Simpson Manufacturing Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
April 28, 2025
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Operator

Greetings and welcome to the Simpson Manufacturing Co. Inc. First Quarter twenty twenty five 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

It is now my pleasure to introduce your host, Kim Orlando with Investor Relations. Thank you, Kim. You may begin.

Kimberly Orlando
Senior Managing Director at ADDO Investor Relations

Good afternoon, ladies and gentlemen, and welcome to Simpson Manufacturing Company's First Quarter twenty twenty five 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 or the company's corporate website.

Kimberly Orlando
Senior Managing Director at ADDO Investor Relations

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 04:15 p. M. Eastern Time.

Kimberly Orlando
Senior Managing Director at ADDO Investor Relations

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 Alofsky, Simpson's President and Chief Executive Officer.

Michael Olosky
Michael Olosky
CEO, President & Director at Simpson Manufacturing

Thanks, Kim. Good afternoon, everyone, and thank you for joining today's call. With me today is Matt Dunn, our Chief Financial Officer. Today, my remarks will provide an overview of our first quarter performance and highlights from our end markets. Matt will then walk you through our financials and fiscal twenty twenty five outlook in greater detail.

Michael Olosky
Michael Olosky
CEO, President & Director at Simpson Manufacturing

Now turning to our results. Our net sales of $538,900,000 reflected modest growth over the prior year in a highly uncertain macroeconomic environment in both

Michael Olosky
Michael Olosky
CEO, President & Director at Simpson Manufacturing

The U. S. And Europe. Over the

Michael Olosky
Michael Olosky
CEO, President & Director at Simpson Manufacturing

past twelve months, I'm pleased to report that our volume performance in North America once again exceeded U. S. Housing starts by approximately four twenty basis points. Net sales in North America totaled $420,700,000 up 3.4% from 406,700,000 last year. Results included a contribution of roughly $9,000,000 from our twenty twenty four acquisitions and a favorable comparison to prior year net sales, which were negatively affected by the timing of volume discount estimates.

Michael Olosky
Michael Olosky
CEO, President & Director at Simpson Manufacturing

Collectively, these items more than offset a modest decline in our volumes. Absent these factors, North American sales were relatively flat year over year. As a reminder, software services and equipment are not included in our volume calculations. Our North American volume results were mixed in the first quarter, though sales to all end markets continue to demonstrate above market growth on a trailing twelve month basis. In the component manufacturing market, volumes declined slightly versus last year.

Michael Olosky
Michael Olosky
CEO, President & Director at Simpson Manufacturing

We saw solid results from our acquisition of calculated structure designs and made progress aligning operations and sales to prepare for the scalability of our broadened digital solutions offering. We continue to execute our digital solutions roadmaps to satisfy key component manufacturing customers and leverage our equipment offering to reach opportunities in this market. This has resulted in the conversion of several small to midsize truss manufacturing customers in the first quarter. In residential, volume performance was down modestly. We continue to focus on conversions and line expansions while also deepening builder partnerships through professional services, digital solutions and equipment.

Michael Olosky
Michael Olosky
CEO, President & Director at Simpson Manufacturing

Additionally, our outdoor living category had low double digit growth from a prior year, showing a strong start to the spring building season. We attribute this to our growing product offering and intentional marketing sales efforts to reach pro and DIY customers. The national retail market saw mid single digit decreases. We offset a slow market by driving growth in e commerce, new anchor product listings introduced last year and additional retail space gained in our two largest retailers. In OEM, we delivered high single digit volume growth year over year with strong sales growth in mass timber and off-site construction solutions.

Michael Olosky
Michael Olosky
CEO, President & Director at Simpson Manufacturing

OEM remains a relatively small contributor to our overall revenue with significant opportunity for share gains. And finally, in the commercial market, we improved volumes broadly across the business resulting in low single digit growth over last year despite a challenging commercial market. This momentum was driven by the strong performance of our anchor and cold formed steel product lines. Turning to Europe. Our net sales of $113,900,000 decreased 5.1% compared to prior year and decreased by $1,300,000 on a local currency basis.

Michael Olosky
Michael Olosky
CEO, President & Director at Simpson Manufacturing

On a volume basis, we believe our European business has continued to outperform the local markets, supported by new applications and customer wins. Consolidated gross margin modestly improved to 46.8% from 46.1% in Q1 twenty twenty four despite higher input and labor costs. Additionally, the timing of volume discount estimates just discussed had an unfavorable impact in the prior year. When excluding this factor, gross margin would have been relatively flat year on year. Further product and customer mix have and will continue to be a gross margin headwind.

Michael Olosky
Michael Olosky
CEO, President & Director at Simpson Manufacturing

Next, I'd like to take a moment to discuss some recent pricing dynamics in the marketplace. As previously announced, in early April, we implemented target price increases at a weighted average rate of approximately 8% across certain wood connectors, fasteners and mechanical anchor products in The U. S. Since our last pricing change, which was a decrease a few years back, we have experienced significant increases in our costs from our cost of goods to labor, energy, transportation and equipment. Additionally, while we are largely domestically sourced, we procure fasteners and a limited number of other products from countries that are subject to the recent announced tariffs.

Michael Olosky
Michael Olosky
CEO, President & Director at Simpson Manufacturing

Accordingly, the price increases were an effort to offset both rising costs across nonmaterial and material categories as well as a portion related to the current trade policy actions. The increases will go into effect on June 2 following a sixty day notice period to our customers. We understand that rising prices are especially challenging in a construction market where affordability remains a key concern. Therefore, we have and will continue to minimize additional increases. These price increases combined with strong cost discipline and productivity improvements will help us generally maintain our current gross margins and make selective investments to provide even better customer service.

Michael Olosky
Michael Olosky
CEO, President & Director at Simpson Manufacturing

Our first quarter operating margin expanded by 90 basis points to 19% over last year, reflecting investments that were more commensurate with our volumes and overall market performance in 2025. Consolidated adjusted EBITDA totaled $121,800,000 an increase of 3.8% year over year. Looking ahead, we will remain disciplined in cost management to protect our margins while prioritizing the retention of our valued customers and highly skilled workforce to support long term execution. Next, I'd like to highlight our strategic growth plan in the context of our three financial ambitions, which are continuing above market growth relative to U. S.

Michael Olosky
Michael Olosky
CEO, President & Director at Simpson Manufacturing

Housing starts, maintaining an operating income margin at or above 20% and driving EPS growth ahead of net revenue growth. We believe our business can deliver a 20% operating margin in a growing market environment. For 2025, our outlook for U. S. Housing starts is to remain flat to up in the low single digit range from 2024 levels, with growth weighted towards the second half of the year.

Michael Olosky
Michael Olosky
CEO, President & Director at Simpson Manufacturing

In Europe, housing starts are expected to remain broadly in line with 2024 with more substantial recovery anticipated in 2026 and beyond. As a growth focused company with industry leading margins, we believe we can consistently drive EPS growth ahead of net revenue growth. We also remain committed to returning at least 35% of our free cash flow to shareholders, reinforcing our balanced approach to capital allocation. Before I conclude, I'm proud to share that both customer and employee engagement remain strong as evidenced by recent survey results showing high levels of satisfaction and connection across both groups. These findings reflect the success of our strategy to inspire our employees and relentlessly serve our customer while also advancing our first two company ambitions, strengthening our values based culture and being the business partner of choice.

Michael Olosky
Michael Olosky
CEO, President & Director at Simpson Manufacturing

In summary, we were pleased to deliver above market growth in a challenging environment. Our focus on cost discipline while improving our position in diversified end markets has strengthened our business through the cycle, particularly in a soft housing market. We remain confident in the mid to long term housing outlook and believe Simpson is well positioned to capitalize on future growth. With that, I'd like to turn the call over to Matt, who will discuss our financial results and outlook in greater detail.

Matt Dunn
Matt Dunn
Chief Financial Officer and Treasurer at Simpson Manufacturing

Good afternoon, everyone. Thank you for joining us on our earnings call 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 twenty twenty five, and all comparisons will be year over year comparisons versus the first quarter of twenty twenty four. Now turning to our results. Our consolidated net sales increased 1.6% year over year to $538,900,000 Within the North America segment, net sales increased 3.4% to 4 and $20,700,000 which includes approximately $1,500,000 in negative foreign currency translation.

Matt Dunn
Matt Dunn
Chief Financial Officer and Treasurer at Simpson Manufacturing

In Europe, net sales declined 5.1% to $113,900,000 primarily due to the unfavorable effect of approximately $4,000,000 in foreign currency translation. Globally, Wood Construction product sales were up 1.7% and Concrete Construction product sales were down 1.3%. Consolidated gross profit increased 3.1% to $252,000,000 resulting in a gross margin of 46.8% compared to 46.1%. On a segment basis, our gross margin in North America was 50%, marginally higher than the 49.3% reported in the prior year, due primarily to the timing of volume discounts adversely affecting net sales and gross profit in the prior year. Without the benefit from the absence of these discounts, gross

Matt Dunn
Matt Dunn
Chief Financial Officer and Treasurer at Simpson Manufacturing

margins would have been flat.

Matt Dunn
Matt Dunn
Chief Financial Officer and Treasurer at Simpson Manufacturing

Our gross margin in Europe decreased to 35.2% from 36.5%, primarily due to higher factory and overhead as well as labor and warehouse costs, which were partly offset by lower material costs, all as a percentage of net sales. From a product perspective, our first quarter gross margin was relatively flat at 46% for Wood Products and was 49.5% for Concrete Products compared to 46.5%. Now turning to expenses. Total Q1 operating expenses were $149,700,000 an increase of 2.1%, primarily due to higher personnel costs and variable compensation. As a percentage of net sales, Q1 twenty twenty five operating expenses were 27.8% compared to 27.6.

Matt Dunn
Matt Dunn
Chief Financial Officer and Treasurer at Simpson Manufacturing

As Mike indicated, we have seen increases in our major input costs over the past several years. Further, the current tariffs and trade policy coupled with a run up in both nonmaterial and material input costs led us to enact price increases on our products effective June 2, the impact of which will be partly reflected in our Q2 results. In recognizing price increases are generally not welcomed, we have worked to minimize them as much as possible by passing on only a portion of the anticipated tariff impacts. Additionally, we are evaluating sourcing options to mitigate the potential effects of tariffs. We will continue to monitor the market in 2025 and we'll be limiting incremental investments in the business until we see a more meaningful improvement in the housing market.

Matt Dunn
Matt Dunn
Chief Financial Officer and Treasurer at Simpson Manufacturing

To further detail our first quarter SG and A, our research and development and engineering expenses decreased 9.5% to $19,800,000 primarily due to a reorganization of our IT group, which resulted in the movement of approximately $3,400,000 expense from R and D to general and administrative expense. Selling expenses decreased modestly by 0.6 to $54,200,000 primarily due to reduced personnel costs, which were partly offset by higher travel costs. On a segment basis, selling expenses in North America were up approximately 0.7% and in Europe, they were down approximately 5%. General and administrative expenses increased by 7.8% to $75,700,000 largely as a result of the reallocation of IT group expenses I just discussed and higher personnel costs of $3,900,000 As a result, our first quarter consolidated income from operations totaled $102,300,000 an increase of 6.5% from $96,100,000 Our consolidated operating income margin was 19%, up from 18.1%. In North America, income from operations

Matt Dunn
Matt Dunn
Chief Financial Officer and Treasurer at Simpson Manufacturing

from In Europe, income from operations increased 12.7% to $9,300,000 due to reduced operating expenses including variable compensation costs. And operating income margin of 15% in Europe remains our midterm goal. As a reminder, this target is predicated on various assumptions including improved economic conditions and starts in Europe, the realization of offensive synergies, the continuation of secular trends toward greater wood construction and more stringent environmental regulations in Europe. Our first quarter effective tax rate was 25.5%, approximately two ten basis points above the prior year period. Accordingly, net income totaled $77,900,000 or $1.85 per fully diluted share compared to $75,400,000 or $1.77 per fully diluted share.

Matt Dunn
Matt Dunn
Chief Financial Officer and Treasurer at Simpson Manufacturing

Adjusted EBITDA for the first quarter was $121,800,000 an increase of 3.8% resulting in a margin of 22.6%. Now turning to our balance sheet and cash flow. Our balance sheet remained healthy with cash and cash equivalents totaling $150,300,000 at 03/31/2025, down $89,100,000 from our balance at 12/31/2024 due primarily to capital investments and working capital increases. Our debt balance was approximately $379,800,000 net of capitalized finance costs and our net debt position was 229,500,000.0 We have $450,000,000 remaining available for borrowing on our primary line of credit. Our inventory position as of 03/31/2025 was $618,800,000 which was up $25,600,000 compared to our balance as of 12/31/2024, mostly as a result of the higher price per pound from inventory on hand.

Matt Dunn
Matt Dunn
Chief Financial Officer and Treasurer at Simpson Manufacturing

Overall pounds and inventory were mostly flat. We generated cash flow from operations of $7,600,000 for the first quarter. With regard to capital allocation, our disciplined strategy remains focused on both growth and shareholder returns. In the first quarter, we invested $50,500,000 for capital expenditures, including our investments for facility upgrades and expansions, paid $11,700,000 in dividends to our stockholders and paid down $6,800,000 in debt. In addition, we repurchased 146,640 shares of common stock at an average price of $170.48 per share for a total of $25,000,000 As of March 31, '70 '5 million remained available for repurchases through year end twenty twenty five under our $100,000,000 authorization.

Matt Dunn
Matt Dunn
Chief Financial Officer and Treasurer at Simpson Manufacturing

In regard to our growth investments, both the Columbus, Ohio and Gallatin, Tennessee projects remain on time and on budget. As a reminder, these two investments expand our warehouse and manufacturing capacity, ensuring we continue to provide industry leading service and support to our valued customers. The grand opening of our Columbus facility is scheduled for May. Gallatin's new facility is anticipated to open in the second half of twenty twenty five. Gallatin will play a strategic role in optimizing our fastener sourcing model.

Matt Dunn
Matt Dunn
Chief Financial Officer and Treasurer at Simpson Manufacturing

Currently, we manufacture approximately one third of our fasteners in Gallatin with the remaining two thirds sourced from Taiwan. The new greenfield operation will improve this mix closer to fifty-fifty and allows to in source key third party processes such as heat treating and coatings. This initiative is expected to reduce tariff exposure and gives a significant advantage in terms of inventory lead times. Separately, we are continuing to integrate our recent twenty twenty four acquisitions, which have been performing in line with our expectations. At the same time, we will continue to actively evaluate potential M and A opportunities that accelerate progress on our key growth initiatives and improve our overall operating efficiencies.

Matt Dunn
Matt Dunn
Chief Financial Officer and Treasurer at Simpson Manufacturing

Next, I'll turn to our 2025 financial outlook. Based on business trends and conditions as of today, April 28, we are reaffirming our guidance for the full year ending 12/31/2025 as follows. We expect our operating margin to be in the range of 18.5% to 20.5%. Additional key assumptions include U. Housing starts to be flat to up low single digits from 2024 levels.

Matt Dunn
Matt Dunn
Chief Financial Officer and Treasurer at Simpson Manufacturing

As a reminder, if housing starts are up low single digits, we'd expect to trend toward the higher end of the range. If the market growth is flat or slightly down, we would expect to be closer to the mid and low end of the range respectively. Additionally, we are expecting a slightly lower overall gross margin based on the addition of new warehouses as well as increases in labor, factory and tooling as a percentage of net sales, which we anticipate will be partly offset by the price increases that will go into effect June 2 and an ongoing mix headwind from products and customers that continues to impact our margins. Further, our margin guidance includes a projected benefit of 10,000,000 to $12,000,000 from the sale of the Gallatin property based on a contracted sales price of $19,100,000 Next, interest expense on our term loan, which had borrowings of $379,800,000 as of 03/31/2025 is expected to be approximately $400,000 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.

Matt Dunn
Matt Dunn
Chief Financial Officer and Treasurer at Simpson Manufacturing

Our effective tax rate is estimated to be in the range of 25.5% to 26.5%, including both federal and state income tax rates based on current tax laws. And finally, our capital expenditures are estimated to be in the range of $150,000,000 to $170,000,000 which includes approximately $75,000,000 for the completion of both the Columbus facility expansion and the new Gallatin Faster facility. In closing, Simpson had a solid start to 2025. We continue to believe Simpson is poised to execute our strategic plan for the balance of 2025 through ongoing macroeconomic uncertainty. As part of that plan, we will work diligently to ensure that our expense base and investments are aligned with market conditions to ensure the delivery of a strong operating income margin.

Matt Dunn
Matt Dunn
Chief Financial Officer and Treasurer at Simpson Manufacturing

As always, we will continue to provide our customers with unparalleled service and support. As a result of our significant investments in growth, Simpson is well positioned to continue above market growth. With that, I will now turn the call over to the operator to begin the Q and A session.

Operator

Thank you. We will now be conducting a question and answer session. A confirmation tone will indicate your line is in the question queue. You may press 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up their handset before pressing the star keys.

Operator

One moment please while we poll for questions. Our first question comes from the line of Daniel Moore with CJS Securities. Please proceed with your question.

Daniel Moore
Partner - Director of Research at CJS Securities

Good afternoon, Mike and Matt. Thanks for taking the questions, as always. Maybe just start with the outlook. Obviously, guidance unchanged. How is all the tariff noise and related impact to consumer confidence impacted, I guess, either the range or your outlook in general for US housing starts?

Daniel Moore
Partner - Director of Research at CJS Securities

I know you mentioned unchanged a couple of times, you know, is it just more a function of maybe visibility has changed a bit, you know, or relative likelihood of kind of the top bottom end of the range? Just how are you thinking about housing relative to maybe sixty days ago?

Michael Olosky
Michael Olosky
CEO, President & Director at Simpson Manufacturing

Good question, Dan. So we're obviously talking with our customers, getting a lot of input from them. And then we're spending a lot of time with the people that are building market forecasts. You still got a lot of different mixed views. I think consistently everybody believes first half is going to be a little bit softer than the second half with the hopes that things pick up.

Michael Olosky
Michael Olosky
CEO, President & Director at Simpson Manufacturing

And I think the big driver that we keep hearing from our customers is maybe the possibility of increased interest rate cuts. So when you add it all up, we came into the year, we were thinking low single digits. We put in there now our estimate flat to low single digits is kind of how we're thinking about it from a market perspective. Matt, you want to talk about how that impacts our guidance?

Matt Dunn
Matt Dunn
Chief Financial Officer and Treasurer at Simpson Manufacturing

Yes, sure. In terms of

Matt Dunn
Matt Dunn
Chief Financial Officer and Treasurer at Simpson Manufacturing

our guidance, Dan, we still feel comfortable with

Matt Dunn
Matt Dunn
Chief Financial Officer and Treasurer at Simpson Manufacturing

the outlook that we provided in Q1. Looking at the latest forecast outlook, flat to maybe slightly up as we said from a market perspective, we still feel we can be in that range. And obviously, the pricing impact that we announced gives us some flexibility that we didn't have visibility of where that was going to be when we gave guidance before. So still feel very confident in the range and the middle of the fairway, so to speak.

Daniel Moore
Partner - Director of Research at CJS Securities

Really helpful. Then appreciate all the color on the price increases. Just wondering what feedback you've gotten at this point, just given the general macro uncertainty, any more pushback than usual? I guess I'm thinking particularly from big box retailers, or you've always had been able to push through when needed. Just seems there's any change there in terms of the tone of conversations with customers.

Michael Olosky
Michael Olosky
CEO, President & Director at Simpson Manufacturing

Yes. I mean, Dan, we try very hard to have a fair price for our products. As you know, we're typically less than 1% of the old material of the house. We like to think we add a lot of value in service and support through our engineering teams, our innovation teams, our sales teams out in the field, and everything we do to provide great service out in the field. So we're working hard to make sure that our customers understand the value that we bring and we're doing our best to try to offset as much of these costs as we can so that we've got a reasonable premium that allows us to invest back into

Michael Olosky
Michael Olosky
CEO, President & Director at Simpson Manufacturing

the business to better support our customers.

Matt Dunn
Matt Dunn
Chief Financial Officer and Treasurer at Simpson Manufacturing

And I would add Dan, this is Matt.

Matt Dunn
Matt Dunn
Chief Financial Officer and Treasurer at Simpson Manufacturing

In terms of our price increase, as we mentioned, we've seen our cost inputs going up over the last couple of years. And then obviously with the recent tariff announcements, but I think just to be clear, we're not passing through the full dollar impact of the tariff because we recognize market conditions, the affordability challenges, some of our competitors in terms of where they source from. And so I've been very thoughtful in where we've adjusted the prices and have not passed fully through the tariff impact. Obviously, we'll see where that all nets out after negotiations on tariffs with the governments that are involved. But just being very thoughtful of where we take those price increases because we do need to offset the costs that have gone up over the last several years, including the tariff impacts most recently.

Daniel Moore
Partner - Director of Research at CJS Securities

Certainly makes sense. You mentioned a couple of things, potentially freezing capital investments until housing improves, I assume that's obviously post the Gallatin Tennessee projects, or I should say the Ohio and Tennessee projects, which are already underway. Any other kind of steps to mitigate potential tariffs or exposure that you're contemplating beyond the pricing that you described?

Michael Olosky
Michael Olosky
CEO, President & Director at Simpson Manufacturing

Yeah. If you look at our single biggest investment, the Gallatin facility, so that certainly is going to help us strike a better balance of locally produced fasteners and eventually some anchors compared to where we are today. So there's some work that we're trying to do there. We're trying to accelerate some equipment that we put in that facility. We also had the option of maybe importing some products from Europe.

Michael Olosky
Michael Olosky
CEO, President & Director at Simpson Manufacturing

But I think the thing that we want to do, Dan, is we're picking mid and long term on this story as well as trying to balance the short term costs. Because we don't want to make a bunch of changes and just have everything undo and then maybe the business case doesn't work out as well as we had hoped originally. So we're looking at all kinds of options and doing everything we can to manage both the short term and the long term.

Daniel Moore
Partner - Director of Research at CJS Securities

Perfect. And last for me and I'll jump back in queue. But just given the strength of the balance sheet and the pullback in share price, obviously you were active in Q1. Any changes in terms of the relative order of capital allocation? And how aggressively are you likely to be buying back stock versus maybe looking at M and A at least in the near term?

Matt Dunn
Matt Dunn
Chief Financial Officer and Treasurer at Simpson Manufacturing

Yes, Dan, we were active in the first quarter. We bought back $25,000,000 against our $100,000,000 authorization for 2025, so $75,000,000 plus. So we continue to be desiring to return capital to shareholders via share repurchase. I think you'll see us kind of stay the course like we've been on the last two years. I don't know that we would jump into any significant opportunistic repurchase versus what we've already sort of announced as part of the authorization.

Daniel Moore
Partner - Director of Research at CJS Securities

Perfect. I'll jump back with any follow ups. Thanks again.

Michael Olosky
Michael Olosky
CEO, President & Director at Simpson Manufacturing

Thanks, Sam.

Operator

Thank you. Our next question comes from the line of Tim Weiss with Baird. Please proceed with your question.

Timothy Wojs
Senior Research Analyst at Robert W. Baird & Co

Hey, guys. Good afternoon. Nice job. Maybe just what is the annualized tariff impact that you guys have to absorb without any sort of mitigation?

Michael Olosky
Michael Olosky
CEO, President & Director at Simpson Manufacturing

Yes. So Tim, when we look at the business, we import a relatively small percentage of the cost of goods from Asia. So we're not releasing the exact number. When we look at the price increase that we talked about, it's a weighted average 8%. So that helps us basically manage all the cost increases we've seen over the last three plus years in pretty much everything but steel.

Michael Olosky
Michael Olosky
CEO, President & Director at Simpson Manufacturing

Now we see steel going up. And then that also helps us offset part of the tariffs. So just to be clear, we are not passing through all of the tariff related costs to our customers. But bigger big picture, relatively small percentage of the goods that we sell today come from Europe come from Asia, sorry, come from Asia.

Timothy Wojs
Senior Research Analyst at Robert W. Baird & Co

Okay. Okay. Gotcha. That's helpful. And then I guess just when you're thinking about the kind of price so just I want to make sure I kind of understand this.

Timothy Wojs
Senior Research Analyst at Robert W. Baird & Co

So all of the costs outside of tariffs were kind of included in the original guide. And now we kind of have pricing layered in. So obviously, you have tariffs. It sounds like it's not a big portion of the number. But all of the costs that you guys had incurred in terms of inflation and things like that, that was largely in the guidance range before, right?

Matt Dunn
Matt Dunn
Chief Financial Officer and Treasurer at Simpson Manufacturing

Yes. I'd say you kind of have three factors, maybe Tim. You have the costs were already in the guidance, the pricing was not. We've announced the pricing. The tariffs weren't in the guidance.

Matt Dunn
Matt Dunn
Chief Financial Officer and Treasurer at Simpson Manufacturing

We're offsetting part of that with the pricing. And then we've also when we gave our original guidance, we gave the range, we sort of clarified high end of the range based on low single digit housing starts in the market, middle of the range would be flattish and lower end the range would be if we saw a decline. I think we sitting where we are today in terms of the housing starts, first quarter is a little bit soft in terms of the market. We believe there's upside in the back half and we can get to still get to a low single digits housing starts market environment and we hear that from the customers that we talk to and various forecasters. They're all over the board a little bit.

Matt Dunn
Matt Dunn
Chief Financial Officer and Treasurer at Simpson Manufacturing

We still think possible. So we've softened that a little bit in terms of flat to slightly up U. S. Housing starts. But yes, that was all essentially everything was baked into the guide except for the pricing and the tariffs.

Timothy Wojs
Senior Research Analyst at Robert W. Baird & Co

Okay. Okay, got you. And then just that the gain that you have coming through with Gallatin, is that going to hit in this specific quarter? I just want to make sure that if that's kind of running through the P and L that we get the modeling right on that.

Matt Dunn
Matt Dunn
Chief Financial Officer and Treasurer at Simpson Manufacturing

Yes, it should hit in the third quarter, Tim.

Timothy Wojs
Senior Research Analyst at Robert W. Baird & Co

Okay. Okay. Got you. All right. I'll hop back in queue.

Timothy Wojs
Senior Research Analyst at Robert W. Baird & Co

Thanks a lot, guys.

Michael Olosky
Michael Olosky
CEO, President & Director at Simpson Manufacturing

All right, Tim.

Operator

Thank you. Our next question comes from the line of Kurt Yinger with D. A. Davidson. Please proceed with your question.

Kurt Yinger
Associate Vice President, Research Analyst at D.A. Davidson Companies

Great. Thanks and good afternoon everyone. Just wanted to start off on the demand side. I was hoping you could talk about kind of the seasonal progression of volumes maybe moving into March and what you've seen here in early April, as well as how consistent that is with kind of what you would expect normally with seasonality and maybe on a year over year basis as well?

Michael Olosky
Michael Olosky
CEO, President & Director at Simpson Manufacturing

Good question, Kurt. So as you know, pre COVID there was a fairly significant difference in seasonality between this second, third quarter and the first and the fourth. During the COVID times that kind of evened out a little bit. And now we're trending back towards that more traditional seasonality split. So if we look at it this year and actually the second half of last year and into this year, we're still not seeing big trends one way or another.

Michael Olosky
Michael Olosky
CEO, President & Director at Simpson Manufacturing

October last year was a pretty good month for us. November, December wasn't. January and February were not particularly good months. March was okay. April, let's see on how that plays out.

Michael Olosky
Michael Olosky
CEO, President & Director at Simpson Manufacturing

So we're not seeing a consistent pickup in the business yet. We do believe that's going to come going forward.

Matt Dunn
Matt Dunn
Chief Financial Officer and Treasurer at Simpson Manufacturing

Yes. And then a year over year perspective, Kurt, last year Q1, our volume was up, I believe 8%. This year Q1 volume is down slightly. So we definitely had a tough comparison period from a volume standpoint a year ago. As you know, last year, the rest of the year got a little bit softer both in the market and obviously on our volume.

Matt Dunn
Matt Dunn
Chief Financial Officer and Treasurer at Simpson Manufacturing

But to be pretty close to flat on volume in this Q1 compared to Q1 a year ago with what Mike described, which is what January and February were a little soft. There definitely were some weird weather and things in terms of snow in Southeast and not being a leap year, one less shipping day, all those things. But overall, a pretty solid volume quarter against a pretty tough comparison. And then as Mike said, seasonally, generally Q1 is maybe a little bit lower than kind of the core two quarters, Q2, Q3.

Kurt Yinger
Associate Vice President, Research Analyst at D.A. Davidson Companies

Right. Okay.

Kurt Yinger
Associate Vice President, Research Analyst at D.A. Davidson Companies

That's helpful. Then just going back to gross margin.

Michael Olosky
Michael Olosky
CEO, President & Director at Simpson Manufacturing

Kurt, usually it's 22, 20 eight, 20 eight, 20 two is typically Percentage of our year.

Michael Olosky
Michael Olosky
CEO, President & Director at Simpson Manufacturing

Yeah, if you look at the year.

Kurt Yinger
Associate Vice President, Research Analyst at D.A. Davidson Companies

Right. Okay, that's helpful.

Kurt Yinger
Associate Vice President, Research Analyst at D.A. Davidson Companies

Going back to gross margin, in Q2, obviously, you only get pricing benefits for part of the quarter. Typically, we see some seasonal uplift, which is beneficial there as well. I guess as we get into the back half and think about some of these additional costs and inventory starting to roll through, I guess how would you have us think about kind of the trajectory of gross margins Q3 to Q4 and maybe even kind of a jumping off point into early next year all considered?

Matt Dunn
Matt Dunn
Chief Financial Officer and Treasurer at Simpson Manufacturing

Yes, there's lots of moving parts. Obviously, Curt, you're right. The pricing will kick in June. So we'll get a little bit of a slight bump for one month in Q2 to offset some of the costs that already coming in. We're already receiving containers of tariff goods or tariff burden goods already in April, so that the costs are starting to roll in.

Matt Dunn
Matt Dunn
Chief Financial Officer and Treasurer at Simpson Manufacturing

I think we get a little bit of leverage, if you will, from a volume standpoint in those higher volume quarters, Q2 and Q3. But I think overall for the year, we're expecting our gross margin to be essentially flat, right? We're trying to maintain our gross margin. So while we're taking while some of the costs were baked in, in terms of the things that have gone up over the last few years, we're not pricing on dollar for dollar on tariffs. So I think our goal would be to keep our gross margin relatively flat versus year ago for the whole year.

Matt Dunn
Matt Dunn
Chief Financial Officer and Treasurer at Simpson Manufacturing

We had a weird comparison in Q1. Obviously, we talked about some of the timing of volume discounts that were negatively impacted Q1 year ago. That's why the gross margin shows more favorable in Q1 this year than it really would be on an adjusted basis.

Kurt Yinger
Associate Vice President, Research Analyst at D.A. Davidson Companies

Okay. And maybe just a point of clarification to make sure I understand it right. When you're talking about not fully offsetting the additional tariff increases, that conversation would also kind of incorporate the other cost inflation the last couple of years, right? If we were just to kind of isolate that weighted average 8% increase, that itself would offset the tariffs? Or am I maybe misunderstanding that?

Michael Olosky
Michael Olosky
CEO, President & Director at Simpson Manufacturing

Yes. So we've got a tariff impact, Kurt. We have impact from increasing costs that we've seen over the last three years. We've got productivity that we're trying to drive. We've got additional investments into the business in terms of the factories we've talked about, but also additional warehouses to provide even better support to our customers.

Michael Olosky
Michael Olosky
CEO, President & Director at Simpson Manufacturing

Add all that up, the target, as Matt said, is to keep gross margins flat. And ultimately, the target here is to be that 20% operating income driving solid above US housing starts volume growth.

Kurt Yinger
Associate Vice President, Research Analyst at D.A. Davidson Companies

Okay. All right. Just last one. You talked about some small and medium sized conversions in the component manufacturer space. I think you alluded to some expanded shelf space in the national retail side.

Kurt Yinger
Associate Vice President, Research Analyst at D.A. Davidson Companies

Any way you can roughly maybe size those opportunities as we look out over the next twelve to eighteen months?

Michael Olosky
Michael Olosky
CEO, President & Director at Simpson Manufacturing

That at the end of the day is what's helping us drive that four twenty basis points above U. S. Housing starts, Curt. And I think you've heard me say this before, it's typically a lot of singles and doubles using a baseball analogy. And that's what's been able to drive that above market growth.

Kurt Yinger
Associate Vice President, Research Analyst at D.A. Davidson Companies

Okay. Thank you very much.

Michael Olosky
Michael Olosky
CEO, President & Director at Simpson Manufacturing

Thanks, Kurt.

Operator

Thank

Operator

you. And we have reached the end of the question and answer session. And this also concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Executives
    • Michael Olosky
      Michael Olosky
      CEO, President & Director
    • Matt Dunn
      Matt Dunn
      Chief Financial Officer and Treasurer
Analysts
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Earnings Conference Call
Simpson Manufacturing Q1 2025
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