Q2 2021 Simpson Manufacturing Co Inc Earnings Call
[music].
Greetings and welcome to Simpson manufacturing company incorporated second quarter, 2021 earnings conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation and.
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'll now turn the conference over to Kim Orlando with Aldo Investor Relations. Thank you you may begin.
Good afternoon, ladies and gentlemen, and welcome to Simpson manufacturing.
Sure and company second quarter 2021 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.
Very materially from those expressed or implied by the forward looking statements.
We encourage you to read the risks described and the company's public filings and reports, which are available on the SEC's or the company's corporate website.
Except to the extent required by applicable securities laws.
<unk> no.
<unk> made the 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 that the company's earnings press release was issued today at approximately 415 P M Eastern time on.
Earnings press release is available.
Saleable on the Investor Relations page of the company's website at IR Dot Simpson and F. 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.
And now I would like to turn the conference over to Karen Colonias Simpsons' President.
And Chief Executive Officer.
Thanks, Kim and good afternoon, everyone and thank you for joining us today.
I'll begin with the summary of our key second quarter performance drivers and initiatives.
Brian will then walk you through our financials and updated full year, 2021 and business outlook in greater detail.
We experienced strong business momentum and the second quarter generating net sales of $410.3 million, which grew 18% over the prior quarter and 25, 8% over the prior year period.
Sales growth was primarily driven by the implementation of 2 product price.
Increases during the quarter.
Along with marginal increases in sales volume.
Throughout the quarter, we were very pleased to be able to continue meeting the needs of our customers by providing them with our trusted product solutions typically within 48 hours or less.
This is despite the current.
Environment marked by the increasing prevalence of global supply chain constraints limited steel availability and a tight labor market.
The recent price increases we implemented drove significantly higher gross margins for the second quarter, which increased to 47, 9% from.
And 46, 7% and the prior quarter and 45, 9% in the year ago period and.
As a result, our income from operations improved to $101.7 million and led to strong earnings per diluted share of $1.66.
Looking at our sales results in more detail the majority of the increase we experienced both sequentially and over the prior year period.
As a result of 2 price increases that became effective during the second quarter.
These price increases were in direct response to rising material costs.
Effective April 5th we.
Limited price increases ranging from 5% to 12% depending on the product mix for certain of our wood connectors fasteners and concrete products in the U S.
On June 16th a second price increase ranging from 6% to 12% primarily on our wood connector products.
And the U S also went into effect.
As the price of steel continued to rise throughout the second quarter, we announced a third price increase in June and the range of 7% to 15% across a variety of our product lines and the U S, which will become effective for most customers in mid August.
Consistent with our historical business practice, our customers received at least a 60 day advance notification for price increases along with a clause that reduces significant pre buying.
This enables us to manage our inventory levels in this challenging market.
Importantly, while we expect.
Price increases will support our gross margin levels throughout the remainder of fiscal 'twenty 'twenty 1.
Our gross margins and the first half of 2021 reflect and average cost of steel sourced prior to or earlier into the surgery and still market together with steel purchased more recently at Signet.
<unk> higher prices.
These higher prices are and the range of more than double those earlier costs.
We are continuing to acquire higher price raw materials, which we currently anticipate will result in gross margin compression beginning in late fiscal 2021 and interfaces.
Spec these co 2022.
Brian will discuss this impact and more detail during his remarks.
Turning back to our sales performance, we experienced mixed trends and the various forms of distribution channel, we serve including our home Center channel and.
Other distribution channels to contractors and lumber yards.
While our momentum with home centers continued our sales reflected a high teens percentage decline in this channel year over year, given a challenging comparison with lapping the return of Lowe's as a home center customer and the second quarter.
<unk> of 2020.
As a reminder, the home center channel includes both our home centers as well as co op customers and is where we see much of our repair and remodel and DIY business.
Last year, we experienced elevated volume levels as we began our load in and shipped our connector.
Ector products into Lowe's stores.
We expect to experience a similar trend next quarter as we lap the elevated volumes from our mechanical anchor and fastener load ins at lows in the third quarter of 2020.
Offsetting the decline and the home center channel with double.
Double digit growth and our other distribution channels during the quarter.
This was due to the aforementioned sales price increases and ongoing strength and demand for our products, which benefited from upward trends and U S housing starts.
As we generally experience on multi month lag and demand.
From the time of housing starts the second quarter reflected strength in the housing starts during the first quarter of 2021, which grew by nearly 9% year over year.
Finally in Europe, our second quarter sales improved over the prior year on a local currency basis given street.
Strengthening demand compared to the prior year, where we experienced government mandated COVID-19 related closures.
Which resulted in lower sales volumes.
Sales in Europe were also supported by our ability to continue meeting our customer needs due to our solid inventory management practices amid.
Supply chain shortages.
I'll now turn to a high level discussion on our key growth initiatives, which we first introduced earlier this year during our virtual analyst Investor day event on March 23rd.
Our growth initiatives focus on the following 5.
Broadridge, which I'll name and no particular order of priority.
OEM, which is original equipment manufacturers.
Repair remodel and do it yourself.
Mass timber.
Concrete and structural steel.
Importantly, we currently have existing products.
Mark asked results.
Distribution and manufacturing capabilities in place for all 5 of our growth initiatives.
And these markets, we are focused on organic growth opportunities through expansion into new markets within our core competencies of wood and concrete products.
As well as.
Organic growth opportunities through licensing purchased IP.
And traditional M&A.
In order to appropriately grow and the first 3 markets that would be the OEM DIY R&R and mass timber.
We aspire to be a leader and.
In on generic low grade and construction fastening solutions.
Given each of these markets have a broader product opportunity within fastening solutions.
In addition, we're striving to be a stronger leader and building technology by continuing to provide innovative tools and solutions that both help our customers.
And the enters with design.
And the options management, while simultaneously, enabling them to select and specify the right Simpson solution for the job.
We expect technology investments will drive enhanced growth and all of our key growth initiatives as well as across all of Simpson.
And in general.
Today each of our growth initiatives are in a different stage of development.
We are confident and our ability to execute them based on our strong business model.
I emphasize this engineering expertise.
Deep rooted relationships with our top builders engineers.
Customer actors code officials and our distributors along with our ongoing commitment to testing research and innovation.
We believe these initiatives will continue to position Simpson for above market growth and we will keep you apprised of any significant updates as they arise.
And <unk> I'd like to take a brief moment to touch on our capital allocation strategy.
As our business continues to generate strong cash flow, we remain focused on appropriately balancing our growth and stockholder return priorities.
We will prioritize investing and our growth initiatives in areas.
Engineering.
Talented marketing and sales personnel and testing capabilities.
M&A and also remains a high key area of focus in order to expand our product lines and develop complete solutions for the markets and which we operate as well as potential M&A opportunities and areas of direct alignment.
Such as our support on our key growth initiatives.
To assist with these efforts, we're looking to other avenues, such as venture capital expertise to help identify potential strategic acquisitions or investments, including innovative technologies of interest in the building space.
In regard to stockholder returns during the quarter, our board of directors approved a change to our capital return thresholds to 50% of Simpson's free cash flow.
As compared to our previous threshold of 50% of our cash flow from operations.
This change was made to better align our.
<unk> mental return thresholds with our growth initiative strategies and investments.
We remain committed to returning value to our stockholders and the form of opportunistic share repurchases and dividends moving forward.
In summary, we are very pleased with our strong second quarter financial and operational.
Our cap warm it's low.
Looking ahead to the second half of the year, we expect to build on the continuing momentum we are experiencing including strong housing starts.
We look forward to continuing to provide our customers with Simpsons industry, leading solutions.
Courted by our long standing relationships.
And we'll protect nickel and field support strong inventory position and consistent product availability.
Thank you for your time and attention now I'd like to turn the call over to Brian who will discuss our second quarter financial results and 2021 outlook in greater detail.
Thank.
And good afternoon, everyone I'm.
And I'm pleased to discuss our second quarter financial results with you today.
Before I begin I'd like to mention that unless otherwise stated all financial measures discussed in my prepared remarks today refer to the second quarter of 2021 and.
And all comparisons will be year over year compare.
And you Karen versus the second quarter of 2020.
Now turning to our results.
As Karen highlighted our consolidated net sales increased 25, 8% to $410.3 million.
Within the North America segment net sales increased 22.
And 2.2% to $356 million, primarily due to product price increases.
And that took effect in April and June of 2020.
And in effort to offset rising material costs, along with a marginally higher sales volumes.
We also continue.
The benefit from solid trends and our district, and our distributor channel, which reflected increased demand from ongoing strength and U S housing starts.
And in Europe, net sales increased to 51% to $56.4 million, primarily due to higher sales volume compared to last year's Covid.
And with 19 related slowdown.
Europe sales also benefited by approximately $5.3 million of positive foreign currency translations, resulting from some Europe currencies strengthening against the United States dollar.
Wood construction products represented 87% of total.
<unk> sales compared to 86 per cent and.
Concrete construction products represented 13% of total sales compared to 14 per cent.
Consolidated gross profit increased by 31, 1% to $196.4 million, which resulted in a stronger Q2 gross profit margin.
A 47, 9% compared to last year.
Gross margin increased by 200 basis points, primarily due to the price increases Karen discussed earlier.
Which were partially offset by higher material costs.
On a segment basis, our gross margin and North America increased to 40.
49, 9% compared to 47, 4% while.
While in Europe, our gross margin increased to 36 per cent compared to 35, 1%.
From a product perspective, our second quarter gross margin on wood products was $47.4 per cent compared to 46, 2%.
And the prior year quarter.
And it was 47.5 per cent for concrete products compared to 47 per cent and the prior year quarter.
Now turning to our second quarter costs and operating expenses.
As a reminder.
Last year, we curtailed expenses in light of the.
COVID-19 pandemic as a result total operating expenses were $94.7 million and increase of $17.1 million or approximately 22 per cent.
And as a percentage of net sales total operating expenses were 23, 1% compared to $23.8.
8 per cent.
Research and development and engineering expenses increased 16, 2% to $14.2 million, primarily due to increased personnel costs cash profit sharing and professional fees.
Selling expenses increased 23.
3.6% to $33.2 million.
Due to increased personnel costs and sales commissions traveling and entertainment expenses and professional fees.
And on a segment basis, selling expenses and North America were up 23% and in Europe. They were up 36.
General and administrative expenses increased 22.7% to $47.4 million.
Primarily due to personnel costs cash profit sharing and professional and legal fees offset by a lower stock based compensation.
Our solid topline.
Line performance combined with our stronger Q2 gross margin helped drive a 49% increase and consolidated income from operations to $101.7 million compared to $72.2 million.
In North America income from operations increased 31.8.
And 8% to.
And $95.1 million, primarily due to increased gross profit, partly partly offset by higher operating expenses.
And Europe income from operations increased 117, 8% to.
And to $5.9 million, primarily due to increased sales volumes.
And gross profit.
On a consolidated basis, our operating income margin of 24, 8% increased by approximately 270 basis points from $22.1 per cent.
Our effective tax rate increased to 26, 9%.
From 25, 8%.
Accordingly, net income totaled $72.5 million or $1.66 per fully diluted share.
Compared to $53.5 million or $1.22 per.
For fully diluted share.
Now turning to our balance.
Sheet and cash flow our.
Our balance sheet remained healthy with ample liquidity to operate our day to day operations and <unk>.
June 30th cash and cash equivalents totaled $305.8 million, a decrease of $9.7 million compared to June 32020.
As of June 32021.
The full $300 million on our primary credit line was available for borrowing and we remain debt free mostly unchanged from year end.
Subsequent to the end of the quarter, we entered into a fourth amendment to our credit facility.
Which extended the terms of the agreement.
On July 23rd 2022.
2 July 12, 2026, and modified certain covenants to provide us with additional flexibility.
Our inventory position of $310.3 million at June 30 increased by $13.6 million.
From from our balance at March 31, primarily due to the increases we saw and steel prices over the first half of the year.
Partially offset by a reduction and pounds on hand.
We continue to carefully manage raw material inventory purchases.
And the environment of rising costs.
And limited supplies, all while striving to maintain our high levels of customer service and on time delivery standards.
As a result of our improved profitability and effective working capital management, we generated strong cash flow from operations of $63.8.
And for the second quarter of 2021, and increase of $38.9 million or 156%.
We used approximately $8.8 million for capital expenditures during the quarter and paid $10 million and dividends to our stockholders.
8 million. Additionally, I am pleased to announce that on July 14th 2021, Our board of directors declared a quarterly cash dividend of 25 cents per share.
The dividend will be payable on October 28, 2021 to stockholders of record as of.
On October 7th 2021.
And as a reminder, and early May our board of directors approved a <unk> <unk> or 8.7% increase and our dividend per share.
We are pleased to have increased our quarterly dividend, reflecting our strong financial performance and continued commitment to returning capital to stockholders.
Prior to this we.
That's raised our quarterly dividend by <unk>, <unk> or 4.5%.
Per share and in April 2019, we.
We did not increase our dividend and 2020 as a result of.
Our focus on cash preservation at the on.
Onset of the COVID-19 pandemic.
And so.
And had allowed your 2021, we had the full amount of our $100 million share repurchase authorization available, which remains in effect through the end of 2020.1.
Given our confidence and our business and our expectation that our strategic initiatives will continue to drive improved operational performance and a higher return on invested.
We expect it will remain both active and opportunistic as it relates to share repurchase activity.
Before we turn the call over to questions I'd like to discuss our 2021 financial outlook based on business trends and conditions as of today July 26, we.
We are updating certain elements of our guidance for the full year ending December 31, and 2021 as follows.
Yeah.
We are tightening our operating margin outlook to now be and the range of 19, 5% to 21% compared to our previous estimate of $19.5 per cent to 22%.
Capital current outlook reflects 2 quarters of actual results the impact of our recent price increase announcements.
Rising raw material input costs and.
And the stronger than anticipated demand trends that we've been experiencing and 2021.
In addition, we continued.
To expect our effective tax rate.
And a range of 25% to 26% <unk>.
Including both federal and state income tax rates.
And finally, we are updating our capital expenditure outlook for 2020..1 we are authorized to capex and the range of $55 million from $60 million and.
<unk> and approximately 15 million to 20.
To be and dollars that will be used for safety and maintenance capex.
At this time only a small amount of our capex spend is related to pursuing our growth initiatives Karen outlined earlier in the call.
I'd also like to provide some additional commentary regarding our margin expectations for the remainder of fiscal 2000.
And the 1 and fiscal 'twenty to 'twenty 2.
Based on our current expectations, we are anticipating continued raw material cost pressure and late 2021 and into 2022.
As Karen noted our gross margins and the first half of 2021 reflect and average cost.
100000 sourced prior to or early into the rising steel market together with steel purchased more recently at much higher prices.
And we worked through our on hand inventory and continued continue to buy raw material at these much higher prices are anticipated cost of goods sold are expected to increase significantly.
The steel and the back half of fiscal 2021 and into 2022, even if prices for raw material and begin to decline, which will adversely affect our margins as the impact from averaging and raw material costs typically lags our price increases.
As a result, we currently expect.
<unk> roughly 300 to 400 basis point decline and operating margins for the full year 2022, when compared to 2021.
Despite near term pressures, we continue to focus on the long range view, a key company value and put in place by our founder Barclay Simpson.
They discussed during our analyst and Investor Day, we continue to believe we can maintain and industry, leading operating margin and the high teens range annually in the long term a key goal and our 5 year company ambitions.
In summary, we're very pleased with our solid second.
That's true financial results and operating performance.
We remain confident and our ability to execute against our strategic operational and financial initiatives, along with being able to support current and future demand trends.
We look forward to updating you on our progress in the coming quarters.
With that I'd like to turn the.
Quarter back to Karen for some closing remarks.
Thanks, Brian.
As Brian mentioned in summary, we are very pleased with our second quarter results.
We continue to manage the key areas of our business that we can control while navigating the current macroeconomic environment.
The call, but just characterized by our ongoing rising steel prices.
While these factors will result, and a notable compression to our margins and fiscal 2022.
We remain confident and our ability to achieve our 5 year company ambitions and we unveiled at our analyst and Investor day.
And March.
Our first ambition is we want to strengthen our values based culture.
Our Simpson strong tie employees are our most important asset and we will continue to engage with them to ensure relentless customer focus.
That they are involved and leadership programs.
Day, and it's still a safety first culture.
Second we want to be a partner of choice and all aspects of our business.
Third we strive to be an innovative leader in our product categories.
Fourth we aim to continue our above.
And get growth relative to U S housing starts.
Yes, we will continue to target and operating income margin that remains within the top quartile of our proxy peers.
While we expect increases and our operating expenses and the near term and <unk>.
Support our growth initiatives.
Our goal over the long term is to expand our operating income margin from historical averages supported by enhanced revenue from our growth initiatives.
And finally, we'll continue targeting a return on invested capital and that remains and the top quartile of our proxy peers.
Bob Marley and I'd like to sincerely. Thank all our Simpson employees for their commitment.
As we begin to execute against our 5 year ambitions.
We commend you for your dedication to safety and for working hard everyday to achieve our mission of providing solutions to help people build and design.
On paper stronger structures.
And with that I'd like to open the call up for questions on.
Operator.
Thank you if you would like to ask a question. Please press star 1 on your telephone keypad, a confirmation tone will indicate your line is and the question queue. You May Press Star 2 if you would like to remove your.
Income from the Q and from participants using speaker equipment and may be necessary to pick up your handset before pressing and starkey.
Our first question is from Daniel Moore with CJS Securities. Please proceed.
Afternoon, and Karen afternoon, Brian Thanks for taking the questions.
And then and.
Start with.
Volume press release mentioned marginally higher sales volumes I assume that means low single digits is that correct in terms of ballpark terms and what are your expectations for organic volume growth for Q3, and the remainder of the year, including that tough comp with Lowe's to the next quarter.
Question, well, we certainly saw volumes increase and Europe.
Relative to Q2 of last year.
Looking at North America.
I think you've indicated it nicely.
Low single digit.
Volume expectation.
Relative to.
And what we're seeing and or what we're hearing in the marketplace.
With respect to.
Starts and in general.
Yeah, why R&R elements.
Helpful.
And then.
To give you and I appreciate the color and trying to understand.
And exactly what factors have changed over the past couple of months that caused the delta or the lowering of the top end of fiscal 'twenty, 1 margin range and I understand that.
The puts and takes as you describe them just wondering.
On any 1 of those.
Has changed relative to kind of maybe 2 months ago that would necessarily take down on that top end.
Well for sure and steel prices continue to increase.
And a pretty dramatically from where we were and the last.
Wondering if her and even your expectations, where we were 3 months ago.
And although we have.
Announced multiple price increases this year.
It just.
And there is a bit of that also and there may be a.
Maybe.
A little bit of softening and some of the and markets due to other.
Elements for example housing starts to be impacted by some supply chain issues with regard to things like appliances and the like so just.
<unk>.
Various factors that.
And we're modeling and now with another 3 months under our belt.
Got it and.
Similarly for fiscal 'twenty to appreciate the initial commentary.
As everybody's always trying to sort of a jump on next year, but.
And this year.
Or are we started out with margin expectation and that was arguably conservative and quickly ramped higher so.
Are there factors in your mind that could cause that margin compression next year to be maybe a little bit lighter than what you've described.
I think Dan.
And now as we see steel pricing continuing to increase it seems like a potential.
New availability coming online has been pushed back a little bit from fourth quarter and the first quarter. So we're still seeing.
Tight market and high prices continue.
And for some time to come.
And Dan as you know we've talked in the past.
On these calls where as we buy new steel it takes a while for our average price.
Steel used in our operations to reflect current market conditions. So its just that.
That element and we started the year with.
A relatively lower price per pound and steel and it's gone up pretty dramatically and we will see the full.
And the impact of that in fiscal 'twenty 2.
Oh very good and I appreciate the color.
And we'll circle back with any follow ups. Thank you.
Thanks, Dan.
Our next question is from Tim Weiss with Baird. Please proceed.
Hey, everybody good afternoon.
Good afternoon.
So maybe just to try to level set a little.
But on a couple of basic questions.
And if I'm doing my math correctly, which probably isn't correct, but did you get in North America did you have over $50 million of price contribution and the quarter.
Okay.
Let's see.
It sounds.
And too much.
And that's too much.
That's too much okay.
What was the price contribution.
Well it would be and let's see.
Up fortyish.
Okay.
And that's.
It really only 1 price increase right because you really only had 2 weeks of the second and Theres still a third coming right.
Correct right.
Okay.
Price be.
On a run rate basis.
75 to $80 million to $90 million per quarter.
And give me just a second.
And a little bit on bill.
And then a little math here.
Okay.
Yeah.
Okay.
Katie.
At least $80 million.
On $80 million okay.
And so I've said that okay. So that would be kind of an annualized run rate going forward. So so even though we're talking about a little higher.
I guess margin compression next year, it's off a much higher revenue based and before correct.
Correct.
Okay, Okay, perfect and then.
And then when we think about.
The volume growth.
It sounds like the low single digit does that include the lapping of loans this quarter.
Yes.
And if you take that out what would volumes have grown.
Well, we had lows and last quarter.
Over last year, Q2, and so from a comparability perspective.
And what we're pulling out pretty large numbers on both quarters.
Yes.
Our home Center total.
Combined home center business was down.
Q2 of this year compared to Q2 of last year due to that.
That load in.
With Pos positive.
Well, we and the load in last.
Total come here and there was.
Net of Pos.
I believe so.
Okay, great Okay great.
And then just on and on a dollar for dollar basis as you kind of normalize.
Cash your input costs, and raw material and the price increases where you have effectively offset higher costs with price and and really numerically. It's just margin dilutive because of the mass.
Yes margin dilutive.
And.
I wouldn't I would expect that to be.
And we'd expect that to be correct.
Okay, Okay great.
What I had thank you guys appreciate it.
Thanks, Tim.
Our next question is from Kurt Yinger with D. A Davidson. Please proceed.
Great. Thanks, Kurt Hey.
Hey, Brian.
I guess, just starting off recognizing youre not kind of alone and this botha and I'm. Just curious how you think about the ability to continue to push price on the customers at the same time that it seems.
And is moderating a bit and just kind of the moving pieces within that and what type of responses you're hearing.
Yeah, Let me take a shot at that Kurt.
And is never easy to.
To.
Push price increases through but since it's such a highly publicized inc.
Information about what's going on with the steel industry and of course, it's not only Simpson who's who and.
And pricing true, it's pretty much anybody who's got steel and.
Raw material and their finished goods.
It's very highly publicized as to what's going on with the steel industry a lot of price increase is going and all aspects of the construction industry and.
And so of course.
Pushing our customers.
We're very happy that we have product to provide them.
And as we've mentioned.
And we're certainly not adjust and time shop and that means that we bring steel and we have finished goods, we have raw materials and our inventory and that's really to meet those customer needs.
And to be able to still have that 48 hour turnaround time so.
Although steel pricing or any price increase is hard to push through I think the service levels that we provide is something that the customers.
I appreciate.
And again they are certainly aware of all the changes that are going on and the industry.
Alright that makes sense and I guess sticking along those same lines, we've heard some comments around shortages of truss plates.
Curious, whether you feel you've benefited and North America from some of your competitors, perhaps being more strained from.
And.
Our service proposition.
And our supply chain perspective.
Yeah, we certainly have heard and our European market that we have benefited and.
And from some of our competitors being unable to supply building materials.
And we've been able to pick up some customers in that European market.
And I think on.
On a much smaller scale and in the North American market.
Probably benefited from that also.
As we've mentioned we.
Again, we wanted to be sure from an availability standpoint that we can definitely meet our customer needs and so.
We don't want to bring.
Bring on a customer and then not be able to support and other customers. So we're very careful on how we do that.
But again I think our team has done an excellent job.
Working with our customer base and production team has done a great job on making sure. We've got the right product and the right price and really making sure that we're not holding up.
That's for sure.
Okay, Okay that makes sense and I guess on on the 22 margin outlook obviously.
Talked about the drivers of the gross margin compression I'm just curious whether.
With the assumptions you've made whether you expect.
And Egypt nice leverage on the operating expense line or should we expect that some of the investments you're making behind some of those targeted growth markets will start to ramp up and you won't necessarily.
See that leverage despite the fact that you're benefiting from a lot of price.
Hey, Curt I would.
To get from Us from an Opex perspective, we've got.
Our plans on.
Hmm.
How we co.
Allocate SG&A dollars from supporting.
Not only just our growth initiatives with our current.
Our operations and alike.
And as price increases.
For sure we will look at the investments needed within SG&A.
To support our business and so I would expect there to be some.
Offsetting leverage on the SG&A.
Saving side relative to the gross margin.
On.
Given the resulting in net 2022.
Direction, we gave does that makes sense, yes, yes, no that's great and then just 1.
<unk> on technology could you just talk about what you've seen in terms of software usage and adoption. Among your customers kind of talk up a little bit about what metrics you watch to determine success there and whether you think that's something that can become a leading indicator in terms of product demand.
Non-GAAP over the next couple of years.
So I think each.
Customers are little bit different on the elements of software that they choose to make their business more efficient and that's really why.
On our platform is based on applications.
That can.
Can help.
And manufacturers and trust short versus and different application that would be used at a lumberyard, where potentially they would be doing on a full bill of materials take off. So we first start by trying to figure out the needs of that customer and do we have a software and application that could make them more efficient and more effective.
As you lose in their particular part of the building chain we are.
We are seeing for example, lumber yards using our takeoff tool, because it's making them more efficient on being able to quote more jobs.
And we have a target to convert and.
We offer this product.
And to a significant amount of lumberyards. This year, we're seeing component manufacturers again use our software to design trusses and floor systems, and we still have a small market share there maybe 45% of that total market share in that application.
We're seeing our home centers use our.
Dec solutions, and our fencing products co.
And it bring customers into their locations as well as support not only our products that are used and those applications, but of course a lot of lumber is also sold as youre looking at that growth.
And so there is no 1 answer it's across the board the metrics that we use are as we look at releasing new new deck products do we see an increase and our product specifically that are used for decking applications are fencing applications. We can we can.
Or a simple.
We can.
Get those metrics. We also know from the component manufacturing side the metrics that we use as pounds on plate that we sell to those component manufacturers.
And so each each application a little bit different metric used but I think the.
Is that Kim we and Simpson provide 1.
Building technology solution that can make our customer and that could be a designer.
And the takeoff person that component manufacturer the home owner building index make them more efficient in that role and also.
Key to buy our products on that final construction projects that they're working on.
Some of the other metrics that we would utilize would be.
Opportunities with customers, So we will track them and our CRM tool.
Looking at <unk>.
<unk> opportunities across the customer facing technology.
Low spec opportunities.
Okay, Alright that makes sense alright, great well appreciate all the color and good luck here and the back half of the year.
Thanks, Kurt Thanks, Kurt.
Our next question is from.
And ill Romero with Sidoti and company. Please proceed.
Hey, good afternoon and counter Brian.
Hi, Julio.
So your commentary on your expected margin compression and beginning in late 'twenty, 1 and through early 'twenty 2.
Maybe just talk about some of the assumptions there does does that 300 to 400 basis point decrease and expect.
Net operating margin.
Assume steel's stops rising and remains at the current elevated levels or does that 300.400 basis point decrease.
Assume Steve.
Steel prices decrease.
Okay.
And the.
Yes.
It's a good question.
And would expect.
As I mentioned earlier it takes a while for our average.
The average price.
New purchases and inventory to catch up so I would expect things to.
And continue to increase before things level out.
Got it the day, the reason I'm out and Yep.
And I was going to say today, we're well north of 2 times.
Cost of new purchases versus what we held in inventory.
And at the end of last year.
It may be a little bit of.
A ramp down once we get to a per.
Peak.
And.
And in cost of new purchases coming in but it will take a while for those 2.
It has taken a while to go out and they'll take while to come back down as well.
Got it but that that flight ramped.
Ramped downward and price that could happen.
Given the dramatic jump up and steel price.
Somewhat of a ramp downward it's factored into your <unk>.
2022 assumption would that be fair or yes.
Yes.
Yeah.
Just.
A lot of.
Assumptions, there how much it will be and when.
A lot of questions right now and.
And those and those models.
Yeah, no understood just asking because of the dramatic jump off that steel prices have done and just trying to think about that dynamic.
I guess, just the steel prices rising.
I think about some other inputs for some of your customers such as lumber prices for maybe trust manufacturers Lumbers lemon prices have gone down.
Steel prices have gone up does that dynamic if you will change anything for your customers in terms.
The appetite for them to absorb.
On your price increases.
I think if you look at that from just the standpoint of and building the house right I mean, the majority of the product.
In the residential home would be lumber so on lumber price increases has got a pretty significant impact as compared to steel prices.
As we've mentioned and said in the past it.
And we're probably well under a half a percent of the total cost of the house.
And so even though our price increase is.
Of concern and and as we said, it's not an easy thing to related to our customers. It's a much smaller impact from the overall construction.
And on the house.
I'm not sure that that if that answers your question, but just again from the overall construction industry would.
On pricing, which has been decreasing for about the past 3 weeks is a pretty significant impact from a housing affordability point.
Thank you that is helpful just thinking about that from a.
A broader perspective.
Shifting gears to.
Some of your capital allocation commentary I'm fascinated by the investment and the venture capital Fund can you maybe walk through how that is helping you think about <unk>.
Broke initiatives and the long term.
Sure. So we're really excited about that as the opportunity to engage.
And with.
Firm, that's looking at very cutting edge technologies within the building space.
Yes.
Access to.
To their deal flow, we let them know what we're looking for keeps on their radar screen.
We have.
And I will periodically conversations.
And to look at those opportunities.
<unk>.
So just new technologies that are at the forefront that we may not have had.
Cross our desk that we can potentially take a look at so advanced Scouting if you will.
And.
And it may not be something that we look to acquire we may partner with we've made 2 strategic.
Our relationship and some form or fashion with.
And these.
New technologies.
But just gives us access to more of that.
And that we've not had in the past.
Understood and then just last 1 from me is the $5 million increase and Capex for this year.
Can you maybe give us a quick reminder.
<unk> the implied.
The implied growth Capex I guess, it's $40 million. This year just give us a quick reminder, on whats currently being worked on and this calendar year.
Well, we're working on a number of.
Opportunities to in source products more so we've talked in the past, where we'll buy out a number of.
Our products from vendors.
To the extent, we can make more of that ourselves.
We like to do that.
We've got some.
Opportunities to invest in machinery or capital equipment because.
Hum.
Volume has been up pretty significantly over the last few years. So we want to make sure our our operations are reflecting.
And that type of environment and.
To the extent, we can be more efficient.
More cost effective with our.
Our products and solutions.
We will do that and investing in and Capex is 1 of those methods.
Excellent thanks for taking the questions and best of luck on the back half of the year.
Thanks, Helane thank you.
This does conclude.
Today's conference you may disconnect your lines at this time and thank you for your participation.
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