To go. All right. Great. Good morning. Thanks for joining us. I'm Tim Wojs. I cover building products here at Baird, and we're happy to have Simpson Manufacturing join us again at our Global Industrial Conference. Simpson is the largest U.S. manufacturer of structural connectors and related products for residential and commercial applications. From the company, we have President and CEO Mike Olosky, and we have CFO and Treasurer Matt Dunn. We're going to start with a few prepared remarks from Mike, and then we will hop into Q&A. I will take four minutes.
Okay. We take five minutes just to level set a little bit on Simpson Manufacturing. We are a leading provider of structural solutions into the building and construction industry. Our products are typically less than 1% of the building material of the house, yet critical to the structural integrity of that. That pulls the demand through the channel. We work with our channel partners and talk to them about how we are creating demand via building codes and specifications. We talk with our channel partners about how we are trying to pull that demand through the channel with the programs that we have for builders. We provide great service to these lumber yards, pro dealers, contractors, distributors, so they do not have to carry all 10,000 of our SKUs. Typically, they place an order in the morning.
We ship it the afternoon, and they get it the next day. Over the top of that, we continue to layer digital solutions and services just to make us easier to do business with, to find the right product, to make sure you engineer it in, to design custom products on the web, to check order status. We believe those digital solutions help strengthen that business model. As a result of that, we've made some pretty good progress over the last several years.
Yeah. I think the market's been largely flat. This is 2020 to 2024, roughly a little less than 1.4 million housing starts. In that time period, we've added roughly $1 billion in top line and almost a couple hundred million dollars in operating income. Significant pricing behind the steel cost increases that happened in 2021 and 2022. Did make an acquisition in Europe at ETANCO, roughly $300 million to add, which essentially tripled the size of our European business. We did grow roughly $200 million in share in the market. That's really one of our key metrics is looking at how we perform on volume versus U.S. housing starts.
A lot of things we're proud of here, certainly the things we talked on the last slide, but I think just position well in the industry for when the housing market comes back a little bit, get a bit of tailwind, I think will give us even better outlook.
Great. Okay. Thanks, guys. Thanks for that. If you have any questions, you can raise your hand or email. I do not know which one this is. Session5@rdwbaird.com. Maybe just start, you mentioned just kind of the housing market and when things get better. Just as you look into next year, kind of what are you preliminarily hearing from builder customers about single-family demand next year, maybe multi-family demand? I guess how are you guys kind of planning for that type of environment into next year?
Yeah. We're hearing very much a mixed story, as you can imagine. We use Zonda for all of our forecasting tools because we can get a regional split, and our business is very regional. The Zonda housing starts number for next year is a little bit above flat, 0.4% is I think what they're saying. When we're talking with the bigger builders, their view, cautiously optimistic. From a bigger builder perspective, they believe more in consumer confidence needs to ramp up before they see a significant improvement in sales because they're already subsidizing the rates. A lot of the bigger builders, their customers are getting interest rates in the 4%. Where we think that'll help is in the smaller to medium-sized builders where maybe they don't have the balance sheet or the P&L to be able to subsidize the loans.
We're a little bit more optimistic on that area. If you look at multi-family, we believe that's going to ramp up a little bit because, again, lower interest rates will be able to help that up. Add it all up, after four years of a down market in the U.S., we're probably going to be slightly above flat-ish in that kind of range. That's what we're planning at this point.
From a market standpoint.
From a market standpoint, yep.
From a market standpoint. Okay. I guess when you look at one of the things that was kind of incremental coming out of the quarter was you've taken some actions internally, and one of your targets has been for the last few years a 20% + EBIT margin. Maybe if you could talk about the actions you're taking to kind of get there. Then, second, why is 20%+ EBIT margin the right margin for Simpson?
You talk about the actions off the margin.
Sure. Yeah. So we were above a 20% operating income for a couple of years. We were below it last year, and it's at the top end of our current guide for this year. Some of the actions that we took in late third quarter, early fourth quarter expected to deliver about $30 million or more in annualized savings in 2026. Really a combination of restructuring and reduction in force from a people standpoint, as well as a couple of businesses that just weren't delivering on the returns that we expected and the levels we've been investing. So smaller businesses, innovation that we had launched maybe a few years ago, they were still investing heavily, deciding to wind some of those businesses down and kind of reprioritize the resources.
Big picture from the people standpoint, in addition to winding down those businesses and the people that go with it, did some spans and layers of work, kind of looking at teams and making sure we were management levels and everything were appropriately categorized there, ultimately to give us the ability to deliver a 20% operating income in 2026, even if we get that flattish market that we talked about.
Yeah. To your point about why 20%, we've got a great brand, very good market position, I mean, a very, very good business model, great team. All that needs to translate into very good financials. When we look at the overall industry, 20% is above average in our space, and we think that that is a good level that enables us to invest back into the business, to drive that above market growth, and then also deliver a good return to our shareholders.
Okay. I guess if you would see at some point volume pick up, would you in that case, would you get a good healthy 30%-35% incremental to kind of drop down, or would you manage it to that low 20s type EBIT margin with kind of as you get back to more normalized volume activity?
Yeah. At this point, all about hitting the 20% to prove that we can do that. When we get back to a more normal market growth rate, 3%, 4%, 5%, and we continue to outperform the market, we certainly do believe we can expand our margins.
Okay. Okay. All right. I guess when you think about some of the structural advantages that you guys have, I guess how does that kind of create when you look at the moat that you have, you clearly have a moat in connectors. How translatable is that to other parts of the business, like fasteners or anchors or some of the truss and component software? I think that's a hurdle that people have kind of had historically.
Yeah. I think a good way to think about that is when you look three, four years ago, we went from a product-focused sales team to a market-focused sales team. Before, we had people that just sold the connectors, people that just sold fasteners and anchors. The fastener and anchor business, smaller businesses, smaller sales teams. We did not leverage the relationships and the know-how, and all the know-how we had on the total building systems. Now, just sticking with our residential business, we send somebody into the builders, and we send somebody into the lumber yards that are representing our complete product profile. Now they are leveraging the relationships they have, all the knowledge they have about that lumber yard and all the knowledge they have about those particular builders, and that helps us cross-sell.
When you look back at the business, our fastener and our anchor business have been the fastest growing parts of our business. We do make good margins on those. That helps us provide that complete solutions set to our customers. I think that's a good example of how we can leverage that franchise connector business and help us grow other adjacent product lines.
Even in the fastener line, we're focused on delivery systems as well. Just making that total installed cost advantageous for whoever the end consumer is. On our QuickDrive products, being able to stand up and drive deck screws or subfloor screws, things like that, we think that sort of makes us unique in that spot and kind of creates that value for the end user.
Have you been able to fold some of that into the end spec? I think you said like 25 or 26 of the top 30 builders are in your builder program. Have you been able to put anchors? Have you been able to put fasteners into that program as well?
The focus on the builder program is predominantly around our connector business.
Connector. Okay.
Okay? From a specification standpoint, another example from a fastener perspective is we just came out with what we believe is really the only fully comprehensive tool to help engineers specify the correct fastener for the right application. More and more we are seeing fasteners and anchors called out on the blueprints, and we will continue to do that going forward.
Okay. Okay. Can you just talk a little bit about the software aspect of your business? Because it feels like there's multiple things on the software side that you're trying to do. Can you just kind of elaborate on what you're providing to customers?
Yeah. If you look at all things digital, and let me start with an industry perspective, most of our customers are really focused on getting one ERP system so they have a view into the inventory. As an industry, I still believe there's a lot of opportunities for us to use digital tools to drive productivity and also to help address the affordability story. From a Simpson perspective, we think these digital tools can help us do some of those things, address the productivity opportunities, but also just make us easier to do business with. We have 50+ digital tools that help our customers do a wide range of things. It could be selecting the right product for the right application. When you have 10,000 SKUs going into a lot of different applications, that can be kind of a complex story.
We have tools that plug into CAD programs that help make builders more efficient or help engineers call out the particular product. We have tools that can help somebody design a deck or a pergola system, and then it creates the bill of materials and talks about all the specifications that that deck or pergola need to make. We think those digital tools just help us, again, make that business model stickier. We also believe on our portal that there are tools that can help somebody come in and create a custom connector. They can visualize it, helping improve the accuracy of that particular part for the end application. They can see things like order and delivery details. All of that makes it stickier.
On the component manufacturing end, that's a different story because the business model there, as you develop software that helps them design the component, manufacture the component, manage all the projects associated with that, you give that software for free. In exchange, you charge an inflated price for the plates. Here we've made significant progress in that area. That's been one of our fastest growing segments. We believe that's one of our best growth drivers. We've invested heavily in that area. A lot of that know-how, we think, can translate into other tools, as an example, takeoff tools that help a lumber yard better quote a builder. A builder will come into a lumber yard, present a 2D drawing, and they need to quote that particular project to the builder. There's a lot of manual work there.
We have tools that can automate that work, and we have AI tools that can really automate it, like do it in less than 10 minutes so that the builder can spend, I mean, the lumber yard can spend more time selling to the builder, more time out in the field, less time doing all these manual calculations to try to come up with an accurate bill of materials.
Maybe just from a perspective, just give us some perspective. How sophisticated are your customers with software? Because it seems like there's a varying degree of, I mean, you still talk about guys going to lots and drawing, like manual drawing specs, right?
Yeah. Yeah. Again, I would, kind of going back to what I said earlier, we have a productivity challenge in our industry. We have a lot of people that are still new to the digital tools. That's why we think there's an opportunity. There really aren't a lot of players that are bringing these tools into the residential space. If you step back and you look at construction tech, there are a lot of startups that are going after this space. We're looking at a couple of startups to help us partner in takeoff areas. We're looking at a startup to help us in the development of multi-trade wall panels. We think that's a good way to kind of get into these areas. A lot of investment in construction tech, and I think a lot of opportunity for the overall industry in general to move forward.
Okay. I guess on the truss business, that's something that has kind of been a part of Simpson for the last 10 or 12 years, but it's really changed over the last, call it, four or five. I guess what has happened and what has really opened that market up for somebody like you to kind of enter in a much more meaningful way?
Yeah. A couple of things have happened. One, when we went through all the supply chain challenges from a COVID perspective, I think a lot of customers realized that they need to make sure they're picking the right partner of choice going forward. That opened some doors because there were a lot of supply chain challenges there. Second, a lot of these customers are buying from us anyways. They're buying a lot of our connectors, fasteners, and anchors. They've had long-term relationships with us. They know and love the service from Simpson. They bought into that. In parallel, we've invested significantly into the business. We've upgraded the team. We've got people in there that now not only know the component manufacturing space, but they know how to develop world-class enterprise-wide software.
Putting those two pieces together is something that we needed to develop over the last couple of years. Add all that up, we are very excited about our roadmap for the component manufacturing software that continue, again, as one of our largest growth drivers the last couple of years, and we think that that's a big opportunity going forward for us.
You mentioned, I mean, there's been stages of software development. You mentioned on the call that CS Producer got kind of introduced, but is that the piece that you needed to get some of these larger truss operations to kind of convert to Simpson?
Yeah. I mean, there's really three components to kind of truss software. There's the fully encapsulated design tool to do roof trusses, walls, and floor panels. We have those kind of individually today, but one of the big pieces that we're working on is getting those all together in kind of one app, if you will. The other two are called Director and Producer. Director essentially is, think of it almost like a project management software. If you're running a truss yard, how do I decide what I make when and where? Producer is the actual software that runs the equipment that's manufacturing the trusses. Those three pieces, we launched CS Producer earlier this summer. Good reviews, good feedback at the BCMC. That's, I think, unlocked some opportunities for us to pick up some additional customers.
Director will soon follow, and then ultimately the design tool will be ready essentially around this time next year at BCMC is what we're targeting.
Okay. Okay. How are those customers set up from a, I guess, these are like ERP. This is like basically an ERP system for like a truss operation.
are many ERPs.
Yeah. I guess if you look at some of the bigger truss operations, do they have a sole-sourced operation today where they're using just kind of one software platform across all their truss operations, or is there a bunch of piecemeal type software? I'm just trying to think about how hard it is to convert some of these larger customers.
Most of the pro dealers have built up their network a combination of organic and inorganic, a lot of acquisitions. As you can imagine, that leads to kind of a fragmented footprint. Most of the time, truss software is on-prem. That means that when they start looking at upgrading, there is a whole set of activities around that. Now, whether they upgrade to our competitor or they upgrade to us, the fact that they are on-prem and eventually we believe the industry is going to move to the cloud, I think presents an opportunity for us.
Okay.
The idea for us is the technology we have today, the software and the services we have today, very good fit for medium and small truss manufacturers. Some larger ones also a good fit for. The fully integrated package that Matt's talking about, we believe opens up an opportunity for more. We believe that would probably start in a pilot phase with some of these larger pro dealers to prove it out. We are going to take a super measured approach because we want to make sure there's a fantastic experience, and we will ramp that up slowly over time.
Okay. Any questions from the audience? I guess one of the things that you've talked a little bit about over the last, call it, six months is just you have a lot of content in places like Florida, in places like California relative to a place here. I guess could you just talk a little bit about the variance in that content and kind of what that does to your growth rate if something would slow down in the South and not slow down in other places?
Yes. A house built in a seismic or hurricane area today probably has 10x the content of a house built in Chicago or Milwaukee where you are. That is the reason why now when a hurricane goes through Florida, you look at some of the older neighborhoods versus the newer neighborhoods. The newer neighborhoods, for the most part, withstand those hurricanes fairly well versus the older ones. 10x is a pretty significant deal for us. If you look at just the basic census data, the West and the South, housing starts-wise, although they drive a lot of starts, they are negative versus the Midwest and Northeast. If you look at California, last two years, California houses, they are going to build roughly 16,000 less over the last two years than they did in 2023. Look at Florida, that same time frame, roughly 30,000 houses.
Our best estimate, California home, $3,000-$4,000 of the content, Florida home, $2,000-$3,000 because there's some concrete construction there. Multiply that out by 45,000 houses over the course of two years. I mean, it's at least a couple hundred basis points headwind.
You've still been able to kind of grow.
Yeah. We've been growing through that.
Despite that. You've seen some of that headwind already. You wouldn't necessarily say it's on.
Yep.
It's as ahead of you.
It's not new, right?
Yeah. Okay.
Yeah. We have been able to push through that for the last two years. Exactly. Right. Just to be clear, the visibility is not great because the channel partners to all of our different end markets are, for the most part, the same, and the product lines are very similar as well. When we try to get visibility on an actual residential development, it is hard for us to see that because it is going through our lumber yard partners through multiple different channels.
Yeah. Okay. I mean, as you think about, I mean, the business was kind of started in California because of earthquakes. That's migrated to Florida. Do you see any sort of chunky opportunities for the building code to get more stringent, or is this a local-by-local type of thing that just takes a long time to develop?
I mean, building codes change fairly slowly over time, right? I think if you look at, even if you look at Florida, you do not necessarily see building code changes year to year, but if you look across the decade, you can see a significant difference, right? When we see a hurricane go through a neighborhood that was built in the last five years compared to one 40 years ago, it is a totally different outcome in terms of the structural damage and things like that. We continue to focus at the local level to kind of educate, like we have done for six or seven decades as a company, to help people build safer, stronger structures.
I think some other things that aren't necessarily seismic or hurricane, but some of the trends in big open floor plans and big garages and cantilevered outdoor living spaces, things like that that require a lot of structural connectors. I mean, obviously focus on that as well, which is a bit more universal geographically.
Okay. Okay. Retail has been a nice growth driver for you over the last five years. How much opportunity is still left on the retail side? Maybe just talk a little bit about what you're doing to invest in that business from a rep perspective and a product perspective.
Yeah. We're optimistic. We're in a very good position with the two major national retail customers. They're both less than a 10% story here. We think that there's opportunities to continue to expand our product lines. A specific example would be outdoor living solutions. Hardware that can do a deck or a pergola, decorative hardware. It's painted black, so it looks kind of meaty and chunky. We are looking now at some of the influencers that the national retail customers are using and talking about how can we better integrate into what they do. I've met with several of the influencers. I mean, a good example, a typical influencer crafts their project, puts up some video, and then gets 100 emails on, "How do I do that?" They don't have instructions. They don't have design tools. They don't have a bill of materials.
We think there's some opportunities for us to maybe put a little bit of a back office engine to that, again, creating more specific designs, creating more opportunities to spec or content in so that ultimately our end national retail customers get a bill of material that helps them drive their business as well.
Okay. Any questions?
Maybe just on pricing. I mean, it's been a pretty dynamic environment over the last few years with just a lot of material inflation and things. I think you put through kind of a, I would say, kind of an inflation-based kind of price increase this year outside of tariffs. That's probably the first time I've seen Simpson do it without a direct kind of correlation with steel. I know there's a lot of kind of cost inflation in the market and things, but is that a change in terms of how you guys are thinking about the pricing power or the pricing opportunity within the business, or is it just that was required because we just do not have material inflation, but we have other ports of inflation?
I mean, if you step back, we took roughly $500 million of pricing in 2021 and 2022 as steel prices were going almost 4x up in terms of price. They did come back down a little bit, and we gave back some pricing in late 2022. I mean, we had not touched any pricing in all of 2023, all of 2024. While steel had been largely flat, I mean, labor, freight, utilities, all those things had gone up pretty significantly. We pride ourselves on customer service and being able to deliver that customer service for our customers. We just really needed to take some actions on that pricing because we had not really touched the pricing button in three years. Tariffs added some additional complications, which kind of came out around that same time.
The price increases that we took earlier this year were a combination of inflationary on kind of U.S.-sourced goods and then inflationary plus tariff-related cost increases on fasteners and anchors that we import from Asia. It's about a $100 million cost headwind on an annualized basis from tariffs that we're seeing on the anchor bolts that we import from our factory in China, as well as the fasteners that we import, although we make some domestically in Gallatin. We've priced essentially $50 million on imported items, so we haven't covered the full tariff impact even on a dollar basis. We said on the call a couple of weeks ago, in total, our pricing is about $100 million. That leaves about $50 million related to that inflationary pricing that we expect to see on an annualized basis.
In terms of is it a change in strategy, I think it's difficult in this environment with affordability of homes being a challenge, the volume of starts being down. We're absolutely focused on delivering the service that we need, but recognizing that there are definitely challenges there. It's hard to say is that going to be a change or a more regular, but certainly we're focused on maintaining the gross margins that we have and the service levels that our customers expect.
Okay. I guess just your channel is kind of your channel's consolidating. You have QXO. I mean, you've seen Builders FirstSource get bigger. You've seen QXO enter the market. HD's buying a bunch of this stuff. Your builders are getting bigger. I guess how does Simpson fare kind of in that environment? What are kind of the positives and negatives of that consolidation for you guys?
When bigger builders buy smaller builders, it just reinforces the fact that they're going to use Simpson connectors. When bigger pro dealers buy smaller lumber yards, if we don't have them already, generally it reinforces them converting over to the Simpson product line. There are some positives from that perspective. The negatives, although larger customers are on larger rebate programs, our pricing approach is to have a standard list price to be consistent from a pricing perspective in the market, and then we differentiate on the back end with volume discounts. When those bigger guys are getting bigger, that does result in larger volume discounts. Yes.
Okay. Okay. I guess your CapEx is set to kind of step down here, and you've added a new facility in Gallatin. You've expanded Columbus. I guess maybe just talk a little bit about where your kind of fixed cost capacity is right now in terms of any sort of incremental CapEx you need to make there. I guess if you do start to see more cash flow, is there any kind of priority that you have in terms of how to allocate that?
Yeah. We've been in a pretty heavy CapEx cycle for the last couple of years with those expansions that you mentioned. We're not giving formal guidance yet, but expect that to come down to kind of more normal CapEx range, which is probably $75 million-$80 million if you kind of look back at where we've been and what these expansions have cost the last couple of years. From a footprint standpoint, I think in terms of capacity, we're in a good spot. There's always optimizations to make things in places that are more affordable or closer to the customer, things like that. We're always looking at those opportunities and continue to invest the CapEx within that range that we talked about on things on like productivity.
In terms of capital allocation, we just upped our share buyback amounts for end of 2025, as well as stepped up number for 2026. That continues to be a key focus for us to return cash to shareholders. I think from a CapEx standpoint, it is going to come down. I think we have a little bit of debt, roughly $350 million from the Ataco acquisition. In a pretty good spot from an interest rate standpoint there, but definitely want to pay that down over time. M&A is still opportunistic for us, although there is not a lot of sizable targets out there that would be of interest for us. Very focused on the core. I think that just leaves a lot of free cash flow to continue to fuel the organic business, but also to return to shareholders.
Great. We're out of time, so please join me in thanking the Simpson team for being here.