Q3 2020 Simpson Manufacturing Co Inc Earnings Call
Greetings and welcome to the Simpson manufacturing company incorporated third quarter 2020 earnings Conference call.
This time all participants are in a listen only mode. A brief 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.
They were minor this conference is being recorded it is now my pleasure to introduce your host Kim Orlando from Addo Investor Relations. Thank you Kim you may begin.
Good afternoon, ladies and gentlemen, and welcome to Simpson manufacturing Companys third quarter 2020 earnings conference call any statements made on this call that are not based on 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 Companys public filings and reports, which are available on the fccs 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 Www Dot since then and that's cheap dotcom.
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 census, President and Chief Executive Officer.
Thanks, Kim and good afternoon, everyone I'm pleased to discuss our results with you today I'll begin with a high level summary of our third quarter results and will then turn to a more detailed discussion on our key performance drivers and initiatives.
Brian will then walk you through our financials and updated business outlook in greater detail.
We delivered strong third quarter results with our sales, increasing 17.5% year over year to $364.3 million on significantly higher volume.
Compared to the second quarter of 2020 or sales increased 11.7%.
Further we achieved a considerable improvement in our gross profit margin to 47.6%.
At 44.4% in the prior year quarter.
Primarily related to lower material and labor costs.
The strength in our gross profit margin combined with our EPS.
In expense management and reduced cost from travel and other restrictions as a result of the COVID-19.
Helped drive a 49.8% year over year increase in our income from operations.
To $91.3 million and strong earnings.
$1.54 cents per diluted share.
I'd like to sincerely, thank all of our employees for their perseverance and support through these unprecedented times.
Since then we value our employees help save.
Safety and well being is our top priority and strive for continuous improvement to ensure our company remains a safe and rewarding place to work.
Our diligence, including strict adherence to protocols to help minimize spread of COVID-19.
Has enabled us to continue operating our business with minimal disruptions from the pandemic.
In regard to the recent hurricanes and wildfires, we are incredibly thankful that none of our employees or locations in the affected areas were negatively impacted by these disasters.
We are prepared to play a key role in the rebuilding efforts with our mission of helping people build a safer stronger structures.
Getting back to our results the substantial increase in sales volume we experienced in the third quarter was primarily related to ongoing momentum in the repair and remodel space.
Which includes both our home center and co op customers.
We continue to benefit from a shift in consumer behavior toward home renovations as people are spending more and more time in their home and outdoor living spaces. As a result of the COVID-19 pandemic.
We estimate sales from the home Center channel.
Where we see much of our repair and remodel business improved 125% over the prior year period.
As disclosed on our previous call. We're extremely happy to have those returns as a home center customer in the second quarter during which time, we began shipping our products into their locations.
We continued to make progress on our product rollout during the third quarter.
As of the end of September well, most stores had been set with our industry leading connectors as the.
Exclusive supplier.
In addition spoke or mechanical anchor and south or product solutions were said 987 stores among other competing manufacturers.
By the end of October we expect our product sets to be nearly completed in all 1700 and 37 mode storage.
In addition, well the home depot continues to carry our connector line most of our mechanical anchor and fastener products are being phased out of the home depot locations throughout the remainder of this year.
As a reminder, our mechanical anchor and fastener products, where in some but not all home depot locations.
Our sales were further supported by strong U.S. housing starts in 2020.
The third quarter of 2020 housing starts grew 11.4%.
Versus the comparable period last year.
And grew 29.9% versus the second quarter of 2020.
Notably in the West and South where we provide a meaningful amount of content into homes.
Third quarter starts grew 7.6% and 14.1% respectively year over year.
Turning now to Europe, we saw our sales recovered nicely with our facilities now operating at full capacity foreign government shutdowns in the United Kingdom, and France due to the COVID-19 in late March.
While much of the improvement in Europe was related to the benefit of foreign currency translation sales still improved both year over year and quarter over quarter on slightly higher volumes.
As part of our strategy to continue to grow our market share in Europe.
That's great to quarter end, we acquired a small connector manufacturer based in the United Kingdom with a complementary product line.
The acquisition closed early in October and the acquired company's operations will be absorbed into our existing business.
Overall, we expect this acquisition to benefit our market position in the region moving forward.
I'd now like to shift their focus to our software strategy.
As previously discussed we believe the investments we've made over the years in software have enhanced our technological capabilities to remain competitive in the wood construction space by providing our customers with complete end to end product and software solutions.
We estimate over 40% of our core wood connector sales are to customers with software needs and believe this figure will increase over time.
Further our expertise in this area, we completed the purchase of a small software application for builders during the third quarter of 2020.
Similar to our acquisition of lots back in 2018, which was a suite of software applications designed to optimize efficiency and productivity per home builders.
This application expands our software choices for builders help minimize costs and best align with their business needs.
By expanding our technology offering to provide our customers with more tailored and its innovative software solutions. We believe we will strengthen our value proposition.
Next I'll turn to an update on our Sep implementation with it continued to progress despite trouble limitations related to the cobot nitin.
Some of the benefits. We've enjoyed support include better forecasting tool it with working capital management and particular inventory management.
Earlier this year, we successfully transitioned all of our U.S. based sales organization over to Sep.
Neatly following the third quarter. We also completed two more locations, including our UK branch, which is now live.
That said given the duration and severity of the pandemic.
Remain highly fluid and uncertain, we are unable to accurately predict how COVID-19 will continue to impact international travel.
Onsite meetings and training requirements to complete the rollout in our remaining locations.
As such we currently anticipate a company wide completion goal in 2020 to persist near the end of 2021, though we will continue to monitor and update our timeline should circumstances change.
Now I'd like to briefly touch on our capital allocation strategy.
Business continues to generate strong cash flow, we remain focused on appropriately balancing our growth and stockholder return priorities, while also paying down debt.
Well our focus for the majority of the year has been on cash preservation to ensure our working capital needs during the pandemic could be met in the near term.
Over the past seven months, we have been very grateful to be able to operate as a supplier to other essential businesses with only minimal disruptions to the Cove at 19.
As such we're continuing to support our growth strategy in identifying M&A opportunities that would complement our existing product offerings manufacturing footprint or strengthen our software capabilities.
We were also very pleased to declare our quarterly dividend as we have done consistently since 2004.
Before I conclude I'd like to extend a warm welcome to Mike Oleske, our new Chief operating officer.
As previously announced Mike will be joining Simpson at the end of November after spending over 22 years in numerous leadership positions at Henkel a.
A global chemical and consumer goods company.
We are excited to have Mike on board and he will be instrumental in helping us uncover new ways to remain innovative and seek opportunities for future growth.
Mike replaces our former COO Ricardo a rebel who retired in February of 2020. After 20 years of service to Simpson strong tie.
Well the search to find the right candidate took longer than anticipated I could not be more pleased with our choice.
In summary, we executed an excellent third quarter with strong financial performance across the board the sprite broader macroeconomic challenges that continue to play guar economy.
The durability of our business model has continued to support us through this challenging time as a result of t. elements, including our strong brand recognition and trusted reputation in the industry, our industry, leading high quality and tested product solutions.
Our superior customer service standards.
Our disciplined capital allocation strategy, a strong balance sheet and liquidity position, which enables financial flexibility and most importantly, our passionate and dedicated employees.
Looking ahead, we believe the solid demand trends, we experienced in third quarter of 2020 will continue through the duration of the year aside from the seasonality, we typically experienced during the fourth quarter due to holiday related closures and winter conditions.
I'd like to thank our talented and valued employees for their dedication and commitment health safety and best in class customer service now.
I'd now like to turn the call over to Brian will discuss our third quarter financial results.
And outlook in greater detail.
Brian.
Thank you Karen and good afternoon, everyone I'm pleased to discuss our third quarter financial results with you today.
Before I begin I would like to mention that unless otherwise stated all financial measures discussed in my prepared remarks today refer to the third quarter of 2020 and.
And all comparisons will be year over year comparisons versus the third quarter of 2019.
Now turning to our results.
This is Karen highlighted are consolidated sales were strong increasing 17.5% to $364.3 million within the North America segment sales increased 19.4% to $316.9 million, primarily due to the return.
The home center customer and increased repair and remodel activity as.
As well as from other sales distributor channels, which experienced increased new housing starts and repair and remodel activity.
In Europe sales increased 6% to $44.8 million, primarily due to higher sales volumes.
Europe's sales benefited by approximately $2.1 million of positive foreign currency translations, resulting from some Europe currencies strengthening against the United States dollar.
In local currencies.
Europe net sales still increased.
Wood construction products represented 85% of total sales compared to 84%.
And concrete construction products represented 15% of total sales compared to 16%.
Gross profit increased by 25 point.
9% to $173.2 billion, which resulted in a strong gross margin of 47.6%.
Gross margin increased by 320 basis points, primarily due to lower material and to a lesser extent reduced labor costs, which were partially offset by higher warehouse and shipping costs.
As we continue to purchase steel to support heightened demand levels, we would expect our consolidated gross margin to normalize back down to a more appropriate run rate, which while which I will discuss in greater detail in our outlook shortly.
On a segment basis, our gross margin in North America improved to 48.9% compared to 45.6% well in Europe or gross margin decreased to 37.9% compared to 38.4%.
From a product perspective, our third quarter gross margin on wood products was 48% compared to 44.4% in the prior year quarter.
And was 42.1% for concrete products compared to 41.6% in the prior year quarter.
Now turning to our third quarter cost and operating expenses.
Our strong third quarter performance and improved expectations for the full year 2020 resulted in higher performance based compensation within our total operating expenses.
Research and development and engineering expenses increased 2.6% to $12.3 million, primarily due to cash profit sharing and personnel costs.
Partly offset by lower capitalized software development costs.
Selling expenses increased 6.2% to $29.4 million due to increases in cash profit sharing sales commissions personnel costs and stock based compensation.
Which were partially offset by lower travel fuel and entertainment expenses and advertising expense.
On a segment basis selling expenses in North America were up 7.3% and in Europe, They increased 1%.
General and administrative expenses increased 8.7% to $40.3 million, primarily due to increases in cash profit sharing and stock based compensation depreciation and amortization and insurance.
Partly offset by lower travel associated expenses.
On a segment level general and administrative expenses in North America increased 5.6%.
In Europe DNA slightly decreased.
Total operating expenses were $82 million, an increase of $5.3 million or approximately 6.9%.
As a percentage of sales total operating expenses were 22.5%.
An improvement of 220 basis points compared to 24.7%.
Our solid top line performance combined with our strong gross margin and diligent management of cost and operating expenses helped drive a 49.8% increase in consolidated income from operations to $91.3 million compared to $61 million.
Yes.
In North America income from operations increased 53.7% to $87.4 million due to our strong sales and the strength of our gross profit margin.
In Europe income from operations increased 12.8% to $6.1 million, primarily due to increased gross profit.
On a consolidated basis, our operating income margin of 25.1% increased by approximately 540 basis points.
Our effective tax rate remained flat at 26.2%.
Accordingly, net income totaled $67.1 million or $1.54 cents per fully diluted share compare.
Compared to $43.7 million or 97 cents per fully diluted share.
Now turning to our balance sheet and cash flow.
Our balance sheet remained healthy with ample liquidity to operate our day to day operations.
At September Thirtyth cash and cash equivalents totaled $311.5 million.
A slight decrease of 4 million compared to the balance at June thirtyth after paying down $75 million on our revolving credit facility during the quarter.
As a reminder, we drew down $150 million on a revolving line of credit during the first quarter of 2020 as a precautionary measure in order to preserve financial flexibility given the uncertainty of the link and impact of the COVID-19 pandemic.
[noise] as of September Thirtyth, approximately $225 million remained available for borrowing.
Our inventory position of $260.1 million at September Thirtyth slightly decreased by $5.3 million from our balance at June Thirtyth.
As we strive to maintain inventory levels to service the increased construction activity, we typically see in the summer and fall months, along with the unprecedented demand we've experienced through the pandemic.
We continue to be focused on improving our inventory balance through diligent management and purchasing practices to ensure maximum efficiency, while maintaining our high levels of customer service and on time delivery standards.
We generated strong cash flow from operations of $86.8 million for the third quarter of 2020, a decrease of $8.9 million or 9.3%.
During the third quarter, we used approximately $6.8 million for capital expenditures, which included a minimal amount for our ongoing let's say p. implementation project.
In regards to stockholder returns, we paid $10 million in dividends during the third quarter.
And on October 20, Threerd, our board of directors declared a quarterly cash dividend of 23 cents per share, which will be payable on January 28 2021.
To stockholders of record as of January 720, 21.
Before we turn the call over to questions I'd like to discuss our 2020 financial outlook as a reminder.
On our second quarter earnings call in late July we reinstated our fiscal 2020 outlook based on improved visibility on the progression of pandemic related restrictions and the impact of those restrictions.
On our operations today, we are updating our outlook to reflect an additional quarter of strong financial results as well as the latest business trends and conditions as of today October 26.
As such our current outlook for the full fiscal year ending December 30 Onest.
2020.
Is as follows.
Net sales are estimated to increase in the range of 9% to 10% compared to the full year ended December 31 2019.
Gross margin is estimated to be in the range of approximately 45% 46%.
Operating expenses as a percentage of sales are estimated to be in the range of 25% to 26.5%.
And to be effective tax rate is estimated to be in the range of 24.5% to 26%.
Including both federal and state income taxes.
I would like to note that there continues to be a high level of macroeconomic uncertainty, resulting from the COVID-19 pandemic.
The potential economic impact related to COVID-19 on our operations raw material costs consumers suppliers and vendors they have a material adverse impact on our 2020 financial outlook should conditions materially change from the current environment.
I would expect gross margins and operating margins to pull back as we exit 2020, as we anticipate cost directly related to customer engagement.
Investments in growth to increase.
In closing despite the ongoing macroeconomic challenges in the marketplace stemming from the pandemic, we were thrilled with our third quarter financial results and operating performance.
I'd like to once again, thank all of our employees, who are dedicated to working safely and supporting our customers whether remotely or onsite during these unprecedented times.
We believe our industry, leading position geographic reach and diverse product offerings combined with our strong balance sheet and liquidity position give us confidence in our ability to continue executing against our strategic operational and financial initiatives.
Thank you for your time and attention today at.
At this time I'd like to open the call up for questions.
Operator.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
Thus far too if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star Kids one moment, please while we poll for questions.
Thank you. Our first question is from Daniel Moore with C.S.J.
Securities. Please proceed with your question.
Thank you Karen and Brian Good afternoon, and thanks for taking the questions as always.
Isn't that Kim maybe for starters is it possible to quantify the revenue impact of the inventories selling at lows during the quarter. How much do we expect is left for October and and.
And kind of the full year 2020 impacted we kind of think about that as we start to think about of modeling 2021.
Sure Dan the the sell in for into Lowe's. In Q3 was we did a little bit in Q2 on fasteners and acres, but that was a pretty.
More of those product lines, which which as you know our smaller shuts then the connector line and then as Karen noted there was a little bit of a sets.
In those lines done in Q3.
[noise] combined the for the quarter the home center.
Customers Lowes and home depot were up 125%.
Compared to last year.
So as we're still getting a good.
Good idea of what the.
<unk> the risk or the sell in will be going forward.
Compared to the to the initial load into those assets during Q2, and Q3, well be able to provide a little more intra information there, but I just got a little later, but just from that comparability perspective.
Those home center customers were up a 125%.
Hundred 25 in Q3 correct.
Right, Okay and I.
You know I guess, just order of magnitude is the more than half of that kind of view. It. So a load in or is that the way too high of a thought process.
[noise] for Q3, no it was.
Not.
That extensive again as soon as I mentioned, the the load in the on the fasteners and anchors for.
Those are smaller assets. Okay. So one thing I should mention wouldn't be as we look at.
Revenue growth for the company or for North America for bulk of those.
Oh without lows.
The company during the quarter and North America for the quarter would have both exceeded.
Q3 of 2019.
You would have been up year over year is what you're saying without those correct.
Correct, Okay. Okay.
Hi, there the two small tuck in acquisitions contribute any revenue to the quarter and and or meaningful revenue on an annualized basis.
No we did those actually well one the <unk> software application.
No real meaningful revenue.
There. It's again, just a software application to be able to use with our builder customers and then the.
The small European acquisition was actually done at the very beginning of October.
We would expect about a three to three and a half million dollar.
Annual revenue.
Revenue from that particular acquisition.
But again, but that has zero impact into Q3.
Got it okay.
And.
Maybe just elaborate Brian on your final comments prior to in the prepared remarks, I think you said as we said think about 21 expenses expect gross margin and operating margins to pull back as we exit 2020 is it mix is it specific discrete investments.
What is it that you know might or might obviously, you've got some difficult comps, but <unk> what is it specifically that would cause margins to pull back and Tony <unk> magnitude yes.
Sure No 2020, obviously being a very interesting year with travel restrictions.
HM.
Being able to.
Do some of the customer engagement efforts it that we do.
Large meetings Uh huh.
Uh huh.
Oh so attending.
Trade shows and the like I think those were expecting to ramp up next year.
And I don't have the no the magnitude on on that for you yet.
And then also.
As we think about.
Growth initiatives and the like Jabil will be.
Taking the balance of the fourth quarter to come up with our business plan and then be able to share that but there there may be some there will likely be some of that as well as we look to to grow in other areas.
Got it okay. So all of those more on Opexas as opposed to gross margin commentary or at least it would appear.
Correct, although there there may be a little bit in the in the gross margin.
[noise] area, there as well, Okay, then last one and I'll jump back in Q2, we can back into the implied Q4 guide given the full year revenue outlook, but maybe just talk about revenue trends, thus far in October and what you're seeing in terms of cadence may not but.
What does that look like as far as growth on a year over year basis.
And your expectations for Q4 more generally.
Sure so for.
The guide for the year would would imply about a 3% Q4 growth over.
Q4 of last year.
And we're about on pace with that so far in October.
Okay, I will jump back with any follow ups. Thank you.
Thanks.
Thank you. Our next question comes from Tim Wojs from Baird. Please proceed with your question.
Guys nice job on Q3.
Thanks, Dan.
Maybe just kind of dovetailing on that on the last question.
If I kind of go could you go through could you just maybe elaborate how trends kind of pace through the quarter, because if I recall your revenue was up maybe 10% through kind of the early parts of July you have seat. They you know call. It 17, 18% here, which would imply that the things accelerated through the quarter. So just want to make sure.
That's 3% number is a year over year number.
You know like comparisons to last year in October so I just want to make sure we have the same number.
Sure so that would be driving that.
Okay and that 3% is Q4 2020 versus Q4 2019.
In order to hit called the midpoint of that revenue growth guide for the annual period. So if we're taking.
Taking the year to date number and then.
Grow in Q4 by about 3%, we would hit that.
That that revenue guide and so far in October it's it's.
Right its right on that that number so yes.
Yes, see you noted that Q Q3, when we were commenting about the quarter.
During the Q2 earnings release. It was early July days were or a little bit different compared to what we're seeing for October.
Oh I think it's just.
No seasonality there may be a little bit Uh huh.
But oh, Karen do you have any other thoughts there.
I think as you mentioned, we're tracking pretty well to what we did in the fourth quarter, we always have.
Winter conditions, we always have a some of our customers actually goes down for some of the holidays weather to Thanksgiving or Christmas time.
And you know as as we've always said our fourth quarter and first quarter are typically are weaker.
Third to second and third so I think we're just sort of seen a what we would consider more of a normalized fourth quarter.
Okay, Okay, I mean I mean.
Starts are still up double digits and those to your regions and you're you're still seeing some pretty good our activity right. So I'm just trying to understand what might have driven that type those I guess deceleration versus the last couple of months.
Yeah, you're right Ken I mean, if you look at the start numbers, but if you. If you remember what Weve always said is we tend to trail that start number anywhere from two to four months and that really puts us right in that winter type of season. So.
We're still seeing nice numbers from the RMR standpoint.
But again, we've we've already got places, where we've got snow on the ground. So it's just really a function of do it the seasonality from both the the winter and what we see from those holidays.
Okay, Okay, and I guess as you look at your distributors, how would you kind of characterize their inventories versus versus normal just timing here.
Oh, we're not seeing any price increases or decreases were seeing our distributors are pretty much normal type of ordering pattern.
Okay. Okay.
And then I guess on the home center side of things that to her and 25% number that you quoted is there any way to think about what POS was in your home Center channel just to maybe reconcile what sell in versus sell out looks like.
Well, we do get those Pos numbers, but it's a little bit early especially as we look at the the lows coming on as a new customer. So it's probably be something that we would have a little bit better ideas in Europe.
Okay. Okay and then the last one I have is just on pricing as you think about 21, you've seen decent demand here you know starts activities picking up we have seen a little bit of an uptick in steel how would you think about pricing expectations for next year.
Yeah, We mentioned this in the in the past where you're you're correct. We are seeing a little bit of an increase in steel pricing.
And if we if we think there's some.
Stability and consistency in that then we would take a look at where we might need to do a price increase at this point, we do not asked me doing a <unk> at a price increase throughout the rest of this year, but a as you know as we noted you know material is a key element in our cost of goods sold and we continue to track that.
Okay sounds good thanks, guys like ours here.
Thank you Tim.
Thank you. Our next question comes from Steve Chercover from D.A. Davidson. Please proceed with your question.
Thanks, Good afternoon, everyone.
So.
Give me if I was multitasking and I missed it but obviously.
No you did exceed your expectations in Q3 from what you were producing at the end.
End of July and that goes not just sales, but also margins. So don't think I'm being critical but yeah were you just too conservative like well where were you surprised and did the margins just flow from the operating leverage.
Well part of that Steve I think is there's the <unk> continued strength in that repair and remodel.
A business that we're continuing to see a we know that there it's definitely been a trend this years people have been improving.
Their homes, and backyards, and outdoor living spaces and indoor living spaces, but.
I think it was you know to the extent and then just.
Going back three months or just.
The amount of.
Uncertainty that.
Uh huh.
That were experiencing whether it be.
No.
Another wave of Kobin.
Related research.
Restrictions or what have you.
So I think that was part of it and then.
As we have been busier in the wood.
A more product running through the factories running through the.
New steel that we have on hand to better factory utilization.
Continuing to on the Opex or I guess, even a little bit on the cost of sales you know the reduced.
I travel and other.
<unk> expenses that we would have normally is people are out more but not salespeople per se because we've got salespeople out on the road visiting customers.
But.
Trade show attendance and other other meeting attendance, we just couldn't be virtually.
Many of us have been working virtually Ah.
Remotely from from a im not at our offices so.
But I would I would call it that the volume on the.
Oh <unk> through that home center, and you know repair remodel Cabot.
Type of products that have.
I continue to be very strong.
Okay, and I know, it's early days and you will articulate your 2021 objectives in due course, but you know as you listen to the homebuilders and you.
You know get feedback even if it's from virtual meetings from your customers.
It sure seems like you know suburban low density.
Living.
Might actually be a long term beneficiary from coated.
Kinda snatching victory from.
What we thought was increased urbanization and presumably that would be very good for you. So.
Any comments on that front I mean or are you starting to see that maybe the tide is turning in terms of high density to back towards low density living.
Yeah, Steve when you obviously look at the housing starts you you see a increase in single family starts and a decrease in multifamily so you've clearly seen it from those numbers.
We've also as we mentioned in the last quarter hearing from some of the larger builders that they are seeing some of their first time home owners being those people who are moving from the city out to the suburban area because they want more space. So a couple of indicators there that would that would tell you that.
Single family homes, again, and as as we mentioned, we put our product in both single family and multifamily, but on a per unit basis, we'll typically put more content in single family. So I think just the shift you see in the starts would indicate that that is what we're seeing that that moved from.
Urban high density out to suburban.
All right well that presumably that bodes well for you and then finally this English faster company I mean, if its $3 million worth of sales should we think of this almost just taking out a competitor.
I can't imagine there is a lot of accretion.
Yeah, I'd say, that's right nektar.
Yeah, It's a connector company not a fastener company.
Ah So we'll gain some market share there and also be able to run that production to our facilities, so well that help on absorption.
Got it all right. That's what's so just for the rest of the year. Thank you.
Thanks, Steve.
Thank you. Our next question comes from Julio Romero from Sidoti and company. Please proceed with your question.
Hey, Good afternoon Hope you all are well.
Makes it real down too.
I guess, if I could ask about the European business.
So you did see operating margins improved despite gross margins down year over year, which which is excellent but maybe just talk about what's what's working well there and do you see that trend kind of continuing into Q4.
Yeah, as we mentioned you know Europe had a little bit tougher.
Return from their first wave of COVID-19.
Unlike the U.S.
Where housing and construction materials were considered essential that was not the case in Europe. So not only was our UK and.
France facility close down many of our distributors were close down so that the picking up or the ticking up at the business took little bit longer than we saw in the U.S. I think in the third quarter. They were doing a nice job of kind of getting back to a more normalized rate for them.
We've done a really nice job the management team there has done a great job and is continuing to work on reduced opex.
Helping that bottom line and certainly as we mentioned we had a little bit of a strategy change to get our sales force focused on those customers of ours that are looking to sell our entire breadth of line. So the connectors the fasteners and the anchors and they're doing a good job of executing on that stuff.
At a G.
On the negative side in books like and we're certainly hearing news reports as a potential second wave of Cove in 19 and in Europe with [noise].
We've already seen some countries that have put some restrictions not as.
A steep as they were in earlier in the year, but.
We don't quite know what will happen as far as those operations, but we're certainly see an uptick of COVID-19 in those in those regions.
Got it and I believe asked this last quarter, but any update on the effects of lumber have you seen any issues at all related to your customers and and tightness or or cost of lumber on your customers and how that.
FX Simpson.
Well from a standpoint of affecting us directly or obviously, we have a wood wall product that we make but that's that's not what I would call stick you know two by forcing to buy six is so we haven't been impacted by our.
Supply needed for that particular product.
From a customer standpoint, obviously is what prices are.
Going up or availability is reduced that creates some some slow down.
Certainly heard issues of housing prices going up.
The latest I've heard is that that.
Pricing on lumber is kind of coming back down again, so that will certainly help as far as the cost of the house, but I haven't heard any concern as far as shortage more of just the price being pushed out and pushed onto the consumer so again I think in this.
Back half the we're seeing that those prices dropped down a little bit and that will help as far as affordability issues from housing standpoint.
Got it maybe last one for me is you know would you expect cash flow to be up year over year in the fourth quarter.
I would think so.
I think that yes, our general expectation right now is.
Yes that would be the case.
Great. Thanks.
Thanks very much.
Thanks Julio.
Thanks Julio thanks.
Thank you. Our next question comes from Daniel Moore from C.S.J. Securities. Please proceed with your question.
Sorry, I'm you. Thank you again I'm just pulling on the string a little more sorry to be redundant you're targeting 25% to 26.5% Opex. This year now as a percentage of revenue <unk> given the initiatives and some of the expenses Normalizations is.
Flat within that range of regional thought process for EPS, We think about 21 or are you kind of signaling that opex as a percentage of revenue is likely to rise next year as well.
Okay, and I was like.
Yeah go ahead, Brian.
We can book chime in on this one.
Sure I would say they expect it to likely.
Likely rise in a 2021.
Got it that's helpful. And then one more capital allocation priorities shifting focus back to M&A, a little bit obviously.
If you said this and I missed it I apologize do you still plan to stick to the goal of returning at least 50% of cash flow to shareholders that you had previously how does that sort of factor in on a go forward basis, given where we are now with the pandemic.
Sure. So one thing that we definitely want to do is is that get the remaining balance on the line paid down we'd like to get that done by the end of the year.
And then.
As we take a look at the other cash or returning cash to shareholders.
In addition to the dividend we'd we'd evaluate.
Share repurchases.
But because it was we're thinking about it today, it's good that line pay down and then you know evaluate from there.
We're.
We're still evaluating that the 50%.
Ah of cash flow from operations returned to shareholders on a go forward basis beyond 2021 for beyond 2020.
Certainly would like to put.
Put that to to.
Houston.
Acquisitions that help us fulfill our company strategy and other internal investments that help us make us more efficient more profitable help or serve our customers even better.
But.
So that's.
That's where we're at today as far as that particular goal.
Okay and is there a range or sweet spot of acquisition size that you generally would be targeting.
And you know I I think certainly.
Large acquisition is just as complicated as a small position, we're really looking Dan for something that's in the building materials space. We we've talked about this we would be very interested in.
Manufacturing, extending our manufacturing capabilities and market share in the fastener space.
You saw we did a couple of small bolt ons are those are those are pretty easy to.
[laughter].
To incorporate into negotiate so I don't I don't think we have a sort of a set price were more looking to what fits our strategy and why its simpson the natural owner EPS whatever the company might be what is it what is it that we can do and why would we be that right.
Right.
Why would it be the right acquisition target for us.
Okay and more to come obviously, thank you for comments and again, congrats on obviously really strong quarter and operating leverage.
Great. Thanks, Dan Thank you.
There are no further questions at this time. This concludes todays program you may disconnect. Your lines at this time. Thank you for your participation and have a great though.