Hi, good afternoon, everyone. My name is Maggie Miller. I cover building products here at Jefferies. Thank you for coming to our conference this week. We are thrilled to have Simpson Manufacturing here. We have Mike Olosky, the CEO, and Brian Magstadt, CFO. I think Mike is gonna give a few introductory remarks, and then we'll get started on Q and A.
Great. Thank you, Maggie. So I've got four slides, and let me start very, very high level. So Simpson Strong-Tie is a leading provider of structural solutions to the building and construction industry. We provide these solutions through five end-use markets in our overall North American segment. So the first one is residential business. Our residential business, generally, we believe we are 50% linked to housing starts, and that really comes through our residential business. The next one is our commercial construction business, then our OEM business. So think, manufacturing, housing, sheds, and similar structures. We use wood to wood, wood to steel connections, wood to concrete connections. The national retail, that's the big box retailers, and then our component manufacturers, which you think truss manufacturers.
So we believe that we've got the broadest and deepest product line, making us really a one-stop shop for structural solutions for the building and construction industry. We have five main product lines, so these are engineered, heavily tested, fasteners, connectors, and anchors, and also truss plates. And then the 5th one is our digital solutions. So the digital solutions helps us sell hardware, it helps us be easier to do business with, and we believe in the future, we can monetize those digital solutions more going forward. And the part that I think really makes Simpson unique is our strong business model. So we've got long-standing relationships with building code officials, building agencies, engineers, architects. We work with them very closely to help them design and build safer, stronger structures.
We also provide a broad range of innovative products that helps them specify these products. We also have long-standing relationships with the builders. We have builder programs with roughly 300 builders, representing 50% of the housing starts, and that helps pull through the demand that we create by working with the building code officials and with the engineers and specifiers, and then in the middle, we have our pro dealers, lumber yards, contractor, distributors, where we provide excellent service to them so that they don't have to carry that broad range of products, because if they place an order today, we typically ship it out this afternoon, and they receive it, the next day.
And then you layer over the top of that, digital solutions that help our customers engineer, specify, and pick the right product for the particular application, and in the truss area, it helps them run their business. So that strong business model, we believe, creates a very sticky relationship with all of our customers and really helps create that competitive advantage at Simpson. And as a result of that, that has helped us drive above-market growth. So if you look at how we've done versus the market the last eight years, we've averaged roughly 250 basis points above U.S. housing starts, and we use housing starts as our main financial benchmark.
In the last two years, we've been able to grow eight hundred basis points above the market, and we've done that by, continuing to drive that strong business model, by continuing to gain share. If you look at our business, it's very specialized, so we have lots and lots of small applications that, added up over time, have contributed to that 800 basis points of, over proportional growth. And last comment, let me just talk about the market. So we're on pace for basically three years of declining housing market, so maybe 1.4 million housing units this year. Last time that happened was 2020.
In 2020, we had a $1.25 billion business, with 20% operating income, and as you can see from the chart, we had a nice little bump over 2019. So if we finish with the same size of a market this year, 1.4 million housing starts this year, we're gonna add about $1 billion on the top line, so it'll be over $2.2 billion, and we'll add another $200 million of operating profits. So in a relatively challenging market, we've implemented pricing that stuck, we've made a couple of nice acquisitions, and we've also gained share, contributing to a significantly different business than we had in 2020, even though housing starts are relatively flat. Maggie, that was my four slides.
All right, great. I'm gonna kick off the Q and A, but if anyone from the audience has a question at any point, just raise your hand, and someone will come to you with a mic. I guess going off of that last slide, your above-market growth, can you talk about what specifically is driving that, and are there any particular end markets or products or customers where you feel you're best positioned to continue that above-market growth?
So we run the business with playbooks by our five market segments that I showed you, and also by those five product lines. So we've got very specific plans on where to play, how to win, and when you look at our business again, and I use a baseball analogy here, it's lots of singles and doubles. We don't have a whole lot of customers that have really driven a significant growth in that. It's just been good progress across all five of those segments. The component manufacturing the last couple of years has done quite well. Our commercial OEM business has also done well, but, and really, given the state of housing starts, we're also pleased with how our residential business has developed. So pretty much across the board growth across all markets and all product lines.
All right, and digging in more to each of your end markets, can you walk us through what you're seeing in the current demand backdrop by end market? And you know, you're obviously exposed to cyclical end markets. Where do you see Simpson's growth profile through the cycle, and how do your diversified end markets kind of play into that?
Yeah. So we, let's start with our housing market. Again, our view is based off everything we're hearing from our customers in the markets. We're going to be flat to down, low single digits. Again, that'll be the third year in a row. We believe with the 2 million units short of housing, eventually that's going to start to pick up. You've probably heard that from a lot of other companies here. So we're assuming that starting in sometime in 2025 , housing starts are going to be clicking around 4% or 5, 6%, market growth, and we're going to get that for a couple of years. Okay, assuming no hard landing, everything else kind of stays the same. Interest rates happen, as I'm sure you've heard 100 times now.
If you look then at the commercial business, our view on the commercial business this year, it's going to be up slightly, low single digits. We think that's going to continue to go forward. If you look at our national retail business, so repair, remodel, that's going to be flat to down slightly. Market, I'm talking. The market's flat to down slightly, and we're anticipating that to be up a couple of % next year. And our component manufacturer business really tracks with the housing starts. So all in all, we think you add all that up from a market perspective that fits with our business. Again, we're thinking low to mid single digits market growth next year. And you know how we play the cyclical part of it? Our target is to drive above-market growth.
And as long as we are optimistic about the markets in the mid to long term, we're continuing to invest to make sure that we take great care of our customers and deliver the service that they're used to, and that helps us gain share in the long run.
All right. And you mentioned rate cuts. I have to ask what are you hearing from customers about the potential impact of rate cuts coming up, and how do you see that flowing through your business?
Yeah, so, I mean, a lot of different opinions. The two versions of it, rate cuts happen, things start to tend to pick up slowly, but we've also heard from a couple areas, if a rate cut happens, things will slow down before they get better because now people will see those rate cuts coming, and maybe they'll wait 3/6 months until they see two or three of those to really take advantage of it, so we're on both sides of that, and if anybody knows the answer to that, I would like to incorporate that into our budgeting process, Maggie.
Definitely. Me too.
Yeah.
Yeah, it's interesting. Have you heard from your customers about a certain threshold of where mortgage rates need to be to really get that demand going, or is it, you know, just too uncertain at this point?
Too uncertain at this point.
Okay.
What we have heard, though, is that we've had some builders ask us, "Hey, are you ready if we bump up our business X amount?" We've had some of our pro dealers ask the same. So I think they all feel it's coming, and they're concerned that there's going to be a shortage story again. Our answer is, we have plenty of capacity, and we've got all the investments we've been making over the last couple of years to support them as they grow their business.
Okay. And in terms of your residential business mix, between single family and multifamily, how do you think about those two pieces? And, you know, are you more exposed to one end? Is there a mixed benefit or drag from, you know, going between single family and multifamily?
Yeah, so as we think about single family and multifamily, so we're more exposed to single family, largely built with wood versus multifamily. About a third of multifamily would be built with wood versus concrete or steel, and the starts from a single family perspective really matter where the starts are located, so if they're on the West Coast with seismic code requirements or on the Southeast or Eastern Seaboard with hurricane, high wind requirements, and along the Gulf Coast as well, high wind requirements require more Simpson content on a single family start, versus parts of the U.S., where the building code is less stringent and we see less Simpson content. On a multifamily, it's actually more across the board, more consistent.
Due to the density of those structures, they're more highly engineered, so the Simpson content in the multifamily that we participate in will be fairly consistent for a Simpson dollar content per unit, versus again, that multifamily single family. And on the single family in California with seismic or in Florida with high wind, we could see a 10-to-1 factor in the dollar amount, you know, of Simpson content in those starts relative to say, the middle of the country, so where starts are do matter, and we definitely see more benefit on the single family versus multifamily.
Got it. Sticking on demand for a second, the large retailers have recently been signaling some weakening consumer trends. Curious what you're hearing from your retail partners about trends there?
Yeah, so we've got a fairly good-sized team that's calling on the national retail customers. I really like our approach of branding, off-shelf merchandising efforts, working on the labeling. We believe that's helped us grow above what our national retail customers are doing. I don't want to comment too much on their business, but obviously, the lower lumber prices have helped the good growth in the lumber and building material section, and we are tending to comp well versus the growth rates that our customers are seeing.
Awesome. The last few years, you've reorganized your sales teams to be more market-oriented rather than product-oriented. Can you talk about what drove the shift in your strategy there, and any, you know, results you're starting to see from those efforts?
Yeah. So we had our sales teams previously organized by our connector product line, our fastener product line, and our concrete connections product line. And so that meant for some of our customers and some of our dealers or channel partners, they would see three Simpson reps, so they wouldn't have a single point of contact. And since the connector part of the business or product line is the largest part of our business, that meant that in some areas we didn't really get as much contact as we wanted to. So we moved to having a market-based approach along those five market segments that I showed you earlier.
So that now means our customers have a one-stop shop to be able to get the products they need for the particular applications, and it took a lot of training for us to make that happen. And the benefit of that is I think that's part of the reason why we've seen the overproportional growth versus the market lately, is now our connector sales teams are predominantly our residential sales force teams. The lumber yards and the pro dealers, they have great relationships with. They're now selling not just the connector products, but all the other parts of the product line. And that has contributed to us getting a better penetration rate with our current customers, and that's helped us accelerate growth overall the last couple of years.
What's been the response from the teams at Simpson?
Change is never a good thing. There was definitely a change management process. Our sales teams, for the most part, have been long, long-standing relationships with our customers, which is great. Then when we had to move things around a little bit, there was a little bit of angst about, hey, I've been calling on that customer for a long time. I got a great relationship with that customer. I don't wanna change it. And we also heard that from some of our customers, but we spent a lot of time and effort making sure that our sales teams understood the complete product line, they understood the market they were selling into, and eventually, our customers have seen that that's a benefit to them to have that single point of contact.
Gotcha.
I have a question?
Oh, here we go.
Could you talk about the relative outperformance in the component and OEM businesses? What do you think is behind that? Is it what you just talked about, or is it something different? And then also, the digital solutions, just—
Mm-hmm.
What's the plan there?
Yeah. The component manufacturing business, that is basically truss manufacturers. And our competitor in that space ran into a couple of supply chain challenges, and they've got a fairly unique business model, where they, you can only buy product through them. If they use the software, they expect you to buy the plates from them. And when they ran into some supply chain challenges, and they put some customers on allocations, they came to us, and that created a little bit of angst with their customer base, and that opened up some opportunities for us. At the same time, we have significantly developed our software solutions, so we're at a much better point. We've got new people on the team that have helped us really develop enterprise-wide software systems, and that has helped us make progress.
And the third part of that is, we know all of those customers anyways. A lot of them are buying our connector, fastener, anchor product lines, so they understand the service. And I think all that combined has helped us accelerate the progress in the component manufacturing. On the OEM side, really, we're in a space where there's not somebody that is a parts manufacturer, a component manufacturer, a hardware manufacturer, probably a better way to say it, that's selling it to them. It's typically versus distribution partners, so Fastenal, for example. So now we're going to these manufacturers, and we have a dedicated team just focused solely on manufactured housing, sheds, and other types of similar structures made in a factory, and that's helped us accelerate growth in that area.
But to be quite honest, we think we got a lot more room to expand growth, so we think we're in the early innings of that ballgame, and there's some more opportunities for us. And then, on digital. So on the digital side, our view on the digital piece is that these digital solutions make us easier to do business with. It helps our customers select, specify, and engineer in the right solution. We have 18,000 SKUs, so they're trying to work through the complexity of that, and we think the digital tools will help us do that. But right now, it's predominantly focused on making our business model around hardware stickier. But we do believe that there's the opportunity to optimize the software part of it and monetize some of the software that we're selling to some of our customers, and we're putting teams in place to make that happen. We have not released any targets or any specifics on it yet, but we do believe that's an opportunity going forward.
Maybe just to follow up on your digital initiatives, kind of what inning would you put yourselves at in those initiatives, and where do you think you are versus the industry?
If you look at the residential market, there are not a lot of large players offering digital solutions to that market segment. You know, you have BFS and Paradigm. BFS is a very good customer. You've got Hyphen, you've got a couple of other players that are in that space, MiTek in the component manufacturer part of it. But the number of people that have digital solutions for the builders and the number of people with digital solutions for the lumber yards, pro dealers, are relatively small. So if from an industry perspective, I think we're in the early innings. From our perspective, I think we're maybe a touch ahead in a couple areas, but we have not started to scale that to the level that I think we can do that going forward.
Gotcha. A nd then I guess kind of tagging off of that, you have been making investments for growth in SG&A. How should we think about those investments going into 2025 , and I guess, attached to that, the opportunity for margin expansion as you're continuing to make those investments?
Let me start on that one. So as we think about that ambition to grow above market, which we've talked about, one of our other key financial ambitions is top quartile operating income of our proxy peer group. So we would think that would be about 21% at the bottom end of that top quartile. So as we think about the investments to grow above market, we've got that operating income goal in mind as well, and we want to balance those market segments that Mike had talked about, the five. There's a lot of ideas on how we can gain share in each of those categories and subcategories within those five. So we end up with more ideas than we've got, say, bandwidth for.
So we want to balance the investments we're making with the biggest opportunity, of course, and selectively choose, are we going to go after which particular category? Of course, SG&A has grown from a dollar perspective at a rate higher than our volume growth, and we know that's not sustainable. So we want to make sure as we are balancing those investments, where do we think those are going to get us over the next, say, 3 to 5 years? What are the percentages of those TAMs that are going to be achievable? And how do we feel about our realistic chance of capturing those?
As we continue down those roads of going after those opportunities, some are going to work out better than others, and we want to make sure we can pivot and go after, again, those opportunities that are right in front of us. We do recognize that in order to continue that above market growth with that operating income target that we've set, that we do need to have balance. In the long run, we do expect, though, of course, those to leverage at what point, you know, to be determined. We're not guiding yet to 2025 operating income other than that ambition of that top quartile performance.
All right. Inflation broadly seems to be normalizing somewhat, but curious to hear what you're seeing across your major cost buckets and how that's impacting how you're thinking about pricing, going into 2025?
So we feel really good with our position on steel. We carry on our balance sheet a lot of raw material. One of our hallmarks is our customer service, that availability of product Mike had noted earlier. And to be able to do that, we will carry slit steel, raw material, or coil steel to the point where we've got multiple quarters worth in order to hit those service levels if demand were to spike for whatever reason. But as we think about steel on a go-forward basis, what we're comfortable with, where we're at today or where we're positioned from both an inventory level and a cost perspective, we don't necessarily see those key raw material markets changing significantly on a go-forward basis.
But if we do, that's when we're making our price changes. If we believe our raw material input costs are going to change and going to be sustained at that point going forward, we'll make those price changes. For example, in 2021 , steel went from a factor off of a one X factor to three to four times off of that. And we put through four price increases in 2021 that, on an annualized basis, would have been about $500 million of net pricing. We gave a little bit of that back in the first quarter of 2023 when we saw steel moderate a little bit, but that was to the tune of about $50 million.
On a net basis, about $450 million associated with those significant raw material increases from those early days. Again, we feel pretty comfortable with where we're at today from an inventory position going into 2025.
All right. And if you could walk us through your capital allocation priorities, and maybe related to that, how your philosophy on balancing organic and inorganic investments in the business.
Sure. So first priorities are looking for areas where we can continue to invest in the business. We've talked a lot about those already. From an M&A perspective, there's not many companies with the margin profile that we would want in a structural, engineered, load-rated, value-added product line. We're not in the commodity business, so it's going to be a very narrow set of opportunities for us. We do find that there are tuck-in opportunities to help us add to a product line or add to our product offering, whether it be technology or a physical product. So those are the M&A areas that we've looked at. From a capital perspective, we are adding to our Midwest, Northeast distribution facility in Columbus, Ohio.
We're also greenfielding a new production facility in Gallatin, Tennessee, to manufacture more fasteners domestically. So those are two pretty large capital projects that we have underway today. And then we have a dividend that we've modestly increased annually. We supplement the dividend with share repurchase to get to a goal or a target of about 35% of our free cash flow, we're returning back to shareholders. And then lastly, we've got we took down some debt to finance our Etanco acquisition in 2022. So we've paid down most of the revolver, and the term loan goes current in 2026. So we'll evaluate at that time whether we renew that or pay that off. Our cash flow needs will get us through meeting our internal investment requirements, as well as those external capital return or debt repayments.
Okay, great. That is all the time we have. Thank you so much, and they're here if you have any questions.
Thank you.
Thank you, Maggie.