Simpson Manufacturing Co., Inc. (NYSE:SSD) Q1 2024 Earnings Call Transcript April 22, 2024
Simpson Manufacturing Co., Inc. misses on earnings expectations. Reported EPS is $1.77 EPS, expectations were $1.84. Simpson Manufacturing Co., Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings. Welcome to the Simpson Manufacturing Company First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Kim Orlando of ADDO Investor Relations. You may begin.
Kim Orlando: Good afternoon, ladies and gentlemen, and welcome to Simpson Manufacturing Company’s first quarter 2024 earnings conference call. Any statements made on this call that are not statements of historical fact are forward-looking statements. Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties. Actual future results may vary materially from those expressed or implied by the forward-looking statements. We encourage you to read the risks described in the company’s public filings and reports, which are available on the SEC’s or the company’s corporate website. Except to the extent required by applicable securities laws, we undertake no obligation to update or publicly revise any of the forward-looking statements that we make here today, whether as a result of new information, future events or otherwise.
On this call, we will also refer to non-GAAP measures such as adjusted EBITDA, which is reconciled to the most comparable GAAP measure of net income in the company’s earnings press release. Please note that the earnings press release was issued today at approximately 4:15 pm Eastern Time. The earnings press release is available on the Investor Relations page of the company’s website at ir.simpsonmfg.com. Today’s call is being webcast, and a replay will also be available on the Investor Relations page of the company’s website. Now, I would like to turn the conference over to Mike Olosky, Simpson’s President and Chief Executive Officer.
Mike Olosky: Thanks, Kim. Good afternoon, everyone, and thank you for joining today’s call. With me today is Brian Magstadt, our Chief Financial Officer. Our remarks today will provide an overview of our first quarter performance and updates on our end markets and capital allocation priorities. Brian will then talk you through our first quarter financials and fiscal 2024 outlook in greater detail. I am pleased with our first quarter performance in what continues to be a challenging market for new housing starts in both the U.S. and Europe. Our team continues executing our strategy and maintaining our relentless customer focus, which led to various new customer wins and awards during the quarter. Our first quarter net sales totaled $530.6 million, a modest decline year-over-year.
Looking at our regions in greater detail. North American volumes for quarter one were up approximately 8% year-over-year in a relatively flat U.S. housing market. Our increased sales volumes were partly offset by the timing of volume discounts applied with price decreases we implemented in the prior-year period, which led to North American net sales of $406.7 million versus $406.3 million in the prior year. The significant variability in starts we saw last year created a wider disparity in volume discounts than we’ve seen historically. To further break down our North American volume performance, we achieved double-digit growth year-over-year in both our component manufacturer and national retail markets as we have carryover benefit from previous new business wins.
We also improved our volumes in the mid-single digit range in both the residential and commercial markets with a modest improvement in the OEM market. Turning to Europe. Our first quarter net sales of $119.9 million were as anticipated, declining 3.4% or 4.3% on a local currency basis year-over-year. While the market in Europe remains pressured due to macroeconomic challenges and lower overall construction activity, our teams continued our solution-selling approach with our broad product line, resulting in new applications and customer wins. While reduced from prior-year quarter, our European gross margins remained elevated compared to historical levels, given our ongoing focus on pricing discipline and cost management. Our strong commitment to customer service in Europe, coupled with our strategy to grow our share in the midst of an ongoing housing shortage, provides us with optimism that Simpson is well positioned to benefit from broader secular trends, including the growing use of wood construction and increasingly stringent environmental regulations that drive new applications.
On a consolidated basis, our first quarter gross margin declined to 46.1% as anticipated, primarily reflecting higher fixed costs, which were partly offset by productivity improvements. The year-over-year decline in our operating margin to 18.1% primarily reflected additional costs incurred to pursue our growth opportunities in the areas of new products and market penetration. Beginning this quarter, we are now also disclosing consolidated adjusted EBITDA, which totaled $117.3 million for the quarter, a decline of 14% year-over-year. I’ll now turn to an update on new business wins within our five end use markets, which further underscore the investments we are making to drive sustainable long-term growth above the market. Beginning with the residential market, we benefited from share gains during the first quarter through the conversion of lumber dealers in both the U.S. and Canada by recapturing business from competing solutions due to our relentless customer service, specification and builder programs.
Further, we conducted various job site training exercises and demonstrations for a division of a large national homebuilder honor program, which led to the specification of structural fasteners into their regional plans. In addition, we formed a new partnership agreement with a large independent co-op serving more than 12,000 retail hardware stores, home centers and pro lumber dealers, which led to significant conversions for our connectors, fasteners, and anchor products. In the commercial market, sales of our cold-formed steel products were a bright spot in the quarter with double-digit year-over-year sales growth. We continue to educate and partner with the commercial building industry to provide innovative solutions. In the OEM market, we gained new customers during the quarter, including manufacturers of modular buildings, metal buildings, sheds, off-site construction, and material handling.
The OEM market is one of the areas we’re providing additional focus on to accelerate growth. Within the national retail space, we added structural fastener carts near our connectors with one of our largest home center customers, and are continuing to test other off-shelf opportunities with additional home center locations. This has led to increased sales growth for our customers. Our merchandising and marketing efforts also continue to drive growth in our Outdoor Accents product line. Our national retail sales teams remain focused on merchandising and education efforts with our customers, sales staffs, as we head into the build season. And finally, in the component manufacturer market, we are committed to ongoing investment and growing our offering in this space with new product development, software improvements, equipment solutions, and improved manufacturing processes to increase capacity in order to better serve our customers.
As an example, we recently released a new truss plate product for long-span agriculture and commercial applications. These customer wins are in direct alignment with our core company ambitions that we continue to pursue, including strengthening our values-based culture, being the business partner of choice, striving to be an innovative leader in the markets we operate, continuing above market growth relative to the U.S. housing starts, returning to the top quartile of our proxy peers for operating income margin, and returning to the top quartile of our proxy peers for return on invested capital. These ambitions stem from our dedication to superior levels of customer service as well as our high product availability and delivery standards to provide innovative and complete solutions for the markets we serve.
Being the partner of choice for our customers was recognized during the first quarter following the receipt of multiple awards from several of our major customers. Next, I’ll turn to a discussion on our capital allocation priorities. We maintain a balanced approach through our focus on both growth opportunities and stockholder returns. In Q1, we generated cash from operations of $8.6 million, which helped finance $28.5 million in capital expenditures and $11.4 million of quarterly cash dividends. We also paid down $5.6 million against our term loan, which we incurred to finance the acquisition of ETANCO. As previously discussed, we continue evaluating a number of tuck-in M&A opportunities to help us accelerate our growth initiatives. Concurrent with this strategy, we are making significant investments in people, engineering, equipment, and other capabilities to drive organic growth in the business.
We are also expanding our facilities for increased capacity and improving overall efficiencies. We believe these investments are important to provide high levels of service and customer support for an expected housing market recovery in 2025, leading to mid-single-digit growth in U.S. housing starts. For 2024, we expect low-single-digit growth in U.S. housing starts, with European housing starts below prior year. In summary, I’m pleased with our execution to date in 2024 as we lay the groundwork necessary to ensure our continued outperformance versus the market longer term. We believe the strategic investments we are making in the business will help us accelerate our historical average performance for compounded annual growth in North American sales volume above the market of approximately 250 basis points over the mid to long term while also returning to the top quartile profitability.
With that, I’d like to turn the call over to Brian, who will discuss the first quarter financial results in greater detail.
Brian Magstadt: Thanks, Mike, and good afternoon, everyone. Thank you for joining us to discuss our first quarter financial results today. Before I begin, I’d like to mention that unless otherwise stated, all financial measures discussed in my prepared remarks refer to the first quarter of 2024, and all comparisons will be year-over-year comparisons versus the first quarter of 2023. Now, beginning with our first quarter results. Our consolidated net sales decreased 0.7% to $530.6 million. Within the North America segment, net sales increased 0.1% to $406.7 million, primarily due to the higher sales volumes of 8%, as Mike mentioned, which were partially offset by the timing of volume discount applied, as well as price decreases implemented during 2023.
As you may recall, estimated allowances for volume discounts are deducted from revenues and are estimated for expected volumes. As such, volume discounts impacted our first quarter net sales more than anticipated. In North America, wood product volume was up 8.3% and concrete product volume was up 5.7%. In Europe, net sales decreased 3.4% to $119.9 million, primarily due to lower sales volumes, partially offset by the positive effect of $2.2 million in foreign currency translation. Consolidated gross profit decreased 3.3% to $244.6 million, resulting in a gross margin of 46.1% compared to 47.3%. On a segment basis, our gross margin in North America decreased to 49.3% compared to 50.6%, primarily due to higher warehouse and freight costs, partially offset by lower material costs, all as a percentage of net sales.
Our gross margin in Europe decreased to 36.5% from 37.5%, also primarily due to higher warehouse and freight costs as a percentage of net sales. From a product perspective, our first quarter gross margin on wood products was 46% compared to 47%, and was 47% for concrete products in both periods. Now turning to our first quarter costs and operating expenses. Total operating expenses were $146.6 million, an increase of $13.5 million or approximately 10.1%, primarily due to increased personnel costs, including added headcount to drive our growth, higher professional fees, and software licenses. In addition, we increased our IT spend to improve our internal processes and enhance our systems. As Mike touched on, many of these costs are growth-oriented investments to engineer and deliver new products, increase services to fuel take-off and designs, and continue the development of digital solutions which enable our customers and specifiers to select Simpson products.
As a percentage of net sales, total operating expenses were 27.6% compared to 24.9%. To further detail our SG&A investments, our first quarter research and development and engineering expenses increased 5.6% to $21.9 million, primarily due to the higher personnel costs noted above. Selling expenses increased 12% to $54.5 million, primarily due also to the higher personnel costs, as well as increases in travel costs, in advertising, promotion, and trade shows. On a segment basis, selling expenses in North America were up 17.3%, and in Europe, they were down 2.4%. General and administrative expenses increased 10.2% to $70.2 million, primarily due to higher software licensing and IT spend as well as personnel costs, both as noted above. As a result, our consolidated income from operations totaled $96.1 million, a decline of 18.8% from $118.4 million.
Our consolidated operating income margin was 18.1%, down from 22.1%. In North America, income from operations decreased 13.5% to $98.9 million, primarily due to increased personnel costs, travel related, advertising and trade show costs, software licenses and IT related spend, coupled with lower gross profit. In Europe income from operations was $8.3 million compared to $13.5 million, due to lower gross profit and higher personnel costs. Our effective tax rate was 23.4%, approximately 170 basis points lower than the prior-year period. Accordingly, net income totaled $75.4 million, or $1.77 per fully diluted share, compared to $88 million, or $2.05 per fully diluted share. We continue to make significant levels of growth investment in the business, which has and is expected to result in higher-than-expected depreciation.
As Mike noted, we are now disclosing adjusted EBITDA, a non-GAAP financial measure, to provide additional insight into our operating performance in light of the stack. This will also provide a better approximation of our cash flows compared to operating income. For the first quarter, adjusted EBITDA of $117.3 million declined 14%. Adjusted EBITDA is reconciled to the most comparable GAAP measure of net income in our earnings press release. Now, turning to our balance sheet and cash flow. Our balance sheet remained healthy with cash and cash equivalents totaling $369.1 million at March 31, 2024, down $60.7 million from our balance at December 31, 2023, due to changes in working capital, and up $116.6 million from our balance at March 31, 2023.
Our debt balance was approximately $476 million net of capitalized finance costs, and our net debt position was $106.8 million. We have $375 million remaining available for borrowing on our primary line of credit. Our inventory position as of March 31, 2024, was $555.7 million, which was down $4.2 million compared to our balance as of December 31, 2023, a slightly higher pounds. Effective inventory management remains a core element of our strategy and competitive advantage to ensure on-time delivery and exceptional service to our customers. During the first quarter, we generated cash flow from operations of approximately $8.6 million compared to $3 million. We invested $39.4 million for capital expenditures, including our facility investments, and paid $11.4 million in dividends to our stockholders.
While we did not repurchase shares of our common stock, we expect to continue being opportunistic. We also remain committed to our quarterly dividend. Next, turning to our 2024 financial outlook. Based on business trends and conditions as of today, April 22, our guidance for the full year ending December 31, 2024 is as follows. We expect our operating margin to be in the range of 20% to 21.5%. Key assumptions continue to include expected moderate growth above the housing market, a slightly lower overall gross margin based on the addition of new warehouses and modest increase in labor and factory and tooling as a percentage of net sales. Operating expenses at a level we believe are necessary to position the company to make continued meaningful share gains in our markets and growth initiatives and $4 million to $5 million in expected total cost to pursue synergies in Europe.
Next, interest expense on the outstanding revolving credit facility and term loans, which had borrowings of $75 million and $410.6 million as of December 31, 2023, respectively, is expected to be approximately $8 million, including the benefit from interest rate and cross-currency swaps, mitigating substantially all of the volatility from changes in interest rates. Interest on our cash and money markets is expected to offset this expense. Our effective tax rate is now estimated to be in the range of 24.5% to 25.5%, including both federal and state income tax rates based on current laws. And finally, we are updating our capital expenditures outlook to be approximately $185 million, which includes $105 million for the expansion of the Columbus, Ohio facility and the construction of the new fastener facility in Gallatin, Tennessee.
This amount is down slightly from our prior outlook due to the timing of the 2024 cash outlay on the real estate projects. In summary, the first quarter marked a solid start to the year as we furthered our growth strategy and continued traction against our core ambitions. While the market remains challenged, we were pleased with our continued strong performance enabled by our business model. Our financial position remains strong with a solid balance sheet that supports ongoing investments in our growth initiatives. These investments enable us to grow above the market, especially in the fast-growing market that we are anticipating in the coming years. I’d like to thank the entire Simpson team for a job well done. With that, I will now turn the call over to the operator to begin the Q&A session.
Operator: Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Daniel Moore with CJS Securities. Please proceed with your question.
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