Good afternoon, ladies and gentlemen, and welcome to Simpson Manufacturing Company's first quarter 2019 earnings conference call. On this call, the Company may discuss forward-looking statements such as future plans and events.

Forward-looking statements like any prediction or future events, are subject to factors, which may vary and actual results may differ materially from these statements. Some of these factors and cautionary statements are discussed in the Company's public filings and reports, which are available on the SEC or the Company's corporate website.

Please note that the Company's earnings press release was issued today at approximately 4:15 PM Eastern Time. The earnings press release is available on the Company's website, at www.simpsonmfg.com.

Today's call is being webcast and a replay will also be available on the Company's website. Now, I would like to turn the conference over to Karen Colonias, Simpson's President and Chief Executive Officer.

Thanks, Kim, and good afternoon everyone. We had a solid start to the year with our first quarter 2019 net sales increasing 6% year-over-year to $259.2 million, primarily due to higher average selling prices.

Our sales volume was relatively steady with the fourth quarter of 2018. Although, it was down on a year-over-year basis due to unusually wet and cold weather conditions across the U.S., which negatively impacted our sales volume as it relates to our connector products.

That said, our sales volume in the concrete space was up nicely year-over-year, mainly due to the continued roll-out of a mechanical anchor products into the Home Depot stores. U.S.

housing starts which are a leading indicator for approximately 60 percents of our business remains soft, following the challenging fourth quarter and strong first quarter last year. This was especially true in the western and southern regions of the U.S., which were impacted by adverse weather conditions.

However, we believe there are many underlying factors to support healthy growth in U.S. housing starts, including strong consumer confidence, extremely low unemployment rates, declining interest rates, and a low level of housing stock availability.

Looking ahead to the second quarter, we expect demand to improve with the month of April already off to a solid start during improved weather conditions. Over the long term, we remain cautiously optimistic that U.S.

housing starts will increase at an annual mid-single digit rate over the next few years. Our first quarter gross profit margin of 42.5% was pressured by increased material and labor costs, plus unabsorbed factory costs attributed to lower volumes.

While the current microeconomic climate has negatively impacted our gross profit margin, we continue to maintain one of the highest gross margins in the industry due to the longstanding brand reputation we've built through our proprietary trusted, tested capabilities, deep industry relationships and superior level of customer service. We continue to execute on our operating initiatives during the quarter, which are focused on growing our market share, rationalizing our cost structure to drive improved profitability, and enhancing our technology infrastructure.

We continue to expand our market share in a concrete space for the introduction of our mechanical anchor products into the Home Depot stores. Our mechanical anchor steps were available for purchase in approximately 600 Home Depot locations as of March 31st with an additional 400 stores to be set by the end of second quarter of 2019.

We anticipate the full roll-out into all 1,900 stores will be accomplished by the end of 2020, representing a $30 million annualized revenue opportunity once completed. In Europe, we were pleased to increase our net sales in local currencies over the prior year period through a combination of volume improvements and higher selling prices.

We're also seeing improvement in our gross profit and operating margins in the European region. In regards to rationalizing our cost structure, we've continued to make headway on the final stages of our three phases of our SKU reduction program to right size our product offering.

In 2018, we removed over 2,500 slow moving SKUs, and simultaneously converted our customers over to replacement Strong-Tie products. Since the start of this year, we've been working on further SKU rationalization with the goal of an additional 25% reduction by the end of 2020.

We expect our learnings from our continued partnership with our external-linked consultants who'll facilitate this endeavor as we strive to continually improve our management of inventory and purchasing practices. Our inventory balance as of March 31, 2019, was approximately $272 million, an increase of nearly $16 million or 6% year-over-year.

As we've stated before, our 2020 plan goal of improving our inventory turn rate from two times in 2016 to a four time by 2020 is one of our most aggressive targets. While we have made progress on this front, three particular factors have transpired since October of 2017, when we released the plan that had required us to build inventory.

First, we proactively built up our anchor inventory in anticipation of potential tariffs on our mechanical anchor finished goods from China as well as in advance of the Home Depot roll-out. Second, we bought an additional allotment of steel in order to mitigate the potential impact of availability.

And third, we have had inventory built to ensure we can meet our customer needs as we continue our SAP roll-out. We continue to strive towards reaching our four-time inventory turn goal, as we work through this inventory, and we'll be sure to keep you informed of our progress.

Finally, in terms of improvements to our technology infrastructure, at the beginning of April, we completed a highly successful SAP roll-out at our second U.S. manufacturing and selling facility.

We are pleased with our decision to track toward a company-wide completion by early 2021 versus by the end of this year. We've been able to translate our key learnings into improvements to the system after our first go-live more detailed training through multiple data cycles as well as having an existing system already in use.

We remain focused on rolling out SAP technology in our remaining U.S. branches by early next year.

Before I conclude, I want to briefly comment on the results of our annual meeting of the shareholders. The proposed measures were approved by our shareholders including the reelection of our board members.

Peter Louras, our former Chairman of the Board has officially stepped down after 20 years of service. On behalf of all of us at Simpson Strong-Tie, I'd like to thank Peter for his many contributions to the Company.

In summary, we had a solid start to the year despite the relatively weaker demand environment, which was exacerbated by an unusually cold and wet winter. For the remainder of 2019, we remain cautiously optimistic, housing starts will pick up and enable healthier demand levels.

We remain committed to operational excellence through execution on our 2020 plan goals, and focusing on the areas of business we can control to drive long-term shareholder value. I'd also like to recognize our employees for their continued dedication to Simpson, especially their commitment to safety and best-in-class customer service.

Simpson's culture wouldn't be the way it is today without our best assets and that's our people. I’d now like to turn the call over to Brian, who will discuss our first quarter financial results in detail.

Thank you, Karen, and good afternoon everyone. I'm pleased to discuss our first quarter financial results with you today.

Our consolidated net sales for the first quarter of 2019 were $259.2 million, up 6% compared to $244.8 million in the first quarter of 2018. Within the North America segment, net sales increased 7% year-over-year to $221.4 million primarily due to increases in average product prices and sales volume.

In Europe, net sales decreased 1% year-over-year to $35.8 million, primarily due to negative foreign currency translations resulting from Europe currency's weakening against the United States' dollar. In local currency, Europe net sales increased primarily due to both higher sales volume and average product prices.

Wood construction products represented 84% of total net sales in the first quarter of 2019 compared to just under 87% in the first quarter of 2018. Concrete construction products represented 16% of total net sales in the first quarter of 2019, up from 13% in the first quarter of 2018.

Our consolidated gross profit dollars increased by approximately 2% year-over-year to $110.3 million, resulting in a gross profit margin of 42.5%. Compared to the first quarter of 2018, our gross profit margin declined by approximately 180 basis points.

As Karen highlighted, the year-over-year decline gross profit margin was primarily due to increased raw material costs including higher priced steel and higher labor costs resulting from tightening labor market conditions. On a segment basis, our gross profit margin in North America was 44.4% compared to 46.9% in the prior year quarter.

In Europe, our first quarter gross profit margin improved to 32.3% compared to 31.9% in the year ago period. From a product perspective, our first quarter gross profit margin on wood products was 42.3% compared to 44.8% in the prior year quarter, and was 39% for concrete products compared to 35.1% in the prior year quarter.

Now turning to our first quarter costs and operating expenses, consolidated research and development and engineering expenses for the first quarter increased 10% year-over-year to $12.3 million primarily due to increased personnel costs. Consolidated selling expenses for the quarter increased 2% year-over-year to $28.1 million primarily due to increased personnel costs.

On a segment basis compared to the prior year quarter, selling expenses in North America were up 5%, and in Europe, they decreased by 10%. General and administrative expenses are in the first quarter increased 6% year-over-year to $39.5 million primarily due to increases in stock-based compensation and cash profit sharing and professional and consulting fees associated with the SAP project.

On a segment level, general and administrative expenses in North America increased by 5% compared to the prior year quarter, and in Europe, G&A a decreased by 10% year-over-year. Total operating expenses in the first quarter of 2019 were $79.9 million, an increase of $3.8 million or approximately 5% compared to the prior year quarter.

Operating expense dollars increased primarily due to higher stock-based compensation and personnel costs. We were pleased that our first quarter total operating expenses as a percentage of net sales of 30.8% were down by nearly 30 basis points compared to the prior year quarter.

Our consolidated income from operations for the first quarter decreased 8% year-over-year to $30 million compared to $32.7 million in the first quarter of 2018. As a reminder, consolidated income from operations in first quarter of 2018 included a $1 million gain on the exercise of an eminent domain claim.

In North America, income from operations decreased 10% year-over-year to $32.8 million primarily due to the reduction in our gross profit margin. In Europe, loss from operations was approximately $400,000 compared to a loss of $1.6 million in the prior year period due to lower operating expenses.

As a result, our operating income margin of 11.6% on a consolidated basis declined by approximately 180 basis points from the first quarter of 2018. Our effective tax rate increased slightly to 22.5% from 22.2% in the first quarter of 2018.

Our consolidated net income for the first quarter was $22.7 million or $0.50 per share per fully diluted share compared to net income of $25.4 million or $0.54 per fully diluted share in the prior year quarter. Now, turning to our balance sheet and cash flow.

At March 31, 2019, cash and cash equivalents totaled $113.4 million, a decrease from $24 million compared to March 31 2018. We remain debt free with a small portion of capital leases.

The new lease accounting pronouncements that took effect on January 1st resulted in approximately 35 million of operating leases, primarily real estate for Simpson, now recognized on our balance sheet as of March 31 2019. We generated cash flow from operations of $9.9 million compared to $17.1 million in the prior year period.

We used approximately $7.4 million for capital expenditures during the quarter and paid $9.9 million in dividends to our stockholders. Additionally, during the first quarter of 2019, we repurchase approximately 505,000 shares of our common stock at an average price of $59.35 per share for a total of $30 million.

As of March 31 2019, we had approximately $70 million available under our $100 million share repurchase authorization which remains in effect through the end of 2019. Given our confidence in our business and our expectation that the 2020 plan will drive improved operational performance and a higher return on invested capital, we expect to continue to be active as it relates to share repurchase activity.

Before we turn it over to questions, I'd like to discuss our 2019 outlook. For the full year of 2019, we are reiterating guidance as follows.

We expect our consolidated gross profit margin to be in the range of 44.5% to 45.5% given our expectations on material costs and housing starts. Our full year operating expenses as a percentage of net sales to be in the range of 27.5% in 28.5%.

The effective tax rates to be in the range of 25% to 27% including both federal and state income taxes. Depreciation and amortization expenses to be in the range of $39 million to $41 million of which $33 million to $35 million is pure depreciation, and capital expenditures to be in the range of $30 million to $35 million including approximately 25% for maintenance CapEx.

And I'm pleased to announce on April 26, 2019, our Board of Directors declared a quarterly cash dividend of $0.23 per share, which represents 4.5% increase over the first quarter of 2018 dividend. The dividend will be payable on July 25, 2019 to stockholders of record as of July 3, 2019.

In summary, despite macroeconomic and weather related pressures, we were pleased with our first quarter results and look forward updating our shareholders as we continue to execute against our strategic, operational and financial initiatives. Thank you for your time and attention today.

We now like to open up the call for questions. Operator?

Good afternoon, Karen and Brian. Thank you for taking the questions.

Let's start off with on the gross margin line, can you provide a little bit more color or perhaps quantify the impact of both steel prices and labor costs inflation? Kind of a year-over-year basis in terms of gross margin and with steel prices leveling off, do you see the gross margins in Q2 bouncing back to the range you've provided for the full year or might that take a little bit more time?

Quick follow up, thanks

Sure, Dan. This is Brian.

So, we still affirm our guidance there based on or the gross margin guidance we've given. Yes, we had the pressure on gross margin due to material.

As you recall, last quarter, we commented on making some steel purchases, so that we have an adequate supply. And during the allocation, we were purchasing at a higher price than what was occurring earlier in the year.

But we would expect that as we work through that inventory, it takes a couple of quarters, couple of few quarters that we would still expect to achieve our gross margin guidance. Labor had also that impact, that material had more of an impact on gross margin than this labor, but if we were to order them in magnitude, material first, labor second,

And would absorption be third behind those two?

Right.

Got it, helpful. And then, the R&D tick up a little higher, you've mentioned increased personnel costs is the 12 million plus kind of a good quarterly run rate to think about?

Or is there anything unusual in the quarter?

No, nothing unusual during the quarter there, we -- at the beginning of the year, we put in on a standard wage rate increased soon as them like. So, I would expect that to be a fairly normal Q1 from that perspective.

Karen, do you have any other thoughts on that one?

Yes, sometimes, you know, it's just we have code reports coming in place and that sort of thing, but nothing really unusual from the standpoint of what's happening in R&D.

Got it. And then lastly, for me anyway, and I recognized that this is a really but it's still a year to go in your 2020 plans.

Once, we get through the cost reduction and obviously some work to do on the inventory management side still, when do we start to turn your attention toward priorities for the next two to three year plan in terms of capital allocation, growth, diversification? When do you expect to update investors?

I know you're still in the execution phase right now, but just kind of looking ahead. Thank you very much.

Yes, that's a great question. Obviously, we're very highly focused on accomplishing the metrics that we put it in place for the 2020 plan.

And as we've mentioned, we've got headwinds on a few of those and certainly some work for us to do. We're always looking at what our go forward strategy would be and we're not at the point where we would be ready to make that public information, but speak where that we're certainly working on what are the things that we want to do in the future from a growth standpoint and how those impacts, all of our metrics as well as you know the effects on the shareholders.

So constant conversations that are going on work within the system management team and the board, and when we have something a little more defined, we’ll be ready to share that with investment community.

Okay, I'm going sneak one more in April. Could you give us a sense for overall volume growth and revenue growth for the month of April?

Yes, April was definitely a nice to see you as we mentioned, we were pretty slow in the first quarter, I think, pretty significant impact from the weather conditions, especially compared to 2018 where definitely in the West Coast we had a very, very dry weather compared to this year where we had quite a bit of rain and snow, and I think that was pretty consistent even across most of the countries. We did see improvement in April across all of our regions, little bit stronger in the West, but definitely improvement across all of our regions.

Maybe just going back to the last question there, I guess, where volumes positive on a year-over-year basis in April, I'm just trying to turn -- because it sounds like they were down in the first quarter. And I'm just curious, if things just improved sequentially, if the volumes were actually up year-over-year in Q2?

I would think volumes are up a little bit there for sure in April.

And then, if we look at the gross margins in the concrete business, they -- it's been really nice sales for the last couple years and I guess as you kind of look maybe longer term. What's the right kind of margin level on a gross margin basis for that concrete business?

I think, it's gone from really kind of a low to mid 30s to now something that's approaching your -- approaching 40%?

Yes, that's a great question. So, I think the concrete margins that team has done an excellent job of refocusing on our new strategy and really going after those six target markets where as we mentioned, we have an extensive product line, we have a big customer base, and we're able to differentiate our product.

And obviously, that helps us from a gross margin standpoint. I think the wood margins will still exceed what we get in a concrete gross margin, but we're still pushing that team obviously to maybe get even slightly better than where they are now and they're doing a very nice job.

Also helping the gross margin obviously from an overhead absorption is the volume that we have coming in place. So, the roll-out of the mechanical anchor line into the Home Depot really helps us from a volume standpoint, which helps our manufacturing costs and we make those products in our Xiong'an China facility.

So that increased volume is helping that factory absorption. So, Tim, that team is doing an excellent job.

There's more room there to have a little bit better. Margin, we're certainly looking at costs, but I think the main thing has been the focus and that focus has been on the market.

We're sensing to differentiate our product line.

And then, I guess on it at Home Depot roll-out. How many stores did you -- I am not -- how many stores did you add into first quarter?

I don't know -- have the Q4 number on hand?

Yes, probably about 300 to 350, so we're in 600 totals.

Probably end of the -- end of March.

Yes, end of March, we had 600 totals. So, in the quarter, we probably added around 300 with another 400 scheduled by the end of Q2.

And then, when we think about the ERP roll-out, it sounds like you've had a successful kind second launch or kind of second round? What -- when will the kind of the third and the fourth tranches of the ERP roll-out?

So, as we mentioned, we're looking at completing our North America roll-out, which should be early into next year 2020. We'll do another phase roll-out this year and we're working on preparing that location, but we should have all of our North American locations pulled out early 2022 then we will work into follow that up with our European location.

Okay, Great.

Our, yes, projection is a completion of the SAP project sometime in 2021.

Thank you, hi, Karen, hi, Brian. So, sorry, these aren't ground breakers, but it does sound like weather was a real issue for Q1.

And I'm just wondering, do you think those stars can be recaptured in the next few quarters? Or what was lost was lost?

Yes, that's a great question, Steven. And I think it's really a function of where those starts were in the building cycle.

So was the foundation in or are we a little bit delayed from that standpoint. I think from the builders perspective, there is still the limitation on the manpower.

So you can't just throw more manpower at it, to catch up on those starts. I think we'll have a much better feel for that, as we get through the -- sort of the spring season.

So as we get through Q2, we will have better feel whether we're going to be able to catch up. But really from the builder standpoint, it will still be -- they just can't throw more manpower at them to catch up, because that manpower is not available.

Well, that's a good segue into my next question, because it's a real source of concern for me at least. And so -- the last time I visited one of your facilities, you were looking to hire, you cited the higher labor as a source of margin pressure, and I'm just wondering, are we maxing out?

I mean, is this going to be a governor on construction activity going forward, unless we change some policies?

Well, I think, Steve, there is a couple of things that are going on. First of all Simpson as well as other industry representatives are really working on trade schools, high schools and really doing quite a bit of training on trying to get people into the construction industry.

So when teaching to be a framer or electrician or plumbing, the industry itself is really working on enhancing those efforts. The second thing we're seeing is we're seeing a lot of under the roof building.

So people are prefabbing walls, floor systems and roofs, and then taking the components out of the job site and they're doing that as a means of helping these labor constraints. So there's definitely some areas that are being looked at and actively worked on, to help those labor issues and those are really two the main ones.

Yes. And both of those initiatives seem like perhaps even long overdue.

So, if you could put it to an innings context, are we in the early innings of this initiative or have people seen this coming down the pike and realized that we've got to get young people to embrace the trades and have offsite or factory inventions for construction.

I think both of those questions kind of ebb and flow. Factory manufacturing is not a new concept.

It was something that was attempted by some builders several years ago, and there was no manpower shortage, so it kind of fell off. Now, the manpower shortage really pushes this concern about, should we try to build more of this -- from a factory standpoint.

When we look at labor, I think there has been such a push. You know, we don't have -- they don't teach trades in high school anymore.

So there's been such a push, that that's not available. And also, I think a push that everybody needs to go to college.

So there's definitely some thought process on getting people engaged in these trades associations. A lot of work with high schools and junior colleges in both of those areas and really training of this group that this is a -- it's a good role, its good area to work in, and giving them the experience to be able to walk into some of those jobs.

So I've seen both of these things ebb and flow in my time here.

Sure, will not to digress too much, but I mean, Sears prefabricated homes existed 100 years ago. I mean, is there some sort of bias against a home that is perceived to be a kit?

I'm not sure there's a bias. Obviously things have changed a lot, as far as what you could do from the architectural standpoint.

And I think, we see the for the under the roof kind of building going on in various aspects being looked at, as to how complete you take a project out to the job site. As I mentioned, from walls and the flooring, the roof, all the way to sort of a completed module, where you stack the modules on top.

So different aspects, I don't think there's so much resistance from the buyers of the home. It's a question of logistics, how far can you ship things, there's just a give and take in each of those aspects.

Okay, and final question, switching gears. For Q1, you expect the steel prices to be flat.

Now you're saying that they could actually be down in Q2. Does that -- do you want to extend the forecast for the rest of the year?

You think that could be down and is it that view on steel that allows you to maintain that 44.5% to 45% gross margin?

Hi, Steven, it's Brian. Yes, that's right.

We -- I don't know that we are saying that it would continue to drop from levels where it is today. Although we've seen it obviously moderate from earlier, higher prices.

But that assumption is what is baked into our guidance for the year. That moderate decrease that we've seen, but I guess holding fairly steady from this point forward.

So I appreciate you calling out the strong start you had in April. But how optimistic should we be about year-over-year volume growth in Q2, when we consider you had a pretty tough year-over-year comparison on the volume side, in the prior year quarter?

Yes, that's a great question. And as we said, after having a pretty dismal first quarter, based on volume and weather and everything associated with it.

As I said, we saw strong April in all regions, which is really encouraging and a little bit more in the West, and as we've discussed, when we have increases in the West and South, we will put more product into the content of those houses. So that's always encouraging for us.

Also as we've looked at housing starts, not on a quarter-over-quarter basis, but if you just look at the February versus the March numbers, you see a little bit of an uptick into the West and the South on the start numbers. So that's also an encouraging factor.

Okay, that's helpful. And I just wanted to drill down a little bit more on that Home Depot roll-out.

Think you said you're at 600 stores and should be at 1,000 by next quarter, which I think is faster than you called out on your February call. Can you just talk about if anything has changed there and is there a prospect, if you may be completing the entire store roll-out faster than anticipated?

Yes. As we said, we had -- we set 600 stores by the end of March, and it's currently available in 600 locations and there are 1,900 stores that we're working on.

Another 400 are scheduled to be finished by the end of the Q2. So that would leave us another 800 to 900 stores.

I don't have a schedule on how those will roll-out. But we are still constantly working with Home Depot on trying to push that rollout as fast as possible.

But, as we've mentioned it, it's really finding space in a Home Depot, which is a much more difficult process. So we have continued to work with Home Depot on the schedule of those rollouts.

But, I don't have anything beyond that in the second quarter numbers.