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Edited Transcript of SSD earnings conference call or presentation 27-Apr-20 9:00pm GMT

Q1 2020 Simpson Manufacturing Co Inc Earnings Call

Pleasanton May 19, 2020 (Thomson StreetEvents) -- Edited Transcript of Simpson Manufacturing Co Inc earnings conference call or presentation Monday, April 27, 2020 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian J. Magstadt

Simpson Manufacturing Co., Inc. - CFO & Treasurer

* Karen W. Colonias

Simpson Manufacturing Co., Inc. - President, CEO & Director

* Kimberly Orlando

ADDO Investor Relations - SVP

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Conference Call Participants

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* Daniel Joseph Moore

CJS Securities, Inc. - MD of Research

* Julio Alberto Romero

Sidoti & Company, LLC - Equity Analyst

* Steven Pierre Chercover

D.A. Davidson & Co., Research Division - MD & Senior Research Analyst

* Timothy Ronald Wojs

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to Simpson Manufacturing's First Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note, this conference is being recorded.

I would now like to turn the conference over to your host, Kim Orlando with ADDO Investor Relations. Thank you. You may begin.

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Kimberly Orlando, ADDO Investor Relations - SVP [2]

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Good afternoon, ladies and gentlemen, and welcome to Simpson Manufacturing Co.'s First Quarter 2020 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 of future events, involve risks, uncertainties and assumptions that could cause actual results to 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's or the company's corporate website.

Please note that the company has an earnings press release, which was issued today at approximately 4:15 Eastern Time. The earnings press release is available on the Investor Relations page of the company's website at www.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 Karen Colonias, Simpson's President and Chief Executive Officer.

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [3]

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Thanks, Kim, and good afternoon, everyone. I'm pleased to discuss our results with you today. I'd like to first begin with a high-level summary of our first-quarter financial performance, and we'll then turn to a more detailed discussion on the coronavirus pandemic, the impact it has had on our business and the actions we are taking to address this unprecedented situation.

We delivered a solid first quarter, both operationally and financially. Sales of $283.7 million increased 9.4% over the first quarter of 2019 and were driven by higher sales volumes in North America. Sales volumes increased primarily due to milder weather conditions in our key markets compared to a year ago, which was an unusually cold and wet winter. Sales were partially offset by weaker conditions in Europe, which was impacted by the COVID-19 beginning in mid-March.

Our gross profit margin was strong at 45.7%, an improvement of 320 basis points year-over-year. This was largely due to sales mix and decreased material costs. Our gross margin coupled with the relatively flat operating expenses helped generate operating income of $49.4 million, up 64.4% year-over-year, and strong earnings of $0.83 per diluted share, up 66% year-over-year.

Brian will provide additional details on our Q1 performance shortly. But now let me turn to discussion of the COVID-19.

Our hearts go out to all of those who have been impacted by the coronavirus pandemic. I would like to sincerely thank all of the first responders for their selflessness and courageous efforts to help those in need as well as extend my gratitude to our over 3,300 employees for their cooperation and commitment to help ensure Simpson remains a safe workplace.

The health and safety and well-being of our employees, their families, our customers and our communities is our top priority and is at the forefront of every decision we make. We took immediate action at the onset of this crisis to enact rigorous safety protocols in all of our facilities by improving sanitation measures, implementing mandatory social distancing, reducing on-site staff through staggered shifts and schedules and remote working, where possible, and restricting visitor access to our locations.

As of today, all of our U.S. manufacturing facilities remain operational in accordance with the applicable shelter-in-place orders as suppliers of businesses deemed essential, including hardware stores and other building material companies. However, 2 of our larger European operations, in the United Kingdom and France, were ordered to cease nearly all operations in late March, forcing us to temporarily furlough many of those affected employees. We have every intention of being able to bring those employees back to work when the timing is right.

Over the years, we've built a strong brand reputation with a loyal customer base and talented group of employees and we have every intention of protecting that to ensure we can continue to service our customers while operating in accordance with local government regulations. Importantly, we have not experienced any supply chain disruptions related to the COVID-19 and have been able to meet our customer needs.

In the month of April, sales declined compared to March levels due to lower demand from the anticipated slowdown in housing starts and general construction activities. While this situation is highly unique and unlike any other downturn we've experienced in the past, we believe we are well positioned to emerge on the other side from a position of strength. If you look back to 2008 and 2009 during the Financial Crisis, which was accompanied by a drastic decline in U.S. housing starts and a simultaneous 28% drop in sales, you'll see that our strong balance sheet played a major role in supporting our business through this recovery period.

Today, our balance sheet provides us with ample liquidity to support our day-to-day operations. We ended the quarter with $305.8 million in cash on hand after drawing down $150 million on our revolving credit facility as a precautionary measure to preserve financial flexibility and ensure our working capital needs will be met in light of the current uncertainty stemming from the COVID-19 pandemic.

Importantly, following the 2009 crisis, we made significant strategic changes to our business to ensure our foundation would be even stronger in the event of a future recession. These actions included diversifying our business to be less reliant on U.S. housing starts by making key investments in adjacent products and markets. More recently, we've taken significant steps to rationalize our cost structure over the past 3 years in connection with our 2020 plan goals.

We've been able to operate more efficiently as evidenced by our 250 basis point improvement in our total operating expenses as a percent of sales for the first quarter of 2020 compared to the first quarter of 2019. Given the level of uncertainty regarding the long-term impact of COVID-19, including market conditions and demand trends, we have proactively taken additional measures to ensure we maintain our strong financial position. Beginning in the second quarter, we've implemented a hiring freeze, and we'll focus on employees' retention and adjusting employee hours based on lower production levels in the near term. In addition, our discretionary expenses, including employee travel and spend on certain consultant-related projects, have been significantly reduced as we abide by the shelter-in-place orders throughout our operations.

Turning to capital allocation, our strategy has shifted in the recent months to focus more on cash preservation until this crisis passes. As a result, we are reducing our planned capital expenditures to be used only for projects that are required for repair or maintenance or to address potential safety issues in our factories. In addition, we are being highly selective in regard to inventory purchases in the current environment in line with our goal to improve our inventory balance through careful management and purchasing practices.

That said, you will notice inventory dollars on our balance sheet at March 31 increased compared to the level at December 31. This is primarily to support the rollout of a significant new customer in the second quarter of 2020. Absent the impact of this new customer, our total inventory dollars and pounds on hand, including finished goods, would have been down compared to the levels as of December 31. We look forward to providing more details on this rollout on our upcoming second-quarter conference call.

In regard to stockholder return activities, year-to-date, as of April 25, we paid over $20 million in dividends to our shareholders and repurchased more than 900,000 shares of our common stock at an average price of $69.46 per share for a total of $62.7 million. However, given cash conservation is our priority in this current environment, we are suspending our share repurchase program until further notice.

Finally, before I conclude, I'd like to highlight that we completed the final phase of the SAP implementation in our major U.S. sales organization during the first quarter of 2020 with the successful onboarding of our Stockton manufacturing facility. We now have all of our U.S.-based sales organizations transitioned over to SAP. As of today, we still anticipate a company-wide completion goal near the end of 2021. However, we will continue to monitor and update our time line should stay-at-home orders remain in place for a prolonged period of time.

In summary, we are pleased that we have delivered strong first-quarter results. Since the COVID-19 pandemic began towards the end of the first quarter, we've begun to operate in a highly difficult and unpredictable environment that has shaken our global economy. As announced in our earnings press release issued this afternoon, due to the significant level of uncertainty regarding future market conditions surrounding COVID-19, we have chosen to withdraw our previously issued annual 2020 outlook as well as our financial targets from our 2020 plan at this time.

In terms of our 2020 plan, while the operating environment has made it difficult to predict whether these financial targets remain achievable by the end of the fiscal 2020, we continue to execute based on the same underlying principles of focusing on operating efficiencies and cost savings to guide us through this pandemic as we move forward.

In a world filled with so much uncertainty, I can say that we believe our business is very well positioned to weather the current storm as a result of our focus on elements that we can control, including upholding a best-in-class customer experience and manufacturing high-quality, trusted products; maintaining overall financial flexibility by ensuring we have ample liquidity; and remaining conservative in our capital allocation approach with a focus on cash preservation in the near term.

I'd like to again thank all of our employees for their passion and commitment to their health and safety and our excellent customer service. And I'd now like to turn the call over to Brian, who will discuss our first quarter financials in detail. Brian?

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Brian J. Magstadt, Simpson Manufacturing Co., Inc. - CFO & Treasurer [4]

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

Before I begin, I'd like to mention that unless otherwise stated, all financial measures discussed in my prepared remarks today will be referring to the first quarter of 2020, and all comparisons will be year-over-year comparisons versus the first quarter of 2019.

Now turning to our results, as Karen highlighted our consolidated sales were strong, increasing 9.4% to $283.7 million. Within the North America segment, sales increased 12.5% to $249.1 million due to higher sales volume supported by stronger housing starts compared to the wet winter weather conditions we experienced a year ago. U.S. housing starts grew 22% in the first quarter versus the comparable period last year. Notably in the West and South, where we provide a meaningful amount of content in the homes, starts grew 27% and 19%, respectively, year-over-year.

In Europe, sales decreased 8.5% to $32.7 million mainly due to lower sales volume in our Concrete business. In addition, first quarter sales were slightly impacted by our facilities in France and the United Kingdom, which experienced government-mandated restriction orders on operations in March for safety precautions in response to COVID-19. As a result, these locations were operating with minimal activity to comply with the orders. Europe sales were further negatively impacted by $1 million -- $1.0 million from foreign currency translations resulting from Europe currencies weakening against the United States dollar. In local currency, Europe sales were down approximately 5.5% for the quarter.

Wood construction products represented 86% of total sales compared to 84%, and Concrete construction products represented 14% of total sales compared to 16%.

Gross profit increased by 18% to $129.7 million, resulting in a gross margin of 45.7%. Gross margin increased by 320 basis points primarily due to lower material and factory and overhead costs as a percent of sales on increased production, offset partially by higher labor, warehouse and shipping costs.

On a segment basis, our gross margin in North America improved to 47.7% compared to 44.4%. While in Europe, our gross margin improved slightly to 32.7% compared to 32.3%.

From a product perspective, our first-quarter gross margin on Wood products was 45.4% compared to 42.3% in the prior year quarter and was 42.5% for Concrete products compared to 39% in the prior year quarter.

Now let's turn to our first-quarter costs and operating expenses. Research and development and engineering expenses increased 9% to $13.4 million primarily due to increased personnel costs and cash profit-sharing expense. Selling expenses increased nearly 2% to $28.5 million primarily due to increased personnel costs and commissions and cash profit sharing, partially offset by lower stock-based compensation and advertising and promotion expenses. On a segment basis, selling expenses in North America were up 2%, and in Europe, they increased nearly 2%.

General and administrative expenses decreased 3% to $38.5 million primarily due to decreases in professional and legal fees and stock-based compensation. Partially offsetting these decreases were increases in personnel costs, cash profit sharing, bad debt reserve adjustment and intangible amortization expense. On a segment level, general and administrative expenses in North America decreased 5%. In Europe, G&A increased by nearly 6%.

Total operating expenses were $80.4 million, a slight increase of $0.5 million or approximately 1%. As a percentage of sales, total operating expenses were 28.3%, an improvement of 250 basis points compared to 30.8%. Included in our first quarter operating expenses were SAP implementation and support costs of $3.4 million compared to $2.4 million in the prior year quarter. Since the project's inception, we've capitalized $19.7 million and expensed $29.3 million in total as of March 31, 2020.

Our strong gross margin helped drive a 64% increase in consolidated income from operations to $49.4 million compared to $30 million. In North America, income from operations increased 63% to $53.6 million due to higher sales and lower operating expenses. In Europe, loss from operations was $1.7 million compared to a loss of $0.4 million due to lower sales and higher severance and amortization expense.

On a consolidated basis, our operating income margin of 17.4% increased by approximately 580 basis points. The effective tax rate decreased to 21.3% from 22.5%. Accordingly, net income totaled $36.8 million or $0.83 per fully diluted share compared to $22.7 million or $0.50 per fully diluted share.

Now turning to our balance sheet and cash flow. At March 31, 2020, cash and cash equivalents were $305.8 million, an increase of $192.4 million compared to our levels at March 31, 2019, largely due to the aforementioned decision to draw down $150 million on our revolving credit facility. This action was taken as a prudent measure in order to increase our cash position and preserve financial flexibility in light of current uncertainty resulting from the COVID-19 outbreak. The proceeds from the borrowings will be available to be used for working capital, general corporate or other purposes as permitted by the credit facility. We have approximately $150 million of remaining borrowing capacity under our revolving credit facility.

We generated cash flow from operations of $16.8 million for the first quarter of 2020, an increase of $7.1 million or 74%. We used approximately $6.8 million for capital expenditures, which included a minimal amount for our ongoing SAP implementation project. We also spent $10.2 million in dividend payments to our stockholders.

And on March -- excuse me, and on April 23, our Board of Directors declared a quarterly cash dividend of $0.23 per share, which will be payable on July 23 to stockholders of record as of July 2.

Before opening up the call for questions, I'd like to echo Karen's comments in regard to our 2020 financial outlook. Today, there remains a significant amount of macroeconomic uncertainty regarding the coronavirus pandemic, including an overall lack of visibility into future market conditions including U.S. housing starts, a leading indicator for a significant amount of our business. Based on these factors, we have chosen to withdraw our previously provided full year 2020 outlook as well as the financial targets associated with our 2020 plan.

In closing, we're very pleased with our first-quarter results. I'd like to thank all our employees across the globe who are dedicated to working safely and supporting our customers in these highly challenging times. We believe our significant market share, geographic reach and diverse product offerings combined with our ongoing cost-saving initiatives from our 2020 plan, strong balance sheet and near-term focus on cash preservation will place Simpson in a position of strength when shelter-in-place orders begin to be lifted. We are confident in our ability to maintain our operations during this difficult time as long as we are able to continue operating as a supplier of essential businesses and believe we are well positioned to support future demand trends once the COVID-19 pandemic passes.

Thank you for your time and attention today. At this time, I'd like to open the call up for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Daniel Moore with CJS Securities.

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Daniel Joseph Moore, CJS Securities, Inc. - MD of Research [2]

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I hope you and your families are well, and congrats on obviously strong Q1 results.

Karen, you mentioned this is unlike any other downturn. Can you elaborate a little? Obviously, tremendous uncertainty, but what does your crystal ball say about debt duration relative to '08-'09? How is it similar? How is it different? Just any high-level thoughts would be helpful.

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [3]

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Sure. Thanks, Dan. Appreciate compliments on the quarter. It was really a fantastic quarter until about the middle of March, as everybody knows.

So as we discussed, we did have the financial crisis in the 2008-2009 timeframe, certainly a huge impact on Simpson and our business. And some of the things that we see differently today is a fairly still high demand for housing, low interest rates and not a lot of inventory on the market. So we think the demand side of the equation is still good as we look at where we are in 2020. However, we're one month into Q2, and we're certainly already seeing a significant reduction based on where we were in March. And it's very difficult to know what that timeframe will look like as some states are starting to open up and others are not. So very difficult for us to predict what the curve will look like. We've taken into account, again, that strong balance sheet so that we can ensure that we can be in good shape when we come out of this. But from a timing standpoint, again, it's difficult for us to know when things will pick up again.

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Daniel Joseph Moore, CJS Securities, Inc. - MD of Research [4]

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What kind of volume declines have you experienced, either sequentially or year-over-year, thus far, in April in North America and Europe?

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [5]

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From March to April, we've seen a double-digit decline.

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Daniel Joseph Moore, CJS Securities, Inc. - MD of Research [6]

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And maybe what type -- what percentage of capacity are you operating at? I mean, obviously, Europe is a little bit more impacted, but in North America, what percentage of capacity are your plants currently running at?

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [7]

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Yes, that's -- capacity is a great question. It's impacted by a couple of things. Number one, a reduction in the actual customer orders, but the other thing that's impacting our capacity is the health and well-being of our employees. So today, we do have one facility that's got reduced hours, but the other facilities are running at full one-shift capacity.

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Daniel Joseph Moore, CJS Securities, Inc. - MD of Research [8]

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I'll sneak one more in and jump back in queue. In Europe, can you give us a sense for the -- what type of either weekly or monthly operating losses we're running at, at this stage given shutdowns in those 2 large facilities? And any steps you might be taking to mitigate that?

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [9]

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Yes. So in Europe, obviously, the pandemic hit there sooner than in the United States. And we saw, as we mentioned, in mid-March reduction and actually, a government shutdown on both our U.K. facilities and our France. As we mentioned, those are 2 of our largest. They represent about 5% of our revenue, company-wide revenue.

Today, we're starting to see things pick up a little bit there as some of their shelter-in-place elements are being eased. They did not have an impact on our Concrete business. That was still fairly strong because those are typically a commercial type of business. And the shutdown of the United Kingdom and the France location did not have an impact on our Nordic business, which is supplied by our manufacturing facility in Denmark.

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Operator [10]

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Our next question comes from the line of Julio Romero with Sidoti & Company.

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Julio Alberto Romero, Sidoti & Company, LLC - Equity Analyst [11]

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Just following up on the previous question, I mean when I think about the cadence of revenue for the year, I know you mentioned the double-digit drop-off from March to April, but as I think about Simpson specifically, I think about the lag from housing starts to your sales of, I think, about, on average, 3 months. So I mean, considering that and considering how starts have kind of performed this year, I mean, is it fair to expect kind of a stronger drop-off in 3Q than in 2Q for the year?

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [12]

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Yes, I think what we saw in Q1 was part of that strong December-January housing starts. And obviously, we're -- as the March numbers have come out, we've seen a drop-off in those numbers, and that's what we'll start continuing to see as we go through the second quarter. And I think that's what you're seeing already from our March to April drop-off, is that housing start drop-off.

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Julio Alberto Romero, Sidoti & Company, LLC - Equity Analyst [13]

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Okay. And I know you focused on rationalizing the cost structure over the past few years, but can you maybe talk about your current mix of fixed-to-variable costs and how that maybe compares to your cost structure, maybe pre-2020 plan or maybe the last downturn?

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Brian J. Magstadt, Simpson Manufacturing Co., Inc. - CFO & Treasurer [14]

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Julio, it's Brian. So part of the efforts that we've spent over the last few years have really been to position ourselves, not necessarily for a pandemic situation but really try to maximize operating efficiencies and the like. And although we don't typically comment on the fixed versus variable cost structure within our business, the efforts over the last couple of years, which we really started to see payoff as SG&A as a percent of revenue started coming down, we believe those elements we're going to benefit from going forward. But I'm not going to comment right now on how much of our costs are fixed versus variable.

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Julio Alberto Romero, Sidoti & Company, LLC - Equity Analyst [15]

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Fair enough. And maybe just my last one here is, I know you mentioned in the press release kind of tightening your belt on planned capital expenditures. I guess that, along with kind of 2020 plan and how you thought about capital allocation with that, I mean, how do you think about maybe your balance sheet post 2020? And I know that there's a ton of uncertainty, but assuming some type of recovery starts to happen within this year, I guess longer term, I mean, how do you think about your balance sheet and the right cash position assuming a recovery begins to materialize by the end of the year?

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Brian J. Magstadt, Simpson Manufacturing Co., Inc. - CFO & Treasurer [16]

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Well, it's a good question. The -- our initial response was, let's look to preserve liquidity with the moves that we've made and by focusing on CapEx that are primarily safety or replacing equipment that needs to be replaced as the primary focus, at least until we get better visibility into our end markets, and take it from there. So we are -- we continue to monitor, like, I'm sure, all other companies are doing and looking for those signs that things are either turning or they're going to remain this way for a while. But right now, just trying to focus on preserving that balance sheet and delaying, if you will, some of those other CapEx projects that we originally had in our 2020 -- in the fiscal 2020 plans and the like.

So again, just looking to preserve that flexibility until better -- more insight into the end markets come into play. So I don't necessarily have an answer for where we're targeting cash to be, but it's just, again, trying to maintain that flexibility.

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Operator [17]

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

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Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [18]

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I hope everybody's well. Nice job on the quarter and managing the expenses there.

Maybe just -- I hate to harp on kind of May -- March through April, but you said April down double digits relative to March. And I assume you generally have a meaningful stocking that happens between March and April. So I guess, in a normal year, what type of trend would you see from April to March -- from March to April in terms of growth? Would it be up double digits or up single digits?

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [19]

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Well, as we've always said, our -- typically, our best quarters are second and third quarter. And that's really a function of construction being able to be active based on coming out of winter months. So last year, of course, was an anomaly because we had a very tough winter first and second quarter. But historically, our best quarters are second and third quarter. So historically, we would have seen second quarter ticking up compared to where first quarter numbers were.

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Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [20]

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Okay, okay. And then just on the new customer you mentioned, is there any way to just kind of think about sizing or maybe where that customer is in terms of end markets and products -- the types of products that they're purchasing from you?

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [21]

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Yes. I mean I think we've said that the new customer is Lowe's. So that gives you an idea of their end market. And we'll certainly be relaying much more details when we finish -- have our Q2 conference.

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Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [22]

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Okay. Okay, okay. Just any -- is that a pretty sizable win just in terms of overall size?

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [23]

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We'll give you more details on that size and product mix, again, when we've had that opportunity in the Q2 conference.

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Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [24]

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Okay. Okay. Fair enough. And then just -- I guess, when we think of SG&A, and you guys have done a good job controlling SG&A over the last couple of years with the 2020 plan, how should we think of just the flexibility around SG&A if you see meaningful sales declines? And I'm just trying to understand, if sales were down double digits in the second quarter, for example, would you expect SG&A to be down but by a lesser amount or would you expect it to be kind of flat? Anything kind of directional, I think, would be helpful.

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Brian J. Magstadt, Simpson Manufacturing Co., Inc. - CFO & Treasurer [25]

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I would say slightly down to -- or flat to slightly down. I mean there is variable compensation in there. And that's based on profitability and the like. And when you've got lower volumes, you've got lower profitability. But I would say slightly down there.

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Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [26]

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Okay. Okay. And then from a steel perspective, just last one I had. Just if you kind of look forward where prices are today, how big of a tailwind or how long of a tailwind can the material costs be for the gross margin line in your COGS?

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Brian J. Magstadt, Simpson Manufacturing Co., Inc. - CFO & Treasurer [27]

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Yes, it's a good...

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [28]

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Yes, that's a great -- go ahead, Brian.

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Brian J. Magstadt, Simpson Manufacturing Co., Inc. - CFO & Treasurer [29]

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Yes, go ahead, Karen. Yes, so I was going to say that...

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [30]

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Yes, it's a great -- go ahead.

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Brian J. Magstadt, Simpson Manufacturing Co., Inc. - CFO & Treasurer [31]

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Yes, it's still dependent on volume and the like, and we're really not looking to comment on those elements. Of course, we're looking at steel and the markets and the like but also looking to try to balance where we think demand will be with what we need to purchase and kind of take it from there.

So I don't know, Karen, if you've got anything else to add there?

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [32]

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Yes. I would just say that, as we mentioned, our gross margin in the first quarter was good volume, good mix, more Wood products than Concrete products, and certainly we had some contribution from the materials side. It's tough to know. Again, material is really a function of what that volume is going to look like, and it's tough for us to get any good crystal ball at this point. Certainly, we'll continue tracking what's going on with the housing starts and what's going on with the R&R market but really tough to be able to get some clarity on that right yet.

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Operator [33]

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Our next question comes from the line of Steven Chercover with D.A. Davidson.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [34]

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So it's kind of late, so forgive me if there's any repetition. But it sounds like the quarter could have been even better, how stiff a headwind or how steep was the drop-off that you experienced in the last 2 weeks of March?

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [35]

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Steve, I would say that in Europe, they felt that drop-off, as we mentioned, in about mid-March. We probably didn't feel it as significantly. So we were really probably the last week in March is when we started to have the shelter-in-place orders come into effect.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [36]

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Got it. And as we think of your U.S. regions, California and Washington amongst the seismic regions are currently down. Did things really slow down a lot in your wind-shear regions? Because they seem to be a bit more liberal about getting things back and running.

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [37]

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Yes. As you mentioned, so the regions have put these ordinances out in various phases. California did shelter-in-place and then, of course, construction and hardware was still essential. And then some counties in California and as you mentioned, in Washington cut even construction activities, although keeping hardware as essential businesses. So certainly that would have an impact. As you mentioned, in the Western states we've got a lot more content in those houses based on seismic criteria. We're not seeing quite as strict a construction mandate in some of the other states, although parts of the Northeast had similar mandates where construction was not allowed in some areas in Pennsylvania markets. So it varies quite throughout the country.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [38]

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Okay. And then how much flexibility do you have adjusting your work hours? I mean, I guess, in Europe, they kind of did at 40. But in the domestic facilities, can you tell the rank and file we're going to ring the bell after 6 hours because we've got 6 hours' worth of work even though we were accustomed to doing an 8-hour shift? I mean just how much flex is there?

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [39]

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Yes, that's a great question. And of course, we have a very skilled workforce, and so we want to ensure that we're putting everything in place to make sure we don't have to go to reduced work hours. As I mentioned, we've only had to do that at one of our facilities; we went from a 40-hour week to a 32-hour week. And it is -- things that we have to work with. If we're a union shop, we have to go through those processes. But again, we're doing everything as far as making sure we can look at what the production needs are to be keeping that very skilled workforce in place.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [40]

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Okay. And then switching to maybe a Brian question, but the $150 million drawdown on your revolver, I mean, was that just a full-blown abundance of caution, kind of use it or lose it? Are you concerned that somehow your bankers would withhold it or yank it from you?

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Brian J. Magstadt, Simpson Manufacturing Co., Inc. - CFO & Treasurer [41]

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Yes, a full-blown abundance of caution. And early -- in the early days, if you will, we just wanted to make sure that we had that access. It wasn't anything to do with any of our particular banks. I mean they're all very strong banks and strong partners. But I think as we saw in the '08-'09 crisis, companies had been paying for lines of credit and when they went to draw on them were told they were -- funds were not available. So that was -- our position was to make sure that that scenario didn't happen to us.

And I've not heard of any significant -- any restrictions in that regard in this go around. But again, it was just out of that abundance of caution to make sure it was there, if, for whatever reason, the credit markets dried up, and we weren't -- companies weren't allowed to pull it down. But again, I've not seen that this go around, but just to make sure we had it.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [42]

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Got it. And then are you seeing any pockets of strength? I mean, anecdotally, it sounds like a lot of the decking and fencing -- I always want to call them honey-do projects that are -- if the weather is conducive and people have got time on their hands, that's the one area where the home centers are really having a tough time keeping up with the demand. And I'm just wondering, does that benefit for some of your Outdoor Accents products or other product lines that really cater to, well, fencing and decking?

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [43]

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Yes, Steve, I mean, certainly, hardware stores being an essential business, so we do business with Home Depot, True Value, Do it Best. And all of those, I think, are active and busy. A major part of our business, as we always say, is about 60% of our business is driven from home starts. So as much as these areas are doing better than maybe a contractor distributor, they're still not a really large part of our business. So I think they are seeing some good business through those locations. But again, homes start is 60% of our revenue.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [44]

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Sure. Well, I mean, let's hope that your comments at the outset that indicate that there's not an oversupply of housing inventory and that rates remain low, allows us to snap back a little bit differently than after 2008.

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Operator [45]

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We have a follow-up question from the line of Daniel Moore from CJS Securities.

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Daniel Joseph Moore, CJS Securities, Inc. - MD of Research [46]

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It would be shame to not ask at least one question on Q1 given how -- the strength in the quarter. Maybe just, Brian, any commentary? The 320 basis point gross margin improvement, can you break that out between volume and raw material or at least rank order them?

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Brian J. Magstadt, Simpson Manufacturing Co., Inc. - CFO & Treasurer [47]

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Well, we definitely saw volume compared to Q1 last year, but also, as we noted, gross margin benefited from material as a percent of revenue being a little lower, absorbed more overhead, which, I guess, tails into that -- to the volume question. But also, one of the other elements there is mix. We had better Wood margin. Our Wood margins improved in Q1 of '20 versus last year, and that Wood product business was a little bit more of the percent of the total for the company. So a bit of benefit on mix, material and volume.

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Daniel Joseph Moore, CJS Securities, Inc. - MD of Research [48]

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Okay. And lastly, in terms of just getting back capital allocation, the one thing we didn't mention was M&A. Do you see the potential, at least, for increased opportunity given some dislocation? Or are we really on hold as far as that's concerned as well for the time being?

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [49]

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Dan, obviously, we're -- we would keep our eyes open to see if anything of interest was to come around, but certainly we're not actively in that market.

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Operator [50]

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Ladies and gentlemen, we have reached the end of our question-and-answer session as well as today's conference call. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.