categories and then on revenue, kind of low to mid-single-digit overall growth rate from a volume perspective. Karen, was there anything you'd like to add there?

No, I think that covers it. Again, just to reiterate, we had some savings in our SG&A due to lack of travel, trade shows, basic projects, and things that were canceled. So I would anticipate that those would pick up somewhat, again, as we're starting to see a little bit of easing in some of the restrictions around the COVID pandemic. And I think Brian hit the rest of those elements perfectly.

Got it. That's helpful. So if we think about mid-single digits being the higher end of the range, if R&R remains robust and housing activity remains robust, and we pushed through those at the higher end, maybe a little bit of upside to the guide, at least that's what I'm hearing.

Yes, I believe there’s a lot of excitement among some builders regarding new projects. We have definitely noticed an uptick in remodeling activities as people are spending more time at home and taking on projects like remodels, decks, and fences. We'll see if this trend continues, but I think expecting mid- to single-digit growth seems quite reasonable based on our observations.

Absolutely. Very helpful. And then is it possible to quantify how much of a benefit in ballpark terms, reduced travel, trade show activity was? And part of the reason is, is it possible that some of that doesn't necessarily come back, whether it's in 2021 or beyond? But just trying to get a sense of the magnitude of that benefit that we had this year.

I think that so far in the early part of the year, it doesn't seem much different from that perspective relative to the latter part of 2020 from a travel and those other activities' perspective. We would anticipate those to pick up at some point. But a lot of uncertainty right now around when that might be, maybe midyear, maybe a little earlier, maybe a little bit later. I don't have the specific dollar amount in front of me for the travel and trade. I'll see if I can pull it before the call ends. We did note that as we put in the release, there were some variable comp elements that did increase, but other elements were not really called out yet. So let me see if I can pull that for you at the end.

Okay. And a long shot here, but any chance we get any sort of preview on what type of metrics you might be talking about in March, not necessarily the magnitude, but whether they'd be similar or different to your last three-year goals that obviously executed on extremely well?

Yes, that's a great question, and we want to keep some surprises for now, but we will provide information on our growth strategy and related metrics. We'll clarify everything in March.

Our next question comes from the line of Tim Wojs with Baird.

Maybe to begin, could you clarify what you have considered for steel price inflation in your EBIT guidance range and possibly in your revenue as well?

Well, right now, with our guide, we do include some assumptions on some steel price increases. We do want to provide more granular detail on that Investor Day as that comes out. So if you could bear with us until that time, Tim, we'll plan on disclosing more of that information around what we're seeing and planning for as far as are looking to implement as far as the rising steel price and what we would plan to do for that.

Okay. I guess, so we should take revenue expectations in terms of the low to mid-single-digit volume growth you talked about, and we should layer in some price on top of that, correct?

Correct.

Okay. And then secondly, just on the investments, I know you want to kind of keep the cat in the bag a little bit. But could you just quantify how much incremental investment related to your growth opportunities you're making in '21?

There will be some impact on operating expenses. However, we plan to discuss those growth opportunities during Investor Day. Additionally, we will outline the investments we will be making in 2021 to pursue and achieve these opportunities.

Okay. Okay. And I guess, big picture, I mean, is there any reason why SG&A shouldn't continue to grow at a slower rate relative to revenue over time?

Over time, typically, that would be the case 2021, as we'll detail out later, may or may not. But in general, over the longer run, then we should definitely see the leverage on the revenue.

Okay. Great. Please go ahead, Karen.

I would just say that we have done a great job in our 2020 plan of closely examining all of our SG&A spending. We will maintain that approach and will continue to closely monitor our SG&A expenditures.

Okay. That's great. And then just the last question, kind of back on price cost. Has anything changed relative to history in terms of your ability to go out and get price from your customers?

Yes. I think it really hasn't. As we've talked about, there's a lot of information in the market about the rising cost of steel and the availability of steel. Our customers know that, that's a key element in our costs. And that as we have steel increases, we have to evaluate that and be able to push that off into our customers. So I don't think anything's really changed there. I think the change is how rapidly it has increased from where we were last year when the pandemic first struck.

And before we jump to the next question, travel and entertainment savings for the full year 2020 was about $7.5 million, split more in the selling line than the G&A line and other lines.

Our next question comes from the line of Julio Romero with Sidoti.

So I do want to ask about the approach to growth that you guys have and understanding that you'd like to hold some of the details for the Investor Day. But maybe if you could talk about, I guess, what do you think Simpson does exceptionally well that should continue to be part of your approach to growth going forward? It's kind of a broad question, but the best that you can answer.

I think the things that distinguish us are the complete solution that we supply, and that's typically a complete engineered solution. So we do quite well with building materials that are helping make those buildings safer and stronger. And we do that by not only differentiating our product from the standpoint of its performance and corrosion resistance but also the availability. So as we look to growth markets, we want to ensure that we're not looking into commodity areas, but that we are looking to be able to use that engineering, manufacturing, and technology, complete solutions approach into these other markets.

Got it. I believe one of the advantages with your engineered products is the focused approach you have maintained over the past three years. Is that a key aspect of your growth strategy that will continue since it has been effective for you?

Yes. When we talk about a narrow product focus, we consider our fasteners, where there are billions of dollars in opportunities. The structural fastener market alone is $750 million. We have identified a substantial market and concentrated on areas where we can distinguish ourselves by offering a superior product with exceptional performance compared to commodity alternatives. In the markets we aim to grow in, we focus on how we can set ourselves apart. Although the market size may be large, we strive to deliver products and services that stand out and avoid being seen as commodities. This approach is why we are successfully focusing on specific markets, allowing us to offer services and solutions that include engineered offerings, which in turn supports our gross margins by enabling us to sell at a higher level.

I understand. Regarding your CapEx guidance, you adjusted your original target for 2020 when the pandemic began. However, your reported full-year number today was approximately $9 million below that original goal. As I consider your outlook for 2021, how should I interpret that? Is it a matter of catching up, or should I expect your annualized growth CapEx to be higher than in 2021?

Good question. Part of it is catch up, for sure, an element rolling over from 2020 into 2021. And then periodically, there will be years where we may have a higher investment amount due to maybe investing in some element that needs to get refreshed every, say, 4 to 5 years. So there's a bit of that element in 2021 as well. So the number is higher from a guide perspective in 2021. But due to that element that there's some of the things that we didn't do in '20 and some of the things that are more every few years in nature.

And our final question comes from the line of Kurt Yinger with D.A. Davidson.

I just want to confirm that it doesn't seem like you have taken any action on pricing so far. Is that correct?

Well, right now, we are in the initial stages of communicating price increases due to rising steel costs. So we need to allow that process to occur where our customers are hearing about it from our folks and our team, and then we'll have that greater detail that I mentioned or what I mentioned in the latter part of March at the Virtual Investor Analyst Day.

Okay. Got it. That's fair. And then from an inventory standpoint, I mean, how far out do you have, I guess, visibility or confidence before some of this inflation that we've seen starts to roll through the P&L? Is that something that would really be relegated to the back half of the year? Or could we see it here in the first half of 2021?

Yes, really good question because as we purchase steel and consume it, our kind of our weighted average cost change based on the ins and outs there. And there is a bit of a delay factor just because what we have on hand today versus what we're buying at today. So there is a bit of a delay in steel price increases or decreases for that matter as they roll through cost of sales just due to the amount that we do have on hand. So it would be the latter part of the year. And we model that out based on volume assumptions, utilization, or how much we're going to produce in a given quarter or a period to try to correlate or predict what that gross margin will be based on facts known today, so steel prices known today or the like.

Okay. Got it. That makes sense. And the revenue performance was very strong relative to at least what you talked about through October. And it sounds like the Home Center customer set was, again, a big driver of that. I'm curious whether you would view that upside as a load-in benefit associated with gaining back Lowe's or whether that's really indicative of just strong sell-through and the ability to kind of sustain the strength you've seen here in the second half, even without having these load-in benefits and as you lap it in 2021.

I don't think there's much, if any, load-in in Q4. It was largely done toward the end of Q3, maybe a couple of stores at the beginning of the quarter. So largely due to some of the elements that Karen mentioned, more favorable weather, I think, continued DIY element for that trend that has definitely been prevalent in the earlier Q2, Q3 of 2020. So as far as on a go-forward basis, definitely a tougher comp, but we'll have to continue to monitor and follow the DIY R&R trend relative to 2020 to see how strong those growth elements might be.

Got it. Okay. You mentioned gaining market share in Europe due to competitors facing supply issues. Similarly, in the U.S., the building materials supply chain seems to be dealing with relevant challenges as well. I'm interested to know if you are observing similar opportunities in North America and if you believe this could lead to market share gains for your company, considering the emphasis on customer service and inventory management.

Yes. Kurt, I think, obviously, as you've stated, our number one goal is the relentless customer focus, and we have been able to meet our customers' needs as I've mentioned even amazingly as we have many, many people working remote. But to ensure that we have the product availability is a big key. And as you mentioned, there's wood is an issue in the building industry. Certainly, steel is now an issue. But I see us really continuing to maintain our customer service levels and our product availability. I'm not seeing so much potential for market share gains as we saw in Europe. And really, the reason is, in Europe, we have a lot of very small customers. And so if they were not able to meet the needs, we were able to meet those customers' needs versus, in the U.S., we have substantially larger-sized customers. So a little bit different market in both those areas.

And Karen, you were saying customers, but I believe you were meaning competitors.

Oh, sorry, sorry, sorry.

Yes.

Right. Yes. I mean that. Yes. In Europe, we have small competitors who had some problems meeting availability. In the U.S., we have much larger competitors. So a little bit different, much more difficult to get market share because they're also meeting customer needs.

Right. Right. Okay. That's helpful. And then just last one for me. Karen, I know you kind of alluded to the lag impact between starts and seeing that pull through. But just curious, as you sit back and think about, I guess, the volumes going to more new residential type customers, whether there's anything that's surprised you, and whether there's any reason why we wouldn't necessarily see that strength in the starts data here in the second half really come through in the first half of 2021, whether there's a geographic issue or any sort of leakage points that you could think of?

Yes. I think, Kurt, there's definitely demand, but I still see some of the same headwinds that we had. We've talked about material shortage headwinds. But to me, the biggest one is still labor. I think the demand has increased, but being able to complete projects is still a function of that limited labor resource that we have in the construction area. That hasn't really picked up. And so I really believe that that becomes your limiting factor on the number of starts that you can build.

And with that, we've reached the end of our question-and-answer session as well as today's conference call. Thank you for joining us. You may now disconnect your lines, and have a wonderful day.