Simpson Manufacturing Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 23, 2023

There are 7 speakers on the call.

Operator

Greetings. Welcome to the Simpson Manufacturing Company Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded.

Operator

I will now turn the conference over to your host, Kim Orland with ADDO Investor Relations. You may begin.

Speaker 1

Good afternoon, ladies and gentlemen, and welcome to Simpson Manufacturing Company's Q3 2023 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 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 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.

Speaker 1

Please note that the company's earnings press release was issued today at approximately 4:15 p. M. Eastern Time. The earnings press release is available on the Investor Relations page of the company's website at ir. Simpsonmfg.com.

Speaker 1

Today's call is being webcast and a replay will also be available on the Investor Relations page of Now, I would like to turn the conference over to Mike Oloski, Simpson's President and Chief Executive Officer.

Speaker 2

Thanks, Kim. Good afternoon, everyone, and thank you for joining today's call. With me today is Brian Magstat, our Chief Financial Officer. My remarks today will provide an overview of our financial performance, key growth initiatives and capital allocation priorities. Brian will then walk you through our Q3 financials and fiscal 2023 outlook in greater detail.

Speaker 2

We delivered another quarter of solid performance In a challenging operating environment with 3rd quarter net sales of $580,100,000 increasing 4.8% over Q3 2022. North American volumes increased approximately 7%, partially offset by price decreases earlier in 2023, leading to a growth in net sales of 4.4% year over year to $456,800,000 To further break down our North American performance, we achieved double digit volume improvements year over year in our commercial, national retail and building technology markets. We have continued to execute on our strategies, enabling us to win new applications and customers. In our residential market, our volumes improved in the low While 2023 U. S.

Speaker 2

Housing starts will likely finish below 2022 levels, we continue to believe in sustainable strength of the housing market in the mid to long term given the shortage of new housing. In fact, we estimate a shortage of approximately 2,000,000 homes in the U. S. After more than a decade of under building. Further, we are confident our unique business model will enable us to continue to outperform the market given, first, Our increasingly diverse portfolio of products and software and a commitment to developing complete solutions for the markets we serve.

Speaker 2

2nd, Our long standing reputation, relationships and engagement with the engineers, building officials and contractors to design safer, stronger structures and improve construction practices. 3rd, a dedication to innovation, extensive product engineering and rigorous research and testing in our 9 state of the art labs. 4th, best in class field support, technical expertise, digital tools and training to make it easy to select, specify, install and purchase our products. 5th, industry leading product availability and delivery standards on our vast product offerings across multiple distribution channels With typical delivery within 24 to 48 hours and 6th, a deep commitment to trades education and partnering with organizations that provide training to attract more people to the construction industry and alleviate labor shortages. Turning to Europe.

Speaker 2

While our Q3 sales were relatively flat year over year on a local currency basis, our Europe gross margin has continued to improve versus historical levels. As reported, Europe sales totaled $119,000,000 up 6.4% year over year, primarily due to the benefit of $7,900,000 and foreign currency translation. Atonco continues to perform well in a challenging market with relatively flat sales, while our integration efforts continue to progress. Our business associated with the residential housing market was down due to lower housing starts. We continue to believe in the longer term potential of the European market given ongoing housing shortage, increasing use of wood construction and new regulations that drive new applications and specifications.

Speaker 2

Our consolidated gross margin for the Q3 improved to 48.8%, primarily reflecting lower raw material costs, offset by higher fixed costs in our factory tooling and warehouses. Brian will further elaborate on the key drivers of our margin performance shortly. I'll now turn to an update on our key growth initiatives within our 5 end use markets in line with one of our key company ambitions to be the partner of choice. Beginning with the residential market, We continue to improve our market share by completing the conversion of a large 13 location pro dealer chain in the Northeast. In addition, we are pressing forward on a shorter path to market by completing the opening of 3 regional warehouses in the Northwest.

Speaker 2

In the commercial market, our announced alliance with Structural Technologies continues to drive record revenue of our concrete strengthening solutions. In the OEM market, our dedicated OEM team remains focused on new opportunities, including wood to wood connections for shed manufacturers. It's an opportunity for us to sell our complete product line and offer a broad range of solutions including truss plates, fasteners, connectors And our new EZ Frame Saws, we've had a couple of nice wins validating that approach. Also in the OEM space, we continue to focus On mass timber construction, we are launching new solutions specific to mass timber, including fasteners, connectors and our new TimberDry fastening system, which won the 2023 Pro Tool Innovation Award. Within the national retail space, we are very pleased to have been named the We will now begin the call to questions.

Speaker 2

Thank you, delivering on commitments and investing in Lowe's journey and contributing to their success. And finally, in building technology, We continue to make good progress with new and existing truss component manufacturers, including the conversion of a top 10 component manufacturer based in the Midwest with 15 locations. We are pleased with the traction we've made on our growth initiatives to date as we seek to extend our mission to help people design and build safer, stronger structures into new applications. Further, we remain focused on implementing our company ambitions, which include strengthening our values based culture, being the partner of choice, Being an innovation leader in the markets we operate, continuing above market growth relative to U. S.

Speaker 2

Housing starts, Maintaining our operating income margin within the top quartile of our proxy peers and integrating Atonco and returning our ROIC to be within the top quartile Turning now to capital allocation. Our priorities remain centered on growth opportunities, both organically and through tuck in M and A and returning value to our shareholders via quarterly dividends and opportunistic share repurchases and paying down the debt we incurred to finance the acquisition of Atanko. Our organic growth initiatives have been Aimed at further strengthening our business model and expanding our operations and manufacturing capacity to achieve greater supply chain efficiencies and uphold our best in class As noted previously, we are continuing to evaluate potential M and A opportunities to accelerate traction of our key growth initiatives, the majority of which are smaller opportunities to expand our product line or solution set or help us achieve better manufacturing and supply chain efficiencies. Before I conclude, I'd like to briefly comment on the cybersecurity incident that occurred a couple of weeks ago. While our operations were mostly down for approximately 3 days throughout most of the company, our swift actions and commitment to our customers led us to make up for the downtime and allowed us to resume shipments to clear our backlog within just 1 week.

Speaker 2

I'd like to thank our dedicated Simpson team for all of the hard work that made this possible as well as our valued customers for their support during this time. In summary, I am very pleased with our 3rd quarter performance in a challenging market. Based on the current interest rate environment and the resultant impact on the housing market, we anticipate that our Q4 2023 results We'll start reflecting some downward pressure due to these factors. In addition to typical seasonality relative to the Q3 of 2023, So we expect the Q4 to be up compared to the prior year quarter. Looking ahead, we continue to believe that we have ample opportunities to pursue our growth initiatives and enhance With that, I'd like to turn the call over to Brian, who will discuss our Q3 financial results in greater detail.

Speaker 3

Thanks, Mike, and good afternoon, everyone. Thank you for joining us to discuss our Q3 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 Q3 of 2023, and all comparisons will be year over year comparisons versus the Q3 of 2022. Now beginning with our Q3 results. As Mike highlighted, our consolidated net sales increased 4.8 percent to $580,100,000 Within the North America segment, net sales increased 4.4 percent to $456,800,000 primarily Due to higher sales volumes and in Europe, net sales increased 6.4% to $119,000,000 primarily due to the positive effect of $7,900,000 in foreign currency translation, which was partly offset by lower sales volumes.

Speaker 3

Wood Construction Products represented 85.4% of our total 3rd quarter sales compared to 86.4% And Concrete Construction Products were 14.5 percent of total sales, up from 13.5%. And in North America, wood product volume was up 7.6% and concrete product volume was up 3.3%. Consolidated gross profit increased 15.7 percent to $282,900,000 resulting in a gross margin of 48.8% compared to 44.2% last year. On a segment basis, our gross margin in North America increased to 51.8% compared to 47.5%, primarily due to lower raw material costs, which were partially offset by higher warehouse and freight costs as a percentage of net sales. Our gross margin in Europe increased to 37.9% from 31.5%, also primarily due to lower raw material costs as a percentage of net sales.

Speaker 3

As you may also recall, Our raw material costs in the prior year period included a $2,900,000 inventory fair value adjustment for the acquisition of Atanko, representing 2.6 percentage points of Europe gross margin. From a product perspective, our 3rd quarter gross margin on wood products was 49.1% compared to 44.1% in the prior year quarter and was 47.9 percent for concrete products compared to 43.8% in the prior year quarter. Now turning to our Q3 costs and operating expenses. Operating expenses were $141,900,000 An increase of $22,000,000 or approximately 18.3 percent, driven primarily by increased personnel costs to support our growth as well as higher variable compensation. As a percentage of net sales, total operating expenses were 20 4.5% compared to 21.7%.

Speaker 3

Our 3rd quarter research and development and engineering expenses increased 44.9 percent to $24,800,000 primarily due to our strategic growth initiatives, including higher personnel costs Software development initiatives to further our building technology offerings. Selling expenses increased 23.2 percent to $52,400,000 primarily due to increased commissions and personnel in North America. On a segment basis, selling expenses in North America were up 26% and in Europe, they were up 14%. General and administrative expenses increased 7.4 percent to $64,800,000 primarily due to professional fees, personnel costs and software licensing. As a result, our consolidated income from operations totaled $140,200,000 a significant increase of 14.2% from $122,800,000 In North America, income from operations increased 6.5 percent to $135,600,000 primarily due to higher gross profit, partly offset by increased personnel and variable compensation.

Speaker 3

In Europe, income from operations was $15,500,000 compared to $6,100,000 due to higher gross profit, partly due to the prior year's 2.9 $1,000,000 inventory fair value adjustment as well as lower year over year acquisition and integration costs, which were partially offset by increases in personnel, costs and variable compensation. On a consolidated basis, Our operating income margin was 24.2%, an increase of 200 basis points from 22.2%. Our effective tax rate increased slightly to 25.7 percent from 25.3%. Accordingly, net income totaled $104,200,000 or $2.43 per fully diluted share, which is inclusive of $1,300,000 of net interest income. This compares to $88,200,000 or $2.06 per fully diluted share, which included 3,000,000 dollars of net interest expense.

Speaker 3

Now turning to our balance sheet and cash flow. Our balance sheet remained healthy With cash and cash equivalents totaling $571,000,000 as of September 30, 2023, up $163,000,000 from our balance as of June 30, 2023. Our debt balance was approximately $561,600,000 net of capitalized finance costs And our net cash position ex debt was $9,400,000 We have $300,000,000 remaining Available for borrowing on our primary line of credit. Our inventory position as of September 30, 2023 was $504,400,000 which was down $17,700,000 compared to our balance as of June 30, 2023. Effective management of the on hand volume and cost of our inventory remains a key element of our business model as we strive to ensure on time delivery standards and superior customer service levels that set Simpson apart.

Speaker 3

During the Q3, we generated cash flow from operations of $204,600,000 compared to $124,900,000 We invested $22,500,000 for capital expenditures and paid $11,500,000 And dividends to our stockholders. While we did not repurchase any shares of our common stock during the quarter, we continue to evaluate opportunistic share repurchases as part of our capital allocation strategy. Next, turning to our 2023 Financial Outlook. Based on business trends and conditions as of today, October 23, We are updating certain elements of our guidance for the full year ending December 31, 2023 as follows. We now expect our operating margin to be in the range of 22% to 22.5%.

Speaker 3

Key assumptions include higher U. S. Housing starts relative to our assumptions earlier in the year. Although we expect our Q4 will be slightly stronger than the prior year period, we are starting to see additional headwinds for the first half of twenty twenty four. Higher overall gross margin based on improved volumes, as noted above, and material cost assumptions Increased operating expenses, we believe, are necessary to position the company to make meaningful share gains in our markets and growth initiatives $6,000,000 to $7,000,000 in expected total integration costs associated with Atomco.

Speaker 3

We are continuing To make progress on our integration efforts for Atomco in order to realize previously identified offensive and defensive synergies in the years Ahead, subject to macroeconomic changes, which will delay the realization of some of the offensive synergies. Next, our 2023 effective tax rate is expected to be in the range of 25% to 26%, including both federal and state income tax rates and assuming no tax law changes are enacted. Lastly, we now expect capital expenditures to be Approximately $100,000,000 subject to possible weather delaying the construction of our Columbus expansion and supply chain related issues. In summary, we were pleased with our financial and operational performance during the Q3 in a challenging operating environment. We remain focused on providing excellent value, innovation and service to our customers by expanding our broad solution set throughout our 5 key end use markets.

Speaker 3

We are continuing to diligently manage our expenses as the macro environment evolves and our strong balance sheet and cash flow enable us to make investments to support our organic growth initiatives. Thanks again to our team at Simpson for the strong performance and to all of our stakeholders for your support of the company. With that, I would like to turn the call over to the operator to begin the Q and A session.

Operator

At this time, we will be conducting a question and answer session. Our first question comes from the line of Daniel Moore with CJS Securities. Proceed with your question.

Speaker 4

Thank you. Good afternoon, Mike. Good afternoon, Brian. Thanks for taking the questions. Start with your core markets, North American Housing Operations, you said Q4 would start to reflect some of the downward pressure in the housing market.

Speaker 4

But you also said that it will be up versus prior year. I assume you're referring to consolidated revenue when you say it will be up versus prior year. And Maybe just talk a little bit more about your expectations for market growth versus share gains, and whether you see some of that pressure perhaps

Speaker 2

Good question, Dan. So let me start With where it is today and how we think the market is going to finish the year. So housing starts roughly down 12% year to date. We think it will finish the year down 12%. And then when you look at our business, July August for us was pretty strong versus prior year.

Speaker 2

September started to slow down a little bit and October is off a little soft. We do think on a consolidated level,

Speaker 3

The first half is expected

Speaker 2

to be a little soft. Second half is expected to pick up depending upon interest rates, the economy and You know a bunch of other stuff, Dan. That's kind of how we see it today.

Speaker 4

And when you say a little soft, is there any way you can sort of compare that to the down 12 we've experienced so far just in terms of your expectations.

Speaker 3

Yes. Right now, Dan, it's Brian. Just down slightly from October of last year October this year, October And as we're thinking about the balance of the quarter, to Mike's point, having a Pretty good quarter compared to Q4 last year, both on the revenue and the operating margin, which leads us to that Updated guidance on operating margin that we provided.

Speaker 4

Okay, helpful. Maybe looking at the markets you've targeted for increased penetration and are seeing some pretty good success, I think you called out commercial, national retail and building tech. Can you Just maybe speak a little deeper into each of those 3, describe in each market where you're seeing success, what's enabling you to take And your confidence those tailwinds will continue as we look into next year?

Speaker 2

Yes. So Dan, we're Pleased to say, actually, across all 5 market segments in quarter 3, revenue growth was above prior year Q3. So We're seeing good performance in all of them again in a challenging environment. In the commercial space, one of the things that we touched on was our partnership with Structural Technologies. So that's using our concrete repair systems to work with structural technologies to go after infrastructure repair opportunities.

Speaker 2

We're seeing good growth there. On the national retail side, we continue to invest in people to send into our national retail customers To help train their sales associates to work on the sets to clean them up and make sure they're easy to shop, to work with our customers on merchandising and cap Opportunities and we're seeing that investment continue to pay off with those customers by seeing good point of sales data from our national retail customers.

Speaker 4

Got it. Last for me and I'll jump out queue for now at least. Just guidance implies By my math, gross margin is somewhere in the 47% range, give or take, for the year. Just talk about the biggest puts and takes in your mind that would cause that to move Higher or lower as we look to 2024. Certainly, we're going to finish the year above where well above where we started from an But when you look at steel costs, the overall macro, etcetera, mix, Your thoughts, if any, as we kind of look out beyond maybe 1 more quarter?

Speaker 4

Thanks.

Speaker 3

Sure. So as we're thinking about The full year and the various volume assumptions that we're making, the traditional Q4 seasonality, which means we're not absorbing as much overhead as we would during, say, 2nd and third quarter. We're continuing to look at steel market where We're expecting costs to be at current levels or higher in the future Versus some of those headwinds that Mike had mentioned. So the volume assumptions we're making, The product mix, all are factoring into a 4th quarter that we're expecting To be a little bit better from an operating margin perspective than Q4 of 2022. And with a continued focus Looking at those opportunities where we're making investments into building technology solutions or Mike had mentioned A number of other initiatives to support our customers in order to continue to further our those Additional markets we're going after to grow and capture additional market share.

Speaker 4

Very good. I'll jump back with any follow ups or offline. Thanks again, Brian.

Speaker 2

Thanks, Dan. Thanks, Dan.

Operator

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

Speaker 5

Hey, guys. Good afternoon, Ashok. Hi, Tim. Maybe just to start off on SG and A. Trying to think about as you kind of go forward over the next year, maybe 2 years, just How are you kind of thinking about kind of SG and A as a percentage of sales and kind of incremental investments?

Speaker 5

And I guess, how would you kind of think about managing that if you were in kind of a tougher environment? I think this year, we're maybe kind of flattish on sales and SG and A is up nearly 20%. So could you maybe help us with How you would think about managing that SG and A expense on kind of a go forward basis relative to sales?

Speaker 3

Sure. So one of the things that we want to reinforce is that we're hiring to support those growth initiatives That we believe there's a lot of opportunity in front of Simpson, but we are mindful of those expenses In order to go capture those, so as we think about top quartile within our proxy pairs from an operating income Margin perspective, we're looking at balancing how we fund those investments For the growth initiatives versus again, we want to continue to position ourselves in that top quartile. We do note that in Q3, R and D and engineering expenses increased a pretty significant amount. Some of that included investment in some building technology solutions, some No additional costs that I wouldn't necessarily expect to repeat. But as we think about How we are winning in the marketplace and building technology and retail, etcetera, it does Take some of that above average investment.

Speaker 3

We also, as As Mike noted, we continue to add to our national retail team and really want to make sure we're supporting those customers with the various tools That enables them to better serve their customer in addition to the merchandising efforts that Mike mentioned. So as we think about Those funding of those things, we're really looking to balance Where we can where we see ourselves in that mid- to long term versus where we are today from a top quartile performance perspective and really want to be mindful of what we're investing in that's going to drive that long term growth.

Speaker 6

Okay. That's helpful. I mean, would

Speaker 5

you say you're still kind of in the phase of maybe over

Speaker 3

investing or investing ahead of sales? Or do

Speaker 5

you think you're kind of at a point where Ahead of sales or do you think you're kind of at a point where you can maybe invest kind of in conjunction with the sales growth rate?

Speaker 2

Yes. We are over investing relative to revenue growth at this point, Tim, again, because we see a lot of things Right in front of us from a growth opportunity, we want to make sure we get the people in place to do it. And we're all doing that under the mindset of being in the top quartile From an operating income perspective.

Speaker 3

Okay. Okay. Got you.

Speaker 5

And then just maybe on Otanko, I know just with the environment In Europe, I think it's you've kind of pushed out some of the synergies there. But is there a way to maybe give us an update on Kind of where the synergies kind of stand, in terms of maybe what's been captured and kind of compare that to what your initial targets were?

Speaker 3

Yes. So when we look

Speaker 2

at Ataco overall, we're still pleased with how things are developing. Again, we very much like their business model Relative to the market, they're doing fairly well at Atanko, so we're happy with that. Some of the synergies that we're working From a defensive perspective, we realized a couple of smaller ones, more to come on the bigger ones over the next couple of years. The offensive synergies, we've started all the cross selling efforts. We've got things in place to make that happen.

Speaker 2

We're rolling those out now. We've been a little bit slow, Tim, on investing in some of the things that drive offensive synergies because we're very much trying to balance Short term profitability with the longer term plan, so that's why we're kind of we're managing it that way to make sure that we also have Good development of operating margin in Europe. And you see that in our European business, where we're 400 basis points above Year over year and Q3 operating margin?

Speaker 3

Yes. And that was assuming that some of the charges we had last year We're not in there, so on a like for like basis. Yes, like for like. Yes. Yes, perfect.

Speaker 5

Okay. And then just the last one, just Some of these share gains that you're kind of calling out in terms of the conversions of CECO dealers and Component dealers and things like that, I mean, is there any sort of kind of the consistent driver of why you're able to kind of accrue their share gains? Is there any Specific reason is all of us just kind of a bunch of smaller things that kind of added up in a share gain?

Speaker 2

Tim, I think it really comes from our people and Our strong business model, I mean we've got people that are experts in the field. They're long term partnering with the customers. We've got a great Business model, we're driving specifications. We're training a bunch of people. You add all that up with Superior's customer service, and it's just helping us Pick up these customers one at a time and that continues to be a focus for us.

Speaker 6

Okay. Okay, good. Well, good luck on the rest of your guys. Thanks for

Speaker 5

the time. Thanks, Dan. Thank you.

Operator

Our next question comes from Kurt Iger with D. A. Davidson, please proceed with your question.

Speaker 5

Great. Thanks and good afternoon everyone. Mike, you had talked about in the first half of next year starting to think things would soften a Little bit, are those comments just what you're hearing from your builder customers? Or is that customers in some of these different market segments and cohorts as well.

Speaker 2

Yes. It's across the board. So certainly, since 50% of our business is linked to the residential market, that's got the biggest But when you look at these other markets, plus or minus, again, across the board, 1st We see weakness and I think a lot of that is really just driven by the uncertainty associated with the current economic environment.

Speaker 5

Okay. Makes sense. And then I just wanted to go back to the conversation around component manufacturers. And I guess, can you maybe just frame how you think about the current opportunity set because it is a very large market and one where You guys don't have a ton of share at the moment. And then I guess separately, are the customers that you're converting and winning over, are those moving to like a Dual source model or is that single source with Sensen for some of those Truss blades?

Speaker 2

Yes. So it is a good sized market for us. We A lot of these people are also buying connectors and other products from us. So there's some opportunity to leverage our relationships we have with these customers to pick up On the truck side of the business, we continue to invest like crazy into the software space, and we've made a lot of progress in that area. We're adding people to provide service and support into that area.

Speaker 2

And then again, you combine that, Kurt, with our typical service levels And also making sure that we've got an open environment, meaning if people use our software, they can decide where they want to buy their truss plates. We think customers prefer that going forward. And we are very mindful of how we're bringing customers on. We want to make sure that we do bring them on, that we provide that great experience, that great service, that great support, So that they are successful at the end of the day and we do believe that we're going to continue that forward into 2024.

Speaker 5

And is that when you convert some of these component manufacturers? I mean, do you think there's the opportunity for A greater attach rate with your own connectors or just given your dominant market share there, that's probably not much of a sales synergy?

Speaker 2

So the opportunity with these customers for TrustPlace is fairly significant. In some cases, there is the opportunity to combine it with some additional connector business, but we're in a lot of these, we're really just talking about the software and the Trustblade business.

Speaker 5

Got it. Makes sense. And then just lastly on National Retail, with some of the shelf space changes there The last couple of years, has the load in of products to new stores been a meaningful contributor to growth at all this year? Or has that Largely been kind of set and you're just reaping the rewards of some of the investments in merchandising and the like.

Speaker 2

Yes. I think it's a lots of small things adding up to good growth. So certainly, the load in, As we picked up a couple of customers has helped. We continue to work with our customers that get additional shelf space. We continue to work on off the shelf merchandising that makes sense.

Speaker 2

The attachment rate is a big focus for us. We're also investing in e commerce and we Good growth in e commerce with our national retail partners. And as I mentioned, just sending people into the stores, helping them clean up the set, helping them merchandise, Help and train the associates, you add all that up and that's helping us get good growth in that market segment.

Speaker 5

Got it. Okay. Well, appreciate all the color, Mike, and good luck here in Q4, guys.

Speaker 2

Thanks, Kurt. Thanks, Kurt.

Operator

Our next question comes from the line of Julio Romero with Sidoti and Company. Please proceed with your question.

Speaker 6

Hey, good afternoon, Mike. Good afternoon, Brian.

Speaker 3

Hello, Julio. Julio, hello. Hey. So just

Speaker 6

a couple of quick questions for you here. Just first of all, wanted to ask about some of the inflationary pressures You guys called out aside from steel, you talked about some higher warehouse and freight costs, I believe in both North America and Europe. Do Do you see some of those costs moderating or have they reached kind of a level where they're here to stay and elevated Warehouse and freight costs are just kind of a fact of life.

Speaker 2

Yes. Julio, how about I start? And some of the increase in cost We're seeing in warehousing is associated with our effort to go direct to our customers to eliminate the 2 step distribution process. We need to have warehouses Most of our customers, so that when we ship product out, they get it the next day. And we also want warehouses in big markets in case they want to get the product Same day, we can either arrange shipment or they can come in and pick it up.

Speaker 2

So that's driving some of the costs. Brian will

Speaker 3

go through the next set of details. So as part of that, setting up Those warehouses, that's going to come a little bit ahead of the revenue associated with those. So yes, there would be A bit higher warehousing costs as a percent of revenues just because the revenues won't really start to come in, as the latter part of the Q3 and then forward. From a freight perspective, It was getting a lot of that product into those locations. And on a go forward basis, it ought to be pretty consistent with A normal run rate.

Speaker 3

So a bit of getting those additional locations set up in the Northwest to be able to continue to execute on our what we call our path to market initiative.

Speaker 6

Got it. That's helpful there. And then Just talk about you ended the quarter in a net cash position, pretty strong cash position overall here. And you talked about some organic growth opportunities and some M and A you're also evaluating, but sounds like more of a tuck in in nature type of Opportunity set and at the same time, we've got some uncertainty on the macro front. Just talk about how that considering all those factors that kind of shapes up are you thinking about cash deployment?

Speaker 2

Yes. So our capital allocation strategy remains on really driving growth. And obviously, we're investing a lot in our factories and our warehouses that very much align with our business model to provide high service for our customers. We are also

Speaker 5

when we look at M

Speaker 2

and A perspective, Julio, for the most part, we're talking about small tuck ins that complement our business model that help us provide Service to our customers that in some cases maybe help us vertically integrate, there just aren't that many actionable targets that are large that are a good

Speaker 3

fit for us.

Speaker 2

So Major, the focus is small opportunities when they arise.

Speaker 3

And then just to follow-up on that. We've got some larger investments within the business that we've talked about over the last few quarters, expanding our Columbus, Ohio facility, building a new facility in Tennessee Again, part of the business model of providing that really excellent service to our customers, but Some larger cash outlays here coming up over the next couple of years In addition to the debt repayment that we will continue doing, As we noted, we didn't repurchase any shares during the quarter on a comparable basis. That was one of the reasons why Cash was up. So just a bit of working capital that will, I would say, start to get back to Traditional normal levels here going forward.

Speaker 6

Really helpful. I'll hop back in the queue. Thanks very much.

Speaker 3

Welcome.

Operator

And our next question comes from the line of Daniel Moore with CJS Securities. Please proceed with your question.

Speaker 4

Thank you. Just one or two quick housekeeping follow ups. I know you said immaterial. Can you quantify Any expense impact you expect in Q4 as a result of the cybersecurity breach and anything measurable in terms of incremental spend margin impact that on a go forward basis.

Speaker 3

Dan, it's Fred. I wouldn't expect it to be a material amount or We're still working through the process to Evaluate and investigate, but as we noted, we were able to catch up With a lot of the orders that had come through that Mike had noted, but we're still Investigating and evaluating it. Again, from an operating income perspective, I wouldn't expect it to be a material amount.

Speaker 4

Perfect. And then just following up on the capital allocation question, obviously, you've been out of the market in terms of buybacks. You have some significant investments, but you're still cash is building quickly and already in a net cash So would you look to be opportunistic again here and maybe weigh that versus continuing to pay down the remaining debt? Just Any thoughts there?

Speaker 3

Sure. So we're going to look at all of those, definitely. So a A little bit of debt repayment, slightly at the end of the year, similar to what we did last year and continue to evaluate The share repurchase from an opportunistic perspective.

Speaker 4

Very good. Appreciate the help.

Operator

And we have reached the end of the question and answer session. And this also concludes today's conference.

Powered by Quartr

Key Takeaways

  • Simpson delivered Q3 net sales of $580.1 million, up 4.8% year-over-year, with North America volumes rising ~7% and consolidated gross margin expanding to 48.8%.
  • Operating expenses climbed 18.3% due to increased personnel, variable compensation and R&D investments, pressuring operating income despite higher sales.
  • The company expects Q4 results to be up year-over-year but to face downward pressure from higher interest rates, seasonality and a softer housing market into early 2024.
  • Capital allocation priorities include funding organic growth, pursuing tuck-in acquisitions, returning cash via dividends and opportunistic share repurchases, and paying down debt from the Atanko acquisition.
  • Key growth initiatives across residential, commercial, OEM, national retail and building technology markets are gaining traction, highlighted by new warehouse openings, strategic alliances and product launches.
AI Generated. May Contain Errors.
Earnings Conference Call
Simpson Manufacturing Q3 2023
00:00 / 00:00