Q3 2023 Simpson Manufacturing Co Inc Earnings Call

Greetings and welcome to the Simpson manufacturing company third quarter 2023 earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.

Please note. This conference is being recorded I would now turn the conference over to your host Kim Orlando with <unk> Investor Relations you may begin.

Good afternoon, ladies and gentlemen, and welcome to Simpson manufacturing Companys third quarter 2023 earnings call.

Any statements made on this call that are not statements of historical facts 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 S E T or the company's corporate website.

Except to the extent required by applicable securities laws, we undertake no obligation to update or publicly revise any of the forward looking statements that we make here today, whether as a result of new information future events or otherwise.

Please note that the company's earnings press release was issued today at approximately 415 P M Eastern time.

The earnings press release is available on the Investor Relations page of the company's website at IR stopped Simpson M. S. G Dot 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 Laski, Simpson's President and Chief Executive Officer.

Thanks, Kim good afternoon, everyone and thank you for joining today's call with me today is Brian <unk>, our Chief Financial Officer.

My remarks today will provide an overview of our financial performance key growth initiatives and capital allocation priorities.

Bryan will then walk you through our Q3 financials and fiscal 2023 outlook in greater detail.

We delivered another quarter of solid performance in a challenging operating environment with third quarter net sales of $581 million, increasing four 8% over Q3 2022.

North American volumes increased approximately 7%, partially offset by price decreases earlier in 2023, leading to a growth in net sales of four 4% year over year to $456 $8 million.

Operator: Greetings. Welcome to the Simpson Manufacturing Company, third quarter, 2023 earnings conference call. At this time, all participants are now listening only mode.

To further break down our North American performance, we achieved double digit volume improvements year over year in our commercial national retail and building technology markets. We.

Operator: A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please first star zero on a telephone keypad. Please note this conference is being recorded.

We have continued to execute on our strategies, enabling us to win new applications and customers.

Kimberly Orlando: I will now turn the conference over to your host, Kim Orlando, with paddle and vested relations. You may begin.

In our residential market our volumes improved in the low single digit range with notable strength in the southwest and southeast regions of the U S compared to last year.

Michael Olosky: Good afternoon, ladies and gentlemen, and welcome to Simpson Manufacturing Company's third quarter, 2023 earnings conference call. Any statements made on this call that are not statements of historical facts are forward-looking statements. Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties. Actual future results may vary materially from those expressed or implied by the forward-looking statements. We encourage you to read the risks described in the company's public filings and reports which are available on the SEC's or the company's corporate website.

While 2023 U S housing starts will likely finished below 2022 levels. We continue to believe in sustainable strength of the housing market in the mid to long term given the shortage of new housing.

Michael Olosky: 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.

In fact, we estimate a shortage of approximately 2 million homes in the U S. After more than a decade of under building.

Further we are confident our unique business model will enable us to continue to outperform the market given first our increasingly diverse portfolio of products and software and our commitment to developing complete solutions for the markets. We serve second.

Our long standing reputation relationships and engagement with the engineers building officials and contractors designs safer stronger structures and improve construction practices.

Third a.

The dedication innovation extensive product engineering and rigorous research and testing in our ninth state of the art labs.

Operator: Please note that the company's earnings press release was issued today at approximately 415 p.m. Eastern time. The earnings press release is available on the investor relations page of the company's website at ir.census.com. Today's call is being webcast and a replay will also be available on the investor relations page of the company's website.

Fourth best in class field support technical expertise digital tools and training to make it easy to select specify install and purchase our products.

Fifth.

Industry, leading product availability and delivery standards on our vast product offerings across multiple distribution channels with typical delivery within 24 to 48 hours and six a deep commitment to trades education and partnering with organizations that provide training of career opportunities to attract more people to the construction industry and alleviate labor.

Michael Olosky: Now, I would like to turn the conference over to Mike Oloski, Simpson's president and chief executive officer. Thanks, Kim. Good afternoon, everyone, and thank you for joining today's call. With me today is Brian Magstatt, our chief financial officer. My remarks today will provide an overview of our financial performance, key growth initiatives, and capital allocation priorities. Brian will then walk you through our Q3 financials and fiscal 2023 outlook in greater detail. We delivered another quarter of solid performance in a challenging operating environment with third-quarter net sales of $580.1 million, increasing 4.8% over Q3 2022.

<unk>.

Turning to Europe , while our third quarter sales were relatively flat year over year on a local currency basis, our Europe gross margin has continued to improve versus historical levels.

As reported Europe sales totaled $119 million up six 4% year over year, primarily due to the benefit of $7 $9 million and foreign currency translation.

The title continues to perform well in a challenging market with relatively flat sales, while our integration efforts continue to progress.

Michael Olosky: North American volumes increased approximately 7%, partially offset by price decreases earlier in 2023, leading to a growth in that sales of 4.4% year over year to $456.8 million. To further break down our North American performance, we achieved double-digit volume improvements year over year in our commercial, national retail, and building technology markets. We have continued to execute on our strategies, enabling us to win new applications and customers. In our residential market, our volumes improved in the low single-digit range with notable strength in the southwest and southeast regions of the U.S, compared to last year.

Our business associated with the residential housing market was down due to lower housing starts.

We continue to believe in the longer term potential of the European market, giving ongoing housing shortage, increasing use of wood construction and new regulations that drive new applications and specifications.

Our consolidated gross margin for the third quarter improved to 48, 8%, primarily reflecting lower raw material costs offset by higher fixed costs, and our factory tooling and warehouses.

Brian will further elaborate on the key drivers of our margin performance shortly.

I'll now turn to an update on our key growth initiatives within our five end use markets in line with one of our key company ambitions to be the partner of choice.

Michael Olosky: While 2023 U.S, housing starts will likely finish below 2022 levels, we continue to believe in sustainable strength of the housing market in the mid to long-term given the shortage of new housing. In fact, we estimate a shortage of approximately 2 million homes in the U.S, after more than a decade of underbuilding. Further, we are confident our unique business model will enable us to continue to outperform the market, given first, our increasingly diverse portfolio products and software in a commitment to developing complete solutions for the markets we serve.

Beginning with the residential market, we continue to improve our market share by completing the conversion of a large 13 locations pro dealer chain in the northeast.

Michael Olosky: Second, our longstanding reputation, relationships, and engagement with the engineers, building officials and contractors to design safer stronger structures and improve construction practices. Third, a dedication innovation, extensive product engineering and rigorous research and testing in our nine state-of-the-art labs. Fourth, best-in-class field support, technical expertise, digital tools, and training to make it easy to select, specify, install and purchase our products. Fifth, industry leading product availability and delivery standards on our vast product offerings across multiple distribution channels with typical delivery within 24 to 48 hours.

In addition, we are pressing forward on a shorter path to market by completing the opening of three regional warehouses in the northwest.

In the commercial market are announced alliance with structural technologies continues to drive record revenue of our concrete strengthening solutions.

In the OEM market, our dedicated OEM team remains focused on new opportunities, including Woodward connections for shed manufacturers, it's an opportunity for us to sell our complete product line and offer a broad range of solutions, including truss plates fasteners connectors, and our new easy framed sauce.

Had a couple of nice wins validating that approach.

Also in the OEM space, we continue to focus on mass timber construction, we are launching new solutions specific to mass timber, including fasteners connectors and our new timber drive fastening system, which won the 2023 Pro tool Innovation Award.

Within the National retail space. We are very pleased to have been named the 2023 vendor partner of the year for the building materials division by Lowe's.

Michael Olosky: And sixth, a deep commitment to trade to education and partnering with organizations that provide training or career opportunities to attract more people to the construction industry and alleviate labor shortages. Turning to Europe, while our third quarter sales were relatively flat year-over-year on a local currency basis, our Europe gross margin has continued to improve versus historical levels. As reported, Europe sales told $119 million, up 6.4% year-over-year, primarily due to the benefit of $7.9 million in foreign currency translation.

Vendor partner of the year status awarded to those partners, who support those vision by putting customers needs first.

Bringing innovation fresh ideas and value to the market.

Levering, our commitments and investing in those journey and contributing to their success.

And finally in building technology, we continue to make good progress with new and existing trust component manufacturers, including the conversion of a top 10 component manufacturer based in the Midwest with 15 locations.

Michael Olosky: The time goal continues to perform well in a challenging market with relatively flat sales while our integration efforts continue to progress. Our business associated with the residential housing market was down due to lower housing starts. We continue to believe in the longer-term potential of the European market giving ongoing housing shortage, increasing use of wood construction, and new regulations that drive new applications and specifications. Our consolidated gross margin for the third quarter improved to 48.8% primarily reflecting lower raw material costs offset by higher fixed costs in our factory tooling and warehouses. Brian will further elaborate on the key drivers of our margin performance shortly.

We are pleased with the traction we've made on our growth initiatives to date as we seek to extend our mission to help people design and build safer stronger structures into new applications.

Further we remain focused on implementing our company ambitions, which include strengthening our values based culture being the partner of choice being an innovation leader in the markets. We operate continuing above market growth relative to U S housing starts mainly.

Maintaining our operating income margin within the top quartile of our proxy peers and integrating a tango and returning our ROIC to be within the top quartile of our proxy peers.

Turning now to capital allocation.

Our priorities remain centered on growth opportunities, both organically and through tuck in M&A and returning value to our shareholders via quarterly dividends and opportunistic share repurchases and paying down the debt we incurred to finance the acquisition of a taco.

Michael Olosky: I'll now turn to an update on our key growth initiatives within our five end use markets in line with one of our key company ambitions to be the partner of choice. Beginning with the residential market, we continue to improve our market share by completing the conversion of a large 13 location pro dealer chain in the Northeast. In addition, we are pressing forward on a shorter path of market by completing the opening of three regional warehouses in the Northwest.

Our organic growth initiatives have been aimed at further strengthening our business model and expanding our operations and manufacturing capacity to achieve greater supply chain efficiencies and uphold our best in class customer service standards.

As noted previously we are continuing to evaluate potential M&A opportunities to accelerate traction of our key growth initiatives.

Michael Olosky: In the commercial market, our announced alliance with structural technologies continues to drive record revenue of our concrete strengthening solutions. In the OEM market, our dedicated OEM team remains focused on new opportunities, including wood to wood connections for shed manufacturers. It's an opportunity for us to sell our complete product line and offer a broad range of solutions, including trust plates, fasteners, connectors, and our new easy frame saws. We've had a couple of nice wind validating that approach.

The majority of which are smaller opportunities to expand our product line our solution set.

Or help us achieve better manufacturing and supply chain efficiencies.

Before I conclude I'd like to briefly comment on the cyber security incident that occurred a couple of weeks ago.

While our operations were mostly down for approximately three days throughout most of the company, our swift actions and commitment to our customers.

Let us to make up for the downtime and allowed us to resume shipments to clear our backlog within just one week.

Michael Olosky: Also, in the OEM space, we continue to focus on mass timber construction. We are launching new solutions, specific to mass timber, including fasteners, connectors, and our new timber drive fasting system, which won the 2023 Pro Tool Innovation Awards. Award. Within the National Retail Space, we are very pleased to have been named the 2023 Bender Partner of the Year for the Building Materials Division by Lowe's. Bender Partner of the Year status awarded to those partners who support Lowe's vision by putting customers needs first, bringing innovation, fresh ideas, and value to the market, delivering on commitments, and investing in Lowe's journey, and contributing to their success.

I'd like to thank our dedicated Simpson team for all of the hard work that made this possible as well as our valued customers for their support during this time.

In summary, I am very pleased with our third quarter performance in a challenging market based.

Based on the current interest rate environment, and the resultant impact on the housing market, we anticipate that our fourth quarter 2023 results will start reflecting some downward pressure due to these factors.

In addition to typical seasonality relative to the third quarter of 2023 so.

So we expect the fourth quarter to be up compared to the prior year quarter. Looking ahead. We continue to believe that we have ample opportunities to pursue our growth initiatives and enhance stockholder value over time.

Michael Olosky: And finally in building technology, we continue to make good progress with new and existing trust component manufacturers, including the conversion of a top 10 component manufacturer based in the Midwest with 15 locations. We are pleased with the traction we've made on our growth initiative to date as we seek to extend our mission to help people design and build safer stronger structures and new applications.

With that I'd like to turn the call over to Brian who will discuss our third quarter financial results in greater detail.

Thanks, Mike and good afternoon, everyone. Thank you for joining us to discuss our third quarter financial results today.

Before I begin I'd like to mention that unless otherwise stated all financial measures discussed in my prepared remarks referred to the third quarter of 2023.

Michael Olosky: Further, we remain focused on implementing our company ambitions, which include strengthening our values-based culture, being the partner of choice, being an innovation leader in the markets we operate, continuing above market growth relative to U.S, housing starts, maintaining our operating income margin within the top quartile of our proxy peers, and integrating Atonco and returning our ROIC to be within the top quartile of our proxy peers.

And all comparisons will be year over year comparisons versus the third quarter of 2022.

Now beginning with our third quarter results.

As Mike highlighted our consolidated net sales increased four 8% to $581 million.

Within the North America segment, net sales increased four 4% to $456 $8 million, primarily due to higher sales volumes.

Michael Olosky: Turning now to capital allocation. Our priorities remain centered on growth opportunities, both organically and through Tuck-in M&A, and returning value to our shareholders via quarterly dividends and opportunistic share repurchases and paying down the debt we incurred to finance the acquisition of Atonco. Our organic growth initiatives have been aimed at further strengthening our business model and expanding our operations and manufacturing capacity to achieve great supply chain efficiencies and uphold our best in-class customer service standards.

Michael Olosky: As noted previously, we are continuing to evaluate potential M&A opportunities to accelerate traction of our key growth initiatives, the majority of which are smaller opportunities to expand our product line or solution set, or help us achieve better manufacturing and supply chain efficiencies.

And in Europe , net sales increased six 4% to 100 $119 million, primarily due to the positive effect of $7 $9 million and foreign currency translation, which was partly offset by lower sales volumes.

Wood construction products represented 85, 4% of our total third quarter sales compared to 86, 4% in.

In concrete construction products were 14, 5% of total sales up from 13, 5%.

And in North America Wood product volume was up seven 6% and concrete product volume was up three 3%.

Michael Olosky: Before I conclude, I'd like to briefly comment on the cybersecurity incident that occurred a couple of weeks ago. While our operations were mostly down for approximately three days throughout most of the company, our swift actions and commitment to our customers led us to make up for the downtime and allowed us to resume shipments to clear a backlog within just one week. I'd like to thank our dedicated Simpson team for all of the hard work that made this possible as well as our value customers for their support during this time.

Consolidated gross profit increased 15, 7% to $282 $9 million, resulting in a gross margin of 48, 8% compared to 44, 2% last year.

On a segment basis, our gross margin in North America increased to 51, 8% compared to 47, 5%.

Michael Olosky: In summary, I am very pleased with our third quarter performance in a challenging market. Based on the current interest rate environment and the result and impact on the housing market, we anticipate that our fourth quarter 2023 results will start reflecting some downward pressure due to these factors. In addition to typical seasonality, relative to the third quarter of 2023, though we expect the fourth quarter to be up compared to the prior year quarter.

Primarily due to lower raw material costs.

Which were partially offset by higher warehouse and freight costs.

As a percentage of net sales.

Our gross margin in Europe increased to 37, 9% from 31, 5%.

<unk>, primarily due to lower raw material costs as a percentage of net sales.

As you May also recall.

Michael Olosky: Looking ahead, we continue to believe that we have ample opportunities to pursue our growth initiatives and enhance stockholder value over time.

Our raw material costs in the prior year period included a $2 9 million inventory fair value adjustment for the acquisition of the Taco representing two six percentage points of Europe gross margin.

Brian Magstadt: With that, I'd like to turn the call of a brand who will discuss our third quarter financial results in greater detail. Thanks Mike and good afternoon everyone. Thank you for joining us to discuss our third quarter financial results today. Before I begin, I'd like to mention that unless otherwise stated, all financial measures discussed in my prepared remarks referred to the third quarter of 2023. And all comparisons will be year over year comparisons versus the third quarter of 2022.

From a product perspective, our third quarter gross margin on wood products was 49, 1% compared to 44, 1% in the prior year quarter.

It was 47, 9% for concrete products compared to 43, 8% in the prior year quarter.

Now turning to our third quarter costs and operating expenses.

Brian Magstadt: Now beginning with our third quarter results. As Mike highlighted, our consolidated net sales increased 4.8% to 580.1 million dollars. Within the North American segment net sales increased 4.4% to 456.8 million dollars primarily due to higher sales volumes. And in Europe net sales increased 6.4% to 1119 million dollars primarily due to the positive effect of 7.9 million dollars and foreign currency translation, which is partly offset by lower sales volumes. Wood construction products represented 85.4% of our total third quarter sales compared to 86.4% and concrete construction products were 14.5% of total sales up from 13.5%.

Operating expenses were $141 9 million, an increase of $22 million or approximately 18, 3% driven primarily by increased personnel costs to support our growth.

As well as higher variable compensation.

As a percentage of net sales total operating expenses were 24, 5% compared to 21, 7%.

Our third quarter research and development and engineering expenses increased 44, 9% to 24 point.

$8 million.

Primarily due to our strategic growth initiatives, including higher personnel costs and software development initiatives to further our building technology offerings.

Selling expenses increased 23, 2% to $52 $4 million, primarily due to increased commissions and personnel in North America.

Brian Magstadt: And in North America, wood product volume was up 7.6% and concrete product volume was up 3.3%. Insolidated gross profit increased 15.7% to 282.9 million dollars resulting in a gross margin of 48.8% compared to 44.2% last year. On a segment basis, our gross margin in North America increased to 51.8% compared to 47.5%. Primarily due to lower raw material costs, which were partially offset by higher warehouse and freight costs as a percentage of net sales.

On a segment basis selling expenses in North America were up 26% and in Europe , They were up 14%.

General and administrative expenses increased seven 4% to $64 8 million.

Primarily due to professional fees personnel costs.

Software licensing.

As a result, our consolidated income from operations totaled $140 2 million a significant increase of 14, 2% from $122 $8 million.

In North America income from operations increased six 5% to $135 6 million.

Brian Magstadt: Our gross margin in Europe increased to 37.9% from 31.5%. Also primarily due to lower raw material costs as a percentage of net sales. As you may also recall, our raw material costs in the prior year period included a 2.9 million dollar inventory, fair value adjustment for the acquisition of a taco, representing 2.6% percentage points of Europe gross margin. From a product perspective, our third quarter gross margin on wood products was 49.1% compared to 44.1% in the prior year quarter and was 47.9% for concrete products compared to 43.8% in the prior year quarter.

Primarily due to higher gross profit, partly offset by increased personnel and variable compensation.

In Europe income from operations was $15 5 million compared to $6 $1 million due to higher gross profit, partly due to the prior year to $9 million inventory fair value adjustment as.

As well as lower year over year acquisition, and integration costs, which were partially offset by increases in personnel costs and variable compensation.

On a consolidated basis, our operating income margin was 24, 2% an increase of 200 basis points from 22, 2%.

Our effective tax rate increased slightly to 25, 7% from 25, 3%.

Brian Magstadt: Now turning to our third quarter cost and operating expenses. Operating expenses were 141.9 million dollars in increase of 22 million dollars or approximately 18.3%. You have been primarily by increased personal costs to support our growth, as well as higher variable compensation. As a percentage of net sales total operating expenses were 24.5% compared to 21.7%. Our third quarter research and development and engineering expenses increased 44.9% to 24.8 million dollars. Primarily due to our strategic growth initiatives including higher personal costs and software development initiatives to further our building technology up.

Accordingly, net income totaled $104 2 million or $2 43 per fully diluted share.

Which is inclusive of $1 $3 million of net interest income. This compares to $88 2 million or $2 <unk> per fully diluted share, which included $3 million of net interest expense.

Now turning to our balance sheet and cash flow.

Our balance sheet remains healthy with cash and cash equivalents totaling $571 million as of September 32023.

$163 million from our balance as of June 32023.

Brian Magstadt: Selling expenses increased $23.2% to $52.4 million, primarily due to increased commissions and personnel in North America. On a segment basis, selling expenses in North America were up 26% and in Europe they were up 14%. General and administrative expenses increased 7.4% to $64.8 million, primarily due to professional fees, personal costs, and software licensing. As a result, our consolidated income from operations totaled $140.2 million, a significant increase of 14.2% from $122.8 million. In North America, income from operations increased to $6.5% to $135.6 million, primarily due to higher gross profit, partly offset by increased personnel and variable compensation.

Our debt balance was approximately $561 $6 million net of capitalized financing costs.

And our net cash position ex debt was $9 $4 million.

We have $300 million remaining.

Available for borrowing on our primary line of credit.

Our inventory position as of September 32023 was $504 4 million, which was down $17 $7 million compared to our balance as of June 32023.

Effective management of the on hand volume and cost of our inventory remains a key element of our business model as we strive to ensure on time delivery standards and superior customer service levels that sets them apart.

During the third quarter, we generated cash flow from operations of $204 6 million compared to $124 $9 million.

Brian Magstadt: In Europe, income from operations was $15.5 million compared to $6.1 million due to higher gross profit, partly due to the per year's $2.9 million inventory fair value adjustment, as well as lower year-over-year acquisition and integration costs, which were partially offset by increases in personnel, costs, and variable compensation. On a consolidated basis, our operating income margin was 24.2%, an increase of 200 basis points from 22.2%. Our effective tax rate increased slightly to 25.7% from 25.3%. Fortunately, net income totaled $104.2 million or $2.43 per fully diluted share, which is included $3 million of net interest expense.

We invested $22 5 million for capital expenditures and paid $11 5 million in dividends to our stockholders.

While we did not repurchase any shares of our common stock during the quarter, we continue to evaluate opportunistic share repurchases as part of our capital allocation strategy.

Next turning to our 2023.

Our outlook based on business trends and conditions as of today October 23rd we are updating certain elements of our guidance for the full year ending December 31, 2023 as follows.

We now expect our operating margin to be in the range of 22 to.

22, 5%.

Key assumptions include our U S housing starts relative to our assumptions earlier in the year.

Although we expect our fourth quarter will be slightly stronger than the prior year period, we are starting to see additional headwinds for the first half of 2024.

Higher overall gross margin based on improved volumes as noted above and material cost assumptions.

Increased operating expenses, we believe are necessary to position the company to make meaningful share gains in our markets and growth initiatives.

Brian Magstadt: Now, turning to our balance sheet and cash flow. Our balance sheet remained healthy, with cash and cash equivalents totaling $571 million as of September 30, 2023, up $163 million from our balance as of June 30, 2023. Our debt balance was approximately $561.6 million net of capitalized finance costs, and our net cash position, X-DAT, was $9.4 million. We have $300 million remaining available for borrowing on our primary line of credit. Our inventory position, as of September 30, 2023, was $504.4 million, which was down $17.7 million compared to our balance as of June 30, 2023.

6 million to $7 million in expected total integration costs associated with the Taco we are continuing to make progress on our integration efforts for Taco in order to realize previously identified offensive and defensive synergies in the years.

Ahead subject to macroeconomic changes.

Which will delay the realization of some of the offensive synergies.

Next our 2023 effective tax rate is expected to be in the range of 25% to 26%.

Including both federal and state income tax rates and assuming no tax law changes are enacted.

Lastly, we now expect capital expenditures to be approximately $100 million.

Subject to possible weather delaying the construction of our Columbus expansion and supply chain related issues.

In summary, we were pleased with our financial and operational performance during the third quarter in a challenging operating environment.

Brian Magstadt: Effective management of the on-hand volume and cost of our inventory remains a key element of our business model, as we strive to ensure on-time delivery standards and superior customer service levels that sets them apart. During the third quarter, we generated cash flow from operations of $204.6 million compared to $124.9 million. We invested $22.5 million for capital expenditures and paid $11.5 million in dividends to our stockholders. While we did not repurchase any shares of our common stock during the quarter, we continued to evaluate opportunistic share repurchases as part of our capital allocation strategy.

We remain focused on providing excellent value innovation and service to our customers by expanding our broad solution set throughout our five key end use markets.

We are continuing to diligently manage our expenses as the macro environment evolves.

Our strong balance sheet and cash flow enable us to make investments to support our.

Organic growth initiatives.

Thanks, again to our team at Simpson for the strong performance and to all of our stakeholders for your support of the company.

With that I would like to turn the call over to the operator to begin the Q&A session.

Brian Magstadt: Next, turning to our 2023 financial outlook. Based on business trends and conditions as of today, October 23, we are updating certain elements of our guidance for the full year ending December 31, 2023 as follows. We now expect our operating margin to be in the range of 22 to 22.5%. Key assumptions include higher U.S, housing starts relative to our assumptions earlier in the year. Although we expect our fourth quarter will be slightly stronger than the prior year period, we are starting to see additional headwinds for the first half of 2024.

At this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.

You May press Star two if you would like to meet with you.

Question from the queue, so participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Our first question comes from the line of Daniel Moore with CJS Securities.

See with your question.

Thank you good afternoon, Mike Good afternoon, Brian Thanks for taking the questions.

Brian Magstadt: Higher overall gross margin based on improved volumes is noted above in material cost assumptions. Increased operating expenses, we believe are necessary to position the company to make meaningful share gains in our markets and growth initiatives. $6 million to $7 million in expected total integration costs associated with the Tomco. We are continuing to make progress on our integration efforts for Tomco in order to realize previously identified offensive and offensive synergies in the years ahead subject to macroeconomic changes which will delay the realization of some of the offensive synergies.

Start with your core markets in North American housing operations He said.

Q4 would start to reflect some of the downward pressure in the housing market.

He also said that it would be up.

Versus prior year, I assume you're referring to consolidated revenue when you say will be up versus prior year, and maybe just talk a little bit more about your expectations for market growth versus share gains.

And whether you see some of that pressure, perhaps persisting into.

Into the first quarter or two of 24.

Good question, Dan So let me start with where it is today and how we think the market is going to finish the year. So housing starts roughly down 12% year to date, we think it will finish the year down.

Brian Magstadt: Next, our 2023 effective tax rate is expected to be in the range of 25% to 26% including both federal and state income tax rates and assuming no tax law changes are enacted. Lastly, we now expect capital expenditures to be approximately $100 million. Subject to possible weather, delaying the construction of our Columbus expansion and supply chain related issues.

12% and then when you look at our business.

July and August for Us was pretty strong versus prior year.

September is starting to slow down a little bit.

<unk> off a little soft.

We do think on a consolidated level fourth quarter will be above prior year fourth quarter and then when we look out into next year, what we're hearing from our customers as the first half is expected to be a little sore.

Brian Magstadt: In summary, we were pleased with our financial and operational performance during the third quarter in a challenging operating environment. We remain focused on providing excellent value, innovation and service to our customers by expanding our broad solution set throughout our five key and use markets. We are continuing to diligently manage our expenses as the macro environment involves and our strong balance sheet and cash flow enable us to make investments to support our organic growth initiatives. Thanks again to our team at Simpson for the strong performance and to all of our stakeholders for your support of the company.

Half is expected to pick up depending upon interest rates and the economy.

A bunch of other stuff in that's kind of how we see it today.

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

Yeah, right now Dan it's Brian .

Just down slightly.

October .

Last year October this year.

So over the last year and as we're thinking about the balance of the quarter.

Operator: With that, I would like to turn the call over to the operator to begin the Q&A session. At this time we will be conducting a question and answer session. If you would like to ask the question, please press star one on your telephone keypad. A confirmation phone will indicate your a question cue. You may press start to if you would like to move your question from the cue. Participants use a speaker equipment, and may be necessary to pick up your handset before pressing the start keys.

To mikes point, having a.

Pretty good quarter compared to Q4 of last year, both on the revenue and the operating margin, which leads us to that.

Updated guidance on operating margin that we provided.

Okay helpful.

Maybe looking at the markets you've targeted for increased penetration and are seeing some pretty good success.

You called out commercial national retail and building Tech.

Daniel Moore: Call our first question, coming from the line I'm Daniel Moore with CJ with your question. Thank you. Good afternoon, Michael, good afternoon, Brian. Thanks for taking the questions. Start with your core markets in North American housing operations. You said cue 4 would start to reflect some of the downward pressure in the housing market. He also said that it would be up versus prior year. I assume you're referring to consolidated revenue when you say we'll be up versus prior year and maybe just talk a little bit more about your expectations for market growth versus share gains. Whether you see some of that pressure perhaps persisting into the first quarter or two of 24.

Just maybe speak a little deeper into each of those three describe.

In each market, where youre seeing success, what's enabling you to take share and your confidence those tailwind will continue as we look into next year.

So Dan.

I'm pleased to say actually across all five market segments in quarter three revenue growth was above prior year Q3. So we're seeing good performance in all of them again in a challenging environment in the commercial space one of the things that we touched on was our partnership with structural technologies.

Using our concrete repair systems.

To work with structural technologies to go after infrastructure repair opportunities.

We're seeing good growth there on the national retail side, we continue to invest in people to send into our national retail customers to help train their sales associates due to work on the sense to clean them up and make sure they're easy to shop to work with our customers on merchandising and cap opportunities.

Michael Olosky: Good question, Dan. Let me start with where it is today and how we think the market is going to finish the year. Housing starts roughly down 12% a year today. We think it will finish the year down 12%. Then when you look at our business, July and August for us was pretty strong versus prior year. September started to slow down a little bit and October is off a little soft. We do think on a consolidated level fourth quarter will be above prior year fourth quarter.

And we're seeing that investment continues to pay off with those customers by seeing good good point of sales data from our national retail customers.

Got it last for me and I'll jump out of.

Q for now at least just.

No.

<unk> supplies.

By my math gross gross margin somewhere in the 47% range give or give or take for the year.

Michael Olosky: Then when we look out into next year, what we're hearing from our customers is the first half is expected to be a little soft. Second half is expected to pick up depending upon interest rates, economy and a bunch of other stuff. That's how we see it today. When you say a little soft, is there any way you can compare that to the down 12 that we've experienced so far just in terms of your expectations?

You know.

Just talk about the biggest puts and takes in your mind that would cause that to move higher or lower as we look to 2024, certainly you know we're going to finish the year above where well above where we started from an expectations perspective, but when you look at steel costs. The overall macro.

Et cetera mix you know your thoughts if any as we kind of look out beyond and maybe one more quarter.

Michael Olosky: Right now, Dan. It's right and just down slightly from October last year. October this year, October last year. As we're thinking about the balance of the quarter to Mike's point, having a pretty good quarter compared to Q4 last year, both on the revenue and the operating margin, which leads us to that updated guidance on operating margin that we provided.

Sure so as we're thinking about.

The full year.

And.

The various volume assumptions that we're making the traditional Q4 seasonality.

<unk> means we're not absorbing as much overhead.

We would say.

Second and third quarter.

We're continuing to look at.

Okay.

Steel market, where we are.

Michael Olosky: Okay, helpful. Maybe looking at the markets you've targeted for increased penetration and are seeing some pretty good success. I think you called out commercial national retail and building tech. You just maybe dig a little deeper into each of those three, describe in each market where you're seeing success, what's enabling you to take share and your confidence, those tailwinds, will continue as we look into next year. So Dan, please to say actually across all five market segments in quarter three revenue growth was above prior year Q3.

We're expecting costs to be at current levels or higher.

Future.

Future.

Yes.

Versus some of those those headwinds that Mike had mentioned so the volume assumptions, we're making.

The product mix.

All right.

Factoring into a fourth quarter that we're expecting to be.

So a little bit better from an operating margin perspective in Q4 of 2022.

Michael Olosky: So we're seeing good performance in all of them again in a challenging environment. In the commercial space, one of the things that we touched on was our partnership with structural technologies. So that's using our concrete repair systems to work with structural technologies to go after infrastructure repair opportunities. We're seeing good growth there on the national retail side. We continue to invest in people descended to our national retail customers to help train their sales associates to work on the sets to clean them up and make sure they're easy to shop to work with our customers on merchandising and cap opportunities. And we're seeing that investment continue to pay off with those customers by seeing good, good point of sale data from our national retail customers.

And.

With a continued focus on looking at those opportunities, where we're making investments into.

Building technology solutions or Mike had mentioned a number of other initiatives to support our customers in order to continue to further our.

Those additional markets, we're going after to grow and capture additional market share.

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

Thanks, Dan.

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

Brian Magstadt: Got it. Last Romano jump out, Q for now at least, just, you know, guidance implies by my math, gross margins, somewhere in the 47% range give or take for the year. You know, just talk about the biggest puts and takes in your mind that would cause that to move higher lower as we look to 2024. Certainly, you know, we're going to finish the year above, well above where we started from an expectations perspective, but when you look at, you know, steel costs, the overall macro, et cetera, mix, you know, your thoughts, if any, as we kind of look out beyond, maybe one more quarter.

Hey, guys good.

Good afternoon.

Hey, Tim.

Maybe just to start off on on SG&A.

So I'm trying to think about.

As you kind of go forward over the next year, maybe two years.

How are you kind of thinking about kind of SG&A as a percentage of sales and kind of and growing incremental investments in <unk>.

I guess, how would you kind of think about managing that if you were in kind of a tougher environment I think you know.

This year, we're may be kind of flattish in north American sales and SG&A.

Nearly 20% so could you maybe help us with.

Brian Magstadt: Thanks. Sure. So, as we're thinking about the full year and the various volume assumptions that we're making, the traditional Q4 seasonality, which means we're not absorbing as much overhead as we would during, say, second and third quarter, we're continuing to look at steel market where we're expecting cost to be at current levels or higher in the future versus some of those headwinds that Mike had mentioned. So, the volume assumptions we're making, the product mix, all factoring into a fourth quarter that we're expecting to be a little bit better from an operating margin perspective than Q4 of 2022.

Kind of how you would think about managing that SG&A expense kind of a go forward basis relative to sales.

Sure.

So one of the things that we want to reinforce is that.

We're hiring to support those growth initiatives.

That we believe there is a lot of opportunity in front of Simpson.

But we are mindful of those expenses.

In order to go capture those so as we think about it.

Top quartile within our proxy peers from an operating income margin perspective.

We're looking at balancing how we fund those investments.

So the growth initiatives versus again, we want to continue to position ourselves in that top quartile.

Do note that in Q3, R&D and engineering expenses increased pretty significant amount.

Some of that included investment in.

Building technology solutions so some.

Brian Magstadt: And with a continued focus on looking at those opportunities where we're making investments into building technology solutions or Mike had mentioned a number of other initiatives to support our customers in order to continue to further our, those additional markets were going after to grow and capture additional market share.

Additional costs.

Certainly expect to repeat.

But as we as we think about how we are winning in the marketplace.

So and building technology and retail et cetera. It does.

Take some of the above.

Above average.

We also as Mike noted continue to add to our national retail team and really want to make sure we're supporting those customers with the various tools.

Daniel Moore: Very good. I'll drop back when we follow-ups or offline. Thanks again, Brian. Thanks, Dan.

That enable them to better serve their customer in addition to the merchandising efforts.

Tim Weiss: Our next question comes to the line of Tim Weiss with Beard. Please proceed with your question. Hey, guys. Good afternoon. Maybe just to start off on SG&A. Trying to think about, you know, if you kind of go forward over the next year or maybe two years, just how are you kind of thinking about kind of SG&A as a percentage of sales and kind of incremental investments? And I guess how would you kind of think about managing that if you were in kind of a tougher environment?

Mike mentioned, so as we think about.

Those.

The funding of those things, we're really looking to balance.

Where we can where we see ourselves in that mid to long term versus where we are today from a top quartile performance perspective, and really want to be mindful of what we're investing in is going to drive that long term growth.

Okay. Okay. That's helpful. I mean would you say you are.

Youre still kind of in the phase of maybe over investing or investing ahead of sales or do you think you're you're kind of at a point, where you can maybe invest kind of in conjunction with the sales growth rate.

Tim Weiss: I think, you know, this year we're maybe kind of flatish in North America on sales and SG&A's up, you know, kind of nearly 20%. And so could you maybe help us, you know, kind of how you would think about managing that at SG&A expense on kind of a go forward basis relative to sales? Sure.

Yes, we are over investing relative to revenue growth at this point.

Again, because we see a lot of things that are right in front of us from a growth opportunity. If you want to make sure we get the people in place to do it.

Brian Magstadt: So one of the things that we want to reinforce is that we're hiring to support those growth initiatives that we believe there's a lot of opportunity in front of Simpson. But we are mindful of those expenses in order to go capture those. We're looking at balancing how we fund those investments for the growth initiatives versus, again, we want to continue to position ourselves in that top core tile. We do note that in Q3, R&D, and engineering expenses increase a pretty significant amount.

And we're all doing that under the mindset of being in the top quartile from a operating income perspective.

Okay.

Got you.

And then just maybe on the Taco I know just about the environment in Europe I think.

You've kind of pushed out some of the.

The synergies there, but is there a way to maybe give us an update on kind of where the synergies kind of stand.

In terms of maybe what's been captured and kind of compare that to what your initial targets were.

Yes, so when we look at it tackle overall, we're still pleased with how things are developing again, we very much like their business model relative to the market they are doing fairly well.

Tycho So we're happy with that.

Some of the synergies that we're working on from a defensive perspective, we realized a couple of smaller ones.

Brian Magstadt: Some of that included investment in some building technology solutions, some additional costs that I wouldn't necessarily expect to repeat. But as we think about how we are winning in the marketplace and building technology and retail, et cetera, it does take some of that above average investment. We also, as Mike noted, continue to add to our national retail team and really want to make sure we're supporting those customers with the various tools that enable them to better serve their customer in addition to the merchandising efforts that Mike mentioned.

More to come on the bigger ones over the next couple of years.

The offensive synergies we've started to all the cross selling efforts, we've got things in place to make that happen and we're rolling those out now.

We've been a little bit slow Tim on investing in some of the things that drive offensive synergies because we're very much trying to balance.

Short term profitability with the longer term plan.

So that's why we're we're kind of we're managing it that way to make sure that we also have good development of operating margin in Europe , and you see that in our European business, where we're a 400 basis points above.

Year over year in Q3 operating margin.

Yes.

Brian Magstadt: So as we think about those funding of those things, we're really looking to balance where we can, where we see ourselves in that mid to long term versus where we are today from a top core tile performance perspective and really want to be mindful of what we're investing in is going to drive that long term growth. Okay, that's helpful. I mean, would you say you're still kind of in the phase of maybe over investing or investing ahead of sales, or do you think you're kind of at a point where, you know, you can maybe invest kind of in conjunction with the sales growth rate?

Assuming that some of the charges we had last year.

Not in there so on a like for like basis like for like.

Yep Yep perfect. Okay, and then and then just the last one just some of these.

The share gains that you're kind of calling out in terms of the convergence of some pro dealers then.

<unk> dealers and things like that I mean is there any sort of kind of the.

Consistent driver of.

Why youre able to kind of create our share gains is there any specific reason at the office just kind of a bunch of smaller things kind of added up in a share gain.

Tim I think it really comes from our people and our strong business model I mean, we've got people that are <unk>.

Experts in the field there long term partnering with our customers. We've got a great business model, we are driving specifications or training a bunch of people.

Brian Magstadt: Yes, we are over investing relative to revenue growth at this point. Again, because we see a lot of things that are right in front of us from a growth opportunity, we want to make sure we get the people in place to do it. And we're all doing that under the mindset of being in the top core tile from an operating come perspective. Okay, gotcha.

You add all that up with our superior customer service and it's just helping us pick up these customers one at a time.

And that continues to be a focus for us.

Okay, Okay, great well good luck on the rest of you guys. Thanks for that.

Thank you.

Our next question comes from Kurt <unk> with D. A Davidson. Please proceed with your question.

Tim Weiss: And then just maybe on a taco. I know just what the environment in Europe, I think it kind of pushed out some of the synergies there.

Great. Thanks, and good afternoon, everyone.

Brian Magstadt: But is there a way to maybe give us an update on kind of where the synergies kind of stand in terms of maybe what's been captured and kind of compare that to what your initial targets were? Yeah, so when we look at a taco overall, we're still pleased with how things are developing. Again, we very much like their business model relative to the market, they're doing fairly well at a taco, so we're happy with that.

Yeah.

Mike you had talked about in the first half of next year starting to kick.

Thanks.

Softened a little bit are those comments, just what youre hearing from your builder customers or is that.

Customers in some of these different market segments and cohorts as well.

Yes.

Across the board so certainly since 50% of our business is linked to the residential market Thats got the biggest Santa but when you look at these other markets.

Brian Magstadt: Some of the synergies that we're working on from a defensive perspective, we realize a couple of smaller ones more to come on the bigger ones over the next couple of years. The offensive synergies, we started all the cross selling efforts, we've got things in place to make that happen, we're rolling those out now. We've been a little bit slow Tim on investing in some of the things to drive offensive synergies because we're very much trying to balance short term profitability with the longer term plan.

Plus or minus.

Again across the board in first half, we see weakness and I think a lot of that is really just driven by the uncertainty associated with the current economic environment.

Okay.

Makes sense and then I just wanted to go back to the conversation around component manufacturers.

I guess, maybe just frame how you think about the current opportunity set because it is a very large market and one where.

Brian Magstadt: So that's why we're kind of managing it that way to make sure that we also have good development of operating margin in Europe. And you see that in our European business, where we're 400 basis points above year over year in Q3 operating margin. Yeah, and that was assuming that some of the charges we had last year, you know, were not in there.

You guys don't have a ton of share at the moment and then I guess separately are the customers that you're converting and winning over are those moving to like a dual source model or is that single source with Simpson for some of those trust plate.

Yes. So it is a good size market for us we have a lot of these people are also buying connectors and other products from us so theres some opportunity to leverage our relationships. We have with these customers to pick up on the truck side of our business. We continue to invest like crazy into the software space and we've made a lot of progress.

Tim Weiss: So I'm going to like for like, perfect.

Michael Olosky: Okay, and then just the last one, just some of these some of the sharegames that you're kind of calling out in terms of the conversion of those dealers and component dealers and things like that. I mean, is there any sort of kind of consistent driver of why, you know, you're you're able to kind of cruiser sharegames. Is there any specific reason in the office, just kind of a bunch of, you know, smaller things to kind of add it up in a share day.

In that area, we're adding people to provide service and support and into that area and then again you combine that Curt with with our typical service levels and also making sure that we've got an open and open environment, meaning if people use our software they can decide where they want to buy their trust plays.

Michael Olosky: No, Tim, I think it really comes from our people and our strong business model. I mean, we've got people that are experts in the field. They're long term partnering with the customers. We got a great business model. We're driving specifications or training a bunch of people. You add all that up with the superior customer service, and it should help us pick up these customers one at a time. And that continues to be a focus for us.

We think customers prefer that going forward.

Tim Weiss: Okay, okay, good.

And we are very mindful of how we're bringing customers on we want to make sure that we do bring them on that we provide that great experience that great service at great support.

So that and that they are successful at the end of the day and we do believe that we're going to continue that forward into 2024.

Tim Weiss: We'll go left on the rest of your guys. Thanks for the time.

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

Kurt Yinger: Thank you. Our next question comes from Kurt Yinger with D.A. Davidson. See if we'll see you with your question. Great. Thanks and good afternoon, everyone. Mike, you had talked about in the first half of next year, starting to think things would would soften a little bit. Are those comments just what you're hearing from your donor customers or is that customers and some of these different market segments and cohorts as well? Yeah, it's across the board.

So the opportunity with these customers.

For truck places fairly significant.

In some cases, there is the opportunity to combine it with some additional connector business, but we're in a lot of these are really just talking about the software and the trust blade business.

Got it makes sense and then just lastly on national retail.

Kurt Yinger: So certainly since 50% of our business is linked to the residential market, that's got the biggest sale. But when you look at these other markets, plus or minus, you know, again, across the board, first half, we see weakness. And I think a lot of that is really just driven by the uncertainty associated with the current economic environment.

With some of the shelf space changes there. The last couple of years has the load in our products to new stores then.

Meaningful contributor to growth at all this year or has that largely been kind of set and youre just reaping the rewards.

Some of the investments and merchandising and the like.

Michael Olosky: Okay, make sense. And then I just wanted to go back to the conversation around component manufacturers. And I guess you may just frame how you think about the current opportunity set because it is a very large market and one where you guys don't have a ton of share at the moment. And then I guess separately are the customers that you're converting and winning over are those moving to like a dual source model or is that single source with sense and for some of those trust laid.

Yes, I think it is.

Lots of small things, adding up to good growth.

So certainly the load in as.

As we've picked up a couple of pick.

Picked up a couple of customers has held we continue to work with our customers to get additional self shelf space. We continue to work on off shelf merchandising that makes sense. The attachment rate is a big focus for US. We're also investing in e-commerce, and we see good growth in ecommerce with our national retail partners.

As I mentioned, just sending people into the stores, helping them clean up the SaaS, helping the merchandise helping train the associates.

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

You add all that up and that's helping us get good growth in that market segment.

Got it okay, well I appreciate all the color Mike and good luck here in Q4 guys.

Thanks Kurt.

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

Michael Olosky: And then again, you combine that curve with with our typical service levels. And also make sure that we've got an open an open environment, meaning if people use our software, they can decide where they want to buy their trust plates. We think customers prefer that going forward. And we are very mindful of how we're bringing customers on. We want to make sure that we do bring them on that we provide that great experience, that great service, that great support.

Hey, good afternoon, Mike Good afternoon, Brian .

Hello Julio.

Hey, so.

Just just a couple of quick questions for you here just first of all I wanted to ask about some of the inflationary pressures you guys called out aside from steel you talked about some higher warehouse and freight costs I believe in both North America and Europe .

Do you see some of those costs moderating or have they.

Michael Olosky: So that they are successful at the end of the day. And we do believe that we're going to continue that forward into 2024. And is that when you convert some of these component manufacturers? I mean, do you think there's the opportunity for a greater attach rate with your own connectors or just given your dominant market share there? That's probably not much of a sales synergy. So the opportunity with these customers for Trump's place is fairly significant. In some cases, there's the opportunity to combine it with some additional connector business, but we're in a lot of these are really just talking about the software and the trust rate business. Got it. Makes sense.

Reached kind of a level, where they're here to stay and.

Elevated.

Warehouse and freight costs or just kind of a fact of life.

How about I'll start and some of the increase in cost that we're seeing in warehouse and is associated with our effort to.

To go direct to our customers to eliminate the two step distribution process, we need to have warehouses close to our customers. So that when we ship product out to get it. The next day and we also won't warehouses in big markets in case, they want to get the product. The same day, we can eat arrange shipment or they can come in and pick it up so thats driving some of the cost Brian will go through the next set of details so.

As part of that setting up those warehouses.

Michael Olosky: And then just lastly on on national retail, with some of the shelf space changes, there's the last couple of years has the loading of products to new stores been a meaningful contributor to growth at all this year or has that largely been kind of set and you're just reaping the rewards of some of the investments in merchant diving and the like. I think it's a lot of small things adding up to good growth.

That's going to come a little bit ahead of the revenue associated with those so yes, there would be a bit higher warehousing costs as a percent of revenues just because of the revenues will really start to.

To come in.

The latter part of the third quarter and then forward.

From a freight perspective, it was getting a lot of that product into those locations.

On a go forward basis, it ought to be pretty consistent with.

Michael Olosky: So certainly the load in as we've picked up a couple of as we picked up a couple of customers has helped, we continue to work with our customers that get additional self shelf space. We continue to work on off shelf merchandising that makes sense. The attachment rate is a big focus for us. We're also investing in e-commerce and we see good growth in e-commerce with our national retail partners. And as I mentioned, just sending people into the stores, helping them clean up the set, helping them merchandise, helping train the associates.

Normal run rate so.

Uh huh.

A bit of getting those additional locations set up in the northwest.

To be able to.

Continue to execute on our what we call our path to market.

Initiatives.

Got it that's helpful. There and then just talk about you know you ended the quarter in a net cash position.

Michael Olosky: You add all that up and that's helping us get good growth in that market segment. Got it. Okay, we'll appreciate all the color of Mike and good luck here in Q4, guys. Thank you, sir. Thanks, sir.

Pretty strong cash position overall here and then.

You talked about some organic growth opportunities in some M&A youre also evaluating but it sounds like more of a tuck in in nature type of.

Opportunity set and at the same time, you've got some uncertainty on the macro front just talk about how.

Julio Romero: Our next question comes from the line of Julio Romeo Romero with Sedotti in company. Please proceed with your question. Hey, good afternoon Mike. Good afternoon, Brian. Hello, Julio. Julio Romero. Okay, so just a couple of quick questions for you here. Just first of all, I wanted to ask about some of the inflationary pressures. You guys called out aside from steel. You talked about some higher warehouse and freight costs. I believe in both North America and Europe.

Considering all of those factors that kind of shapes up how you're thinking about cash deployment.

Yes so.

Our capital allocation strategy remains on really driving growth and obviously, we are investing a lot in.

Our factories and our warehouses it very much in line with our business model to provide high service for our customers.

We are also.

We're also when we look at M&A perspective, Julio for the most part we're talking about small tuck ins complement our business model that help us provide service to our customers in some cases may be help us.

Michael Olosky: Do you see some of those costs moderating or have they reached kind of a level where they're here to stay and elevated warehouse and freight costs are just kind of a fact of life? Yeah, Julio, how about I start? And if some of the increase in costs that we're seeing in warehouse and is associated with our effort to go direct to our customers to eliminate the two-step distribution process, we need to have warehouses close to our customers so that when we ship product out they get the next day and we also want warehouses and big markets in case they want to get the product the same day we can need a rain shipment or they can come in and pick it out.

Vertically integrate there just arent that many actionable targets that are large that are a good fit for us.

Major of the focus is small opportunities when they arise.

Just to follow up on that.

We've got some some larger investments within the business that we've talked about over the last few quarters.

Pending our Columbus, Ohio facility.

Building, a new facility in Tennessee to.

Michael Olosky: So that's driving some of the costs. Brian, we'll go through the next set of details. So it was part of that setting up those warehouses. That's going to come a little bit ahead of the revenue associated with those. So yes, there would be a bit higher warehousing costs as a percent of revenues just because the revenues will really start to come in a latter part of the third quarter and then forward.

Again part of the business model of.

Of providing that really.

Excellent service to our customers, but some some larger.

Cash outlays here coming up over the next couple of years in addition to the debt repayment.

We will.

So that will continue doing as we noted.

Our repurchase any shares during the quarter.

Michael Olosky: From a freight perspective, it was getting a lot of that product into those locations and on a go-forward basis it ought to be pretty consistent with, with a normal run rate. So a bit of getting those additional locations set up in the Northwest to be able to continue to execute on what we call our path to market initiative. Got it. That's helpful there. And then just talk about, you know, you enter the quarter in a net cash position, you know, pretty strong cash position overall here. And you talked about some organic growth opportunities and some M&A. You're also evaluating, but sounds like more of a tuck in in nature type of opportunity set.

On a comparable basis that was one of the reasons why cash was up so just a bit of working capital.

Well I would say start to get back to traditional.

Normal levels here going forward.

Really helpful I'll hop back into queue, thanks very much.

Welcome.

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

Thank you just one or two quick housekeeping follow ups I know you said immaterial can you quantify that any expense impact do you expect in Q4 as a result of the cyber security breach and you.

Anything measurable in terms of incremental spend slash margin impact that on a go forward basis.

Brian Magstadt: And at the same time, we've got some uncertainty on the macro front, just talk about how that considering all those factors that kind of shapes up higher thinking about cash deployment. Yeah, so our capital allocation strategy remains. I'm really driving growth. And obviously we're investing a lot in our factories and our warehouse is very much in line with our business model to provide high service for our customers. We are also, we're also, when we look at M&A perspective, Julio, for the most part we're talking about small tuck ins, a complimentary business model that help us provide service to our customers that in some cases maybe help us vertically integrate.

Dan It's Brian I wouldn't expect it to be.

Interior will amount or we're still working through.

Uh huh.

The process too.

Evaluate and investigate but.

As we noted we were able to catch up with a lot of the orders that had come through that Mike had noted.

We're still.

Investigating and evaluating it again.

Operating income perspective, I wouldn't expect it to be a material amount.

Perfect and then.

Brian Magstadt: There just aren't that many actionable targets that are large that are a good fit for us. So the major of the focus is small opportunities when they arise. And then just to follow up on that, the, we've got some, some larger investments within the business that we've talked about over the last few quarters. Expanding our Columbus Ohio facility, building a new facility in Tennessee to, again, part of the business model of, of providing that really excellent service to our customers.

Just following up on the capital allocation question, obviously been out of the market in terms of buybacks you have some significant investments but.

Youre still.

Cash is building quickly and already in a net cash position. So you know.

Would you look to be opportunistic again here.

And maybe weigh that versus continuing to pay down the remaining debt just any thoughts there.

Sure.

We're going to look at all of those are definitely so.

<unk>.

A little bit of debt repayments likely at the end of the year similar to what we did last year and continue to evaluate.

Brian Magstadt: But, you know, some, some larger cash outlets here coming up over the next couple of years. In addition to the debt repayment that we will, that will continue doing as we noted, we didn't repurchase any shares during the quarter and comparable basis that was one of the reasons why cash was up. So just a bit of working capital that will, I would say start to get back to traditional normal levels here going forward. Really helpful. I'll hop back into you.

The share repurchase from an opportunistic perspective.

Very good appreciate the help.

Julio Romero: Thanks very much.

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

Thank you for your participation.

Okay.

[music].

Brian Magstadt: And our next question comes from the line of the annual Orange CJA Securities. Please receive with your question. Thank you. Just one or two quick housekeeping follow-ups. I know you said immaterial. Can you quantify that any expense impact you expect in Q4 as a result of the cybersecurity breach and, you know, anything measurable in terms of incremental spend slash margin impact that. Let's go, for Base. Yeah, it's right. I would expect it to be a material amount or we're still working through the process to evaluate and investigate but as we noted we were able to catch up with a lot of the orders I had come through that might get noted but we're still investigating and evaluating it. Again, from an operating income perspective, I wouldn't expect it to be a material amount.

Brian Magstadt: Perfect. And then just following up on the capital allocation question, obviously been out of the market in terms of buybacks. You know, you have some significant investments but you're still, you know, cash is building quickly and already in a net cash position. So, you know, would you look to be opportunistic again here and maybe way that versus continuing to pay down the remaining debt, just any thoughts there? Sure, so we're going to look at all of those in definitely. So a little bit of debt repayment likely at the end of the year, similar to what we did last year and continue to evaluate the sharing purchase from an opportunistic perspective.

Julio Romero: Very good. Appreciate the help.

Okay.

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