Great. So why don't we get started? Good afternoon. I'm Timothy Wojs. I cover building products here at Baird, and we are very delighted to have Simpson Manufacturing join us again at our Global Industrial Conference. Simpson is the largest manufacturer of structural connectors and fastening applications for residential and commercial end markets, mostly here in the U.S., but also in Europe. And so from the company, we have CEO Mike Olosky, and we have CFO Brian Magstadt. I'm gonna turn it over to Mike, and he'll give a couple kinda opening remarks, and then we'll hop into Q&A.
Great.
With that, go ahead.
Tim, thanks for having us. So let me start very high level, very quick intro. So Simpson is a leading supplier of structural solutions to the building and construction industry. We developed the connector market, and the connector products that we developed, these are engineered, stamped steel products that go into wood construction products. We started developing these materials roughly 65 years ago. Since then, we've developed a product line of roughly 10,000 plus products and solutions for our customers, giving us the broadest and deepest product line in the industry. That product line also makes us a one-stop shop for structural solutions, a one-stop shop for structural solutions.
So for the most part, our products represent less than 1% of the bill of materials, but they're critical to the structural integrity of the house, the structure, or the components or systems that they go into. For the most part, our products are engineered and specified into each one of those applications. From a go-to-market approach, we have five customer-facing teams around five different market segments: residential, building technology, which would be truss and component manufacturers, they use software, commercial construction, national retail, so the big box guys, OEM, and then, residential OEM, building technology, commercial, and national retail would be our five segments. If you look at our business model, we think our business model is pretty unique.
So we start by creating demand by working with the building code officials and working with engineers to drive codes and to drive specifications to create safer, stronger structures. We then work with our building customers to pull our products through the supply chain by agreements for them to tell their supply chain they want to buy Simpson connectors. More and more, they are now buying and specifying our fastener and anchor products. And then we work with our customers to make sure that we're providing great service. So everybody in between, now they're talking about the lumber yards and the pro dealers. We go to them and say: "We've got a broad solution set. We're driving demand via specs and codes.
We're pulling it through with the builders, and we can provide great service on those product lines to you." And typically, part of our service package to our lumber yards, you place an order in the morning, we'll ship it out that afternoon, and you get it delivered the next day. So a key part of our business model is also software and digital technologies. With that big, broad product line, we're trying to make it easier for our customers to identify the right product, make it easier for them to specify, engineer it, and in some cases, run their particular businesses from a component manufacturer. So software is gonna continue to be a big investment for area and another point of differentiation. And you add all that up, that's how we believe we're able to drive above-market growth.
That's how we believe we're able to drive profitability from an operating income perspective, and ROIC in the top quartile of our proxy peer group.
Great. Great overview. Thank you. If anybody has any questions, you can email sessiontwo@rwbaird.com. Maybe just start with the end markets. So just a lot of volatility in on the residential side over the last, call it 18-24 months. Just maybe talk about what you're seeing in your residential kinda end markets, you know, kinda going into 2024. You know, maybe you can kinda segment it into kinda new construction, R&R, and then maybe multifamily-
Yeah
... as well as, you know, commercial.
Yeah. So a quick recap of this year. If you go back one year when we were planning our budget for 2023, a lot of volatility. We were expecting mid-single, mid-double digits down, so 12%-14% from a residential perspective below prior year. That's what we were thinking about for this year. We went into January, the builder's show, all of a sudden, "Hey, we're getting a little bit more traffic." Our customers are getting more traffic. They felt a little bit more positive about the market. The summer months for us were quite strong, and then in September, it started to tail off, flattish, a little bit below prior year, October, a little soft. And now, what we're hearing from our builder customers, it's a mixed story.
From the larger builders, we're hearing, mid- to single-digit growth for next year. From the smaller builders that aren't able to subsidize, the interest rates to help, their customers buy down, we're thinking maybe a little bit below, prior year. So when we look at that from a Simpson perspective, we think the first half, again, based off what we're hearing from our customers and the market experts, maybe slightly below prior year, second half, above prior year, total year, flattish to up, maybe, low single digits.
Okay. And then how do you think about, like, multifamily? Because I know it's hard to segment it out.
Yeah
... 'cause the same stuff goes into, you know, residential and multifamily. But, you know, we've had a pretty big—I guess we have a pretty big backlog of multifamily completions that we have to get through, but some of the, you know, I'd say the orders-
Yeah
... or the starts are a little weaker there.
Yeah. So our multifamily business, this year has been very, very strong. It's still good. We are seeing it tail off. We are expecting a slowdown next year. When we talk about total market, though, we think that's gonna balance it out with higher single-family homes.
Okay.
Our split of multifamily to single family is roughly equivalent to the market split.
Okay. Okay, good. And then a couple of years ago, you had an Analyst Day. You laid out some intermediate targets, but a lot has kind of changed since then. So you had the inflation, Etanco, housing's been kind of choppy. So I think at that point, you were kind of targeting high single digit kind of volume CAGR. I think you're kind of running ahead of that from a revenue perspective. So how do you guys see those targets kind of playing out over the next few years? I guess, is it kind of fair to assume that you're on track to exceed those?
So from the total top-line revenue, with the ambition to grow above market, we're still expecting to be able to gain market share wins in those key five market segments that we talked about. So we're building businesses, we're building playbooks and plans to be able to capture share, and we've had some recent wins in those areas, but that doesn't mean we don't think we can grow residential as well. We do. So trying to build out all of that, and with a potential. We think that there's about a 2 million housing unit shortage in the U.S. So going into that immediate term outlook, we're still, you know, positive on housing just because of that fundamental shortage that we've experienced.
The underbuilding ever since the Global Financial Crisis has built that backlog. But, as we continue to develop solutions to help us win in those other four market segments, we think we're gonna be able to continue to, again, grow above market at a pretty good clip. You know, this year we're so far flattish in markets that are generally down, so we're, we feel we're hitting that key ambition of revenue growth above market. But, with our focus on those value-added products and solutions, those playbooks that we have for those market segments, what do we need to do to win? We're building either the products, the testing plans, the marketing plans, to be able to grab that share.
That does mean a little bit of continued investment in SG&A. We've seen that this year, we've seen that in prior years, but we really feel to be positioned for when we come out of this, this slowdown that we're in today, that we wanna be ready. So we're mindful of the, of the ambition of, of top quartile operating margin, return on invested capital, but also thinking out that we don't wanna be caught short when things do change.
Okay. So how do you—when you think about investments, like, where... There's maybe four, five, six different areas that you're kinda looking to invest in.
Yep.
Where are you, I guess, in the investment phase of those individual subsegments?
Yep. So when we laid out in our investor presentation 2021, we laid out a series of growth initiatives. Now, as you've seen us report out, we're talking more about our market segments because we think it tells a bigger, broader story, and we still think there's a lot of growth in our core business. So when we now talk about the business, we're looking at a combination of what are those market playbook opportunities that Brian mentioned? What are those product playbook opportunities? And we create basically a template that says: Where's the intersection of that product and that market? What do we think that opportunity size is, and what do we think the growth potential is there?
So that we've got a very clear list of our top priorities, and we're making sure that we're resourcing those things correctly. So lots and lots of small to mid-size opportunities with lots and lots of customers, so things that aren't gonna be... Individual things are gonna be $30 million, $40 million, $50 million. A lot of small opportunities, and we're just being mindful of how do we manage all those smaller to midterm opportunities in line with our growth ambition.
Okay. How do you manage it internally in terms of, like, putting out the capital, seeing the return, not seeing the return? How do you kind of like... How, how does that kind of process work?
Yeah, so the three people that are driving that is our product management team, our engineering team, and our head of innovation. So those three people, combined with, sorry, the fourth one is our market development head. They're bringing together the product view, the market view, what do we need to do from an engineering. They're working to make sure we prioritize those things, and we've got a clear list of top things we wanna go after.
Okay. Okay. Maybe just talk a little bit about... And we've seen kind of supply chain become important over the last couple of years. You know, you obviously carry more inventory on your balance sheet from a service perspective. Just maybe talk about how your model is maybe a little different than some of your competitors, because I think there's... There's always been a push for you guys to take inventory down, but you had the inventory to service your customers, and I think it's a reason why you've actually been able to, you know, drive some of these kind of customers back to the Simpson kind of ecosystem.
Yes. Service is a differentiator for us. So our customers aren't giving us long lead times, they're not giving us great forecasts. I mean, they typically place an order, and they want it right away. And so the whole supply chain challenges that happened over the COVID period really highlighted that maybe service is not so easy. So through those challenges from a supply chain perspective, we had a lot of inventory. We're making sure we have the right inventory in the right location, and we used that to continue our approach of 97% plus service levels to our customers.
So at the same time, we passed on a ton of pricing because the raw materials had increased, we're able to leverage those service agreements and get a bunch of Vendor of the Year, Supplier of the Year awards because we were able to keep the job sites up and running, because we kept those service levels running, and that will continue to be a big differentiator for us.
And then, how does it factor into the. So, I think you still kind of charge a premium price relative to your peers? And then, if you think about deflation, you know, we've seen in certain metals and things like that, how do you think about that price premium and then the ability to kind of keep that price in a, in a maybe a more moderate kind of inflationary environment?
So that price premium, primarily on the connector line in North America, is, we think, 10%-15% over the number two connector company. And for all the things that Mike had mentioned regarding our business model of delivering the value-added solutions, we feel that we earn that. But we're not resting on those laurels. We're trying to figure out what we can do to delight our customers, whether it's additional warehouses in metropolitan areas where contractors can just come in and pick up inventory when they need it, or creating digital solutions that enable our customers to be more efficient in their back office. Things that just create that additional stickiness with our customers.
So those are the things that we think help us achieve that differentiated price. You know, in a market where steel is gonna bounce around, steel being the largest component of our raw material, we're gonna typically absorb the small increases or decreases in margin. When we see a sustained change, an increase, for example, we'll put out a price increase. But with the smaller movements, that's where you'll see our gross margin in like-for-like quarters, meaning our busier quarters are Q2, Q3, the typical warmer building season. We absorb more overhead because we're building more product.
Q2 versus a prior year Q2, if the gross margin has a little bit of noise, it's largely due to the, you know, the steel bouncing around a little bit.
The emphasis of our sales team is small percentage of bill of material. We drive a ton of value, a lot of innovative products. We focus on, we focus on those aspects with our sales team.
Okay. Okay, very good. So, I think there's some secular opportunity within your business. I mean, obviously, it's very tied to starts, but your products help, you know, improve the viability of your... You know, so if you know, viability of homes, viability of multifamily. So, I mean, are there opportunities with weather events to get more content into single-family homes from a code perspective? And then, I guess, just the move to, if you look in multifamily, it feels like there's a de-emphasis, at least in certain areas, around using steel versus wood. And so, how do those two things kinda, kinda help Simpson.
Yeah
... either now or, like, kinda over time?
Yeah, so we're involved with the building code officials, as I mentioned earlier. I mean, those things move slowly, so we do think the codes will continue to get better and better to build safer, stronger structures. So we do see some advantages there. We have products that are used for steel construction, cold-form steel construction. We have connectors, fasteners, and anchors that can also be used in those, so that part is okay for us. Probably the two secular things that are gonna make an impact on us, one is European-based. So the regulations that the European Union's driving to drive thermal efficiency of residential and commercial homes, they are the biggest consumers of energy in Europe. That drives the need to figure out how to insulate those buildings.
And the façade systems that our acquisition via Etanco enable are a big way to improve thermal efficiency of residential and commercial buildings. So that is one. And then I think another somewhat secular piece is just the wood-to-wood construction, wood to concrete construction. There aren't a lot of people that are taking those solutions into small to medium-sized OEMs, so people that are building trailers, creating systems, sheds, the tiny shed story, the tiny home story. So we do see lots of opportunities to take our solutions into these factory-built applications, and we're learning more about those every day, and the more we get into it, the more we think that's an exciting market.
Okay. Okay, very good. And then, I guess from a channel perspective, I mean, you work with a lot of the bigger, you know, distributors. And there, I mean, there's been a theme over the last four or five years that those bigger distributors are getting bigger, and they're doing a lot of acquisitions. Do you benefit from that? Is it kind of a neutral to you? How does that kinda play out?
Yeah, to the extent that we have consolidation of some of those customers, if one of our customers is buying somebody who doesn't hadn't chosen Simpson as their main product line, that's an opportunity for us to go in and win that business. And we've seen that happen over the course of the years during this consolidation phase. So, we recently had an opportunity to win some business kind of due to a consolidation, but we had to make sure we could prove that we're the right partner for that business, and we did convert a pretty large multi-location distributor because they were acquired by one of our current customers.
But we still need to go in and make sure we're providing the value for that particular customer for that region. And it so in general, I would say it definitely helps us. You know, anytime we can get in front of, you know, those customers. Our salespeople like to consider we have two classes of customers out there, current customers and future customers. And anything we can do to try to win that business, we're gonna, and consolidation is one of those avenues that's helped us.
So those larger customers tend to want to buy from larger suppliers. They want to buy at scale, they want the same service across the whole United States or the particular geography in, and so we think that's an advantage for us. We also have teams that call on the large national accounts, so the large national pro dealers and the large national lumberyards, even the big regional lumberyards, we have people that are calling on them to make sure that we're covering those guys as well.
Okay. And then when you think about, you know, if you look at your market share on new construction, and it moves around a little bit. I think it's, like, 22 of the top 25 home builders. So if you're in, like, a region like Dallas, how does a distributor, like, kind of not carry Simpson? 'Cause it seems like, you know, all of those builders in that region are gonna be specified with Simpson. The distributor is gonna want the lumber package, which is gonna be connectors and things like that. So doesn't that create, like, a pretty big moat around your business? 'Cause you're not really pushing any distribution. I mean, it's kind of being pulled out the other end, right?
Yeah, so that's the exact question I ask our sales team. Well, why wouldn't we have everybody for that exact reason? So, you know, probably a bigger, broader number is we have agreements with roughly 300 builders, and we believe that represents roughly 50% of the U.S. housing starts. So those 50% are, again, telling their supply chain they want Simpson connectors, and more and more, they're telling their supply chain they want Simpson connectors, fasteners, and anchors.
Okay. And how is... So you've done this. You've made this kind of journey that has kind of gone under the radar, I think, and, and you've done it pretty successfully, but you've been de-emphasizing kind of two-step distribution, which might have, you know, kind of helped you with connectors. You know, so where, where are you in kind of that kind of cross-sale effort? 'Cause it seems like you've made kind of the steps to go a little bit more direct than what you were at before. I guess, where is that kind of cross-sale effort you know, today versus where it could kind of wind up?
It's varied across the country. So we've started a number of years ago in the South to move to that direct to the contractor distributor model. On the West Coast, we're completing a transition from two-step distribution. It typically will take a little bit of time to pull through the fasteners, the anchors. The connectors, as Mike noted, are specified on nearly all the plans, so it's our job to show the distribution partners how our structural fasteners, our mechanical, chemical anchoring solutions really do create additional value for that distribution partner in that market.
So it's something that we've been working on in different phases throughout the country, but we feel we can show how those solutions really can be a difference maker versus, say, the two-step distribution partner.
Okay. Okay. And then, you've started to, and maybe this is, you know, competitive, you know, kind of opportunity for you, but you've made a lot of investments over the last five or six years in truss. It felt like, at least externally, it kind of went away, and now it seems like-
Yep
...you are making some progress in terms of converting lumber yards or, or component manufacturers to some of your kind of, kind of truss plates and software. So I guess, where are we on the truss side? 'Cause it seems like your start, it's, it's no longer like, you know, guys that are making pole barns. I mean, it's, it's—you're actually at, you know, kind of getting into big component-
Making progress.
Yeah.
Yep.
Big component manufacturers.
Yep.
And so where are you there, and, like, what is the opportunity there? 'Cause it does seem like that is a pretty big opportunity if you get some momentum.
Yep, it's gonna be a good growth driver for us. So if you look at our investor deck, the truss business is under building technology, and we call that building technology because software is a critical component of that business model. And the business model for that particular market segment is, we're gonna give you the software for free, and that software can design and run your truss or your component yard. In exchange, you're gonna buy our truss plates. So good business model on their end. Our competitor developed that, you gotta give them a lot of credit for it. But again, the supply chain challenges that we had over the last couple of years, our competitor had some scenarios where they were short.
Our several of our customers were put on allocation in a very hot, building market, and part of their business model is you're sole sourced. So if you're gonna use our software, you can only buy our products. That single source approach ran into some issues a couple of years ago, so that made a couple of people think a little bit differently about things. And in parallel, we've been developing our software quite well. There are several areas we're feeling really good. We're as good or better than them in a couple of areas.
We've got some work we still need to do, but we've had enough customers come to us because they also know us, 'cause quite often they're buying our connectors, and saying, "Hey, you know, are you there yet?" And we've got a couple of big wins, one in the southwestern part of the U.S., one in the Midwest, north Midwest, Northeast. That one being a top 10 component manufacturer, and we've made a big deal out of that at a couple of industry trade shows. And now people are realizing that our software is at a point where we can be a good partner for them, and they know that our service and our approach to an open supply chain is gonna help them make sure they get the best support for their business.
And so, yeah, we think it's a good growth opportunity, and we continue to call out some nice wins we've had.
Yeah, that's good. That's really good. Any questions from the audience? Maybe just on the fastener business, there's a lot of different fasteners. How are your fasteners, I guess, different? 'Cause a lot of time people hear fasteners, and they think screws, bolts, you know, drywall screws, that type of thing. Where do you kinda play in the fastening market, and how do you think about growing that business?
So load-rated, engineered, differentiated fasteners. So, starts faster, drives easier. That's the whole story, and if you guys have used our fasteners, hopefully you've seen that. So that's—we're making sure we've got a differentiated product line. That's the first part. The second part is we're trying to increase the attachment rate to our connectors. And so simple example, if you go into a big box retailers, you see a beautiful set of connectors. We want some off-shelf merchandising, having our fasteners right there, so when they buy the connectors, they can buy the appropriate fastener for it. And if you use our fasteners with, those connectors, higher load rating versus nails, one example.
Another one is when we switched from a market focus—from a product-focused sales team to a market-focused sales team. Now we've got teams that are focused on residential, and they focus on selling our complete suite of solutions. So they go into a lumber yard, and they're not just selling connectors anymore. They're selling our fastener and our anchor product line. So we see a lot of opportunity to gain traction in that market, leveraging our current customer base, people that we've known for a long time. So you add all that up, we've had good growth in that market segment. We've had good margin development in that market segment, and that's part of the reason why we're making a big investment in Tennessee. 'Cause we wanna continue to localize production in the U.S.
We think that'll help us better service and support our customers, and we think that'll help us continue to drive good growth in that segment.
Okay. Okay, and then Etanco, maybe just, I mean, biggest acquisition I think Simpson's ever done by miles. How has the integration gone there? And I know there wasn't a lot of cost-out synergies that were really from that acquisition. It was kinda more sales synergies. Maybe just update on the progress on the synergy side.
Synergy, so from an offensive synergy perspective, the market's a little slower than our original assumptions. So just to level set, we thought—we think there's about $30 million of operating income synergies, about 50% offensive and 50% defensive. That amount was based on a certain growth rate assumption for Europe, and it's been challenging since we acquired it, but we're making moves to capture those opportunities. So for example, the Etanco business had a really has a nice manufacturing and distribution business in Italy. Simpson did not sell much, if any, product into Italy. So getting Simpson Strong-Tie connectors into the Italian market via the Etanco distribution is one of the early advances we're making there.
Part of that is getting the products to, you know, in the inventory, in the ERP system. But probably most important is training up the technical support that is required from a pretty technical product. So the connectors are not... They require a bit of in-market support for distribution, so we wanna make sure that our team is capable in that market. And the Etanco group didn't really have that, so there's a bit of work there. Interestingly, in that market, the I guess primary competitor sells direct, and they sell through distribution. So we're hearing a lot of the distribution customers are really looking for that next custom-- that next company to step up with a pretty broad offering, including connectors as well as fasteners.
Just one example of the offensive synergies. And then talking a little bit about the defensive synergies, we've done some small facility consolidations where we had overlapping operations. We've got some more work to do there, and we would expect to complete those over the next year or two in some of the larger operations in the Etanco and Strong-Tie businesses.
Okay. Okay, good. And then in terms of, you know, capital allocation, you guys have a really nice balance sheet. How do you kinda think about... You know, I know you're investing more in the business, you know, kinda today with some of the facilities and things. How do you think about, you know, M&A versus buybacks as an alternative use of, of capital?
M&A.
Sure.
Yeah, so very specialized business, the number of companies that are actionable for us that are over $100 million of revenue is a handful. So of course, we're building relationships up with them in case they decide sometime to make a move, but for the most part, the bigger opportunities are not many, and they're more gonna be more opportunistic. So from a M&A perspective, we continue to look at tuck-ins, things that can extend a product line, broaden the product line out, help us service our customers a little bit better. That's kind of our view on the M&A side.
And then from the CapEx, we've talked about some of the larger investments that we're making over the next couple of years. So then, next up, we've got some debt pay down to do. We've got a revolver and a term loan that are fixed at pretty nice interest rates, but we do wanna continue paying those down a little bit. And then, dividends, we, we pay about $40 million in annual dividends, and then opportunistic share repurchases. We just, in our latest 10-Q, noted a bit of share repurchase subsequent to the quarter-end. And we, you know, again, we continue to look to be opportunistic in light of the investments that we're looking to make over the next couple of years. And then lastly, 'cause I know we're at time-
Blinking red
... we wanna make sure that in a cyclical business, we've got a good, strong balance sheet to make sure we get through it, weather the storm.
Great. Please join me in thanking the Simpson team for being here.