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Edited Transcript of SSD earnings conference call or presentation 29-Jul-19 9:00pm GMT

Q2 2019 Simpson Manufacturing Co Inc Earnings Call

Pleasanton Aug 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Simpson Manufacturing Co Inc earnings conference call or presentation Monday, July 29, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian J. Magstadt

Simpson Manufacturing Co., Inc. - CFO & Treasurer

* Karen W. Colonias

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

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Conference Call Participants

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* Daniel Joseph Moore

CJS Securities, Inc. - Director of Research

* Julio Alberto Romero

Sidoti & Company, LLC - Equity Analyst

* Steven Pierre Chercover

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

* Timothy Ronald Wojs

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

* Kimberly Orlando

ADDO Investor Relations - SVP

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Presentation

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Operator [1]

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Greetings, and welcome to the Simpson Manufacturing Company Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Kim Orlando with ADDO Investor Relations. Please proceed with your conference.

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Kimberly Orlando, ADDO Investor Relations - SVP [2]

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Good afternoon, ladies and gentlemen, and welcome to Simpson Manufacturing Company's Second Quarter 2019 Earnings Conference call.

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

Please note that the company's earnings press release was issued today at approximately 4:15 p.m. Eastern Time. The earnings press release is available on the company's website at www.simpsonmfg.com. Today's call is being webcast, and a replay will also be available on the company's website.

Now I would like to turn the conference over to Karen Colonias, Simpsons' President and Chief Executive Officer.

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

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Thanks, Kim, and good afternoon, everyone. I'm pleased to discuss our results with you today. Net sales for the second quarter of 2019 totaled $304.9 million, down 1% year-over-year primarily due to lower sales volume. U.S. housing starts, which are a leading indicator for approximately 60% of our business, remained soft throughout the first half of the year due to unusually wet and cold weather conditions across the U.S. In fact, according to the National Weather Service, the first 6 months of the year were the wettest on record over the past 125 years of tracking history. This negatively impacted sales volumes as it relates to our wood products. The wet weather conditions also offset any positive benefit we received from higher pricing following the July 1, 2018, price increase, which we enacted on the bulk of our U.S. Wood connector products in response to rising raw material costs.

As a reminder, U.S. housing starts in the second quarter of last year were very strong, the South and West up 14% and 8% year-over-year, respectively, compared to the South up only 5% and the West down 6% year-over-year in the second quarter of 2019. We also believe the second quarter of 2018 included some pre-buying activity ahead of the price increase, which helped support higher volumes last year. That said, our sales volume in the concrete space was up nicely over last year, mainly due to the continued rollout of our mechanical anchor products into the Home Depot stores.

Aside from the slow start to 2019, we believe there are many underlying factors to support healthy growth in U.S. housing starts going forward, including strong consumer confidence, extremely low unemployment rates, declining interest rates and low-level of housing stock availability. Looking ahead to the third quarter, we expect demand to recover given improved weather conditions. The month of July is off to a solid start.

Our second quarter gross margin of 44% declined by 160 basis points year-over-year, mainly due to increased material and labor costs as well as unabsorbed factory costs attributable to lower volumes. Due to lower-than-expected volumes, it is taking us longer to work through some of the higher-priced raw material we purchased during the fourth quarter of 2018 to ensure we had sufficient supplies during the turbulent market. We expect material costs to negatively affect our gross margins for all of 2019.

Partially offsetting this will be the implementation of price increases effective August 15 of 7% on mechanical anchor products and 7.5% on certain of our fastener products in the United States. Our customers were informed of this increase back in mid-June, in line with our typical 60-day notification window. While material costs have continued to pressure our cost of sales, we managed to maintain one of the highest gross margin in the industry due to long-standing brand reputation we've built throughout our proprietary trusted testing capabilities, deep industry relationships and superior level of customer service.

Since unveiling our 2020 Plan in October of 2017, we've made strides in providing transparency into our strategic plan and financial objectives to position Simpson for long-term sustainable and increasingly profitable growth. We're very pleased with the progress we've made to date and look forward to making further advances as time goes on. That said, the macro landscape has changed quite a bit over the past 7 quarters, with tariff and trade uncertainties contributing to a global growth slowdown. While we've made significant efforts to mitigate headwinds associated with these macro trends, I'd like to spend some time today walking you through some necessary updates to our 2020 Plan goals.

As you may recall, our plan is based on 3 key aggressive operational objectives. Our first objective centers on our continued focus on organic growth with the goal of achieving a compounded annual growth rate in net sales of approximately 8% from 2016 through 2020. To date, since 2016, organic net sales have grown at a compounded annual growth rate of 10%. So we feel confident we can achieve this 8% goal.

Our second objective involves rationalizing our cost structure to improve company-wide profitability. We're continuing to work towards reducing our operating expense as a percent of revenue from 31.8% in 2016 to a range of 26% to 27% by the end of 2020. Aside from top line growth, we've been tracking towards this target through a combination of zero-based budgeting, the reduction of indirect procurement costs and the cost reduction measures we've taken in both Europe and our concrete business. Offsetting these reductions will be our ongoing investment in our software initiatives as well as the expenses associated with our SAP implementation.

Given the degradation that we've experienced in our gross margin due to higher raw material costs, today, we are recasting our 2020 target for improving our operating income margin to a range of 16% to 17% by the end of 2020. This is revised down from our prior 2020 target range of 21% to 22% and in line to slightly up compared to our operating margin of 16.4% in 2016. As a reminder, our gross margin was almost 48% in 2016 and we -- when we initiated our 2020 Plan in October of 2017. It does not factor in macro events out of our control such as volatile steel market in connection with the 232 tariffs and other trade events.

While the gross margin pressure has caused us to revise this goal, it's important to note that our success in rationalizing our cost structure has helped us mitigate further downward pressure to this target. We're also recasting operating margin for Europe from a target of 12%, excluding incremental costs associated with SAP implementation, to a range of 8% to 9% in 2020, excluding SAP. Higher material costs have also contributed to this revision, and it still reflects a 700 to 800 basis points improvement from 2016 and substantial progress in the region.

Our third objective is focused on improving working capital management and overall balance sheet discipline primarily by reducing inventory by implementing lean principles in our factories. This included improving our inventory turn rate from 2x in 2016 to 4x by 2020. As we stated in the past, this was one of our most aggressive targets. When we initially disclosed the 2020 Plan, we believed we could achieve an additional 25% to 30% reduction of our raw materials and finished goods inventory through 2020 without impacting day-to-day production and shipping procedures.

When looking at the decrease in pounds on hand, which is the element we can control, we have been making solid progress. We are pleased that since December of 2016, we have reduced our product inventory in North America, which is the bulk of our total inventory, by over 12% in terms of pounds on hand, including raw materials which have come down by approximately 10%. In fact, in constant dollars, we would have seen almost a $40 million reduction in inventory in North America alone. We accomplished this even as we proactively built up our anchor inventory in anticipation of tariffs on finished goods from China. We also bought an additional allotment of steel in late 2018 in order to mitigate potential impact of product availability, and we've built up inventory to ensure we could meet our needs during SAP rollout.

In that same time frame, since December of 2016, our weighted average cost per pound of total inventory on hand and raw materials on hand, which we cannot control, increased approximately 25% and over 35%, respectively. Unfortunately, this has not translated into marked improvement in our inventory turns based on dollars. As a result, we no longer believe we can achieve an inventory turn rate of 4x by the end of 2020. That said, we will continue to leverage the great work we are doing with our lean initiatives, and we'll continue to strive towards reducing our inventory and everything that we can control.

Given the pressure on gross margins, we are updating our expectations for return on invested capital to be in the range of 15% to 16% by 2020 compared to only 10.4% in 2016. Many of our key operating initiatives stem from the 2020 Plan, including those focused on growing our market share, rationalizing our cost structure to drive improved profitability without sacrificing our competitive edge and improving our technologies and systems to provide best-in-class service to our customers.

We continue to expand our market share in the concrete space through the introduction of our mechanical anchor products into the Home Depot stores. Our mechanical anchor sets were available for purchase in 1,025 Home Depot locations as of today, with an additional 25 stores scheduled to be set at the end of 2019. We continue to seek additional products and footage in current locations as well as an additional 800 stores. Importantly, the 1,050 confirmed store sets we will have by the end of the year versus the 1,900 stores we were targeting is not expected to affect our 2020 Plan target for compounded annual sales growth.

While on the subject of concrete products, I'd also like to note that through our revised strategy and diligent work by the team, our concrete gross margin is on track to improve from 34.6% in 2016 to approximately 42% by the end of 2020. In Europe, we are pleased to increase our net sales in local currencies over the prior year period through a combination of volume improvements and higher selling prices. In addition, we expect to realize additional cost savings following the consolidation of 2 of our facilities near Frankfurt, Germany into a single location given the duplicative operations performed.

Finally, in terms of improvements to our technology infrastructure, we are continuing the remaining rollout of our U.S. selling branches through early 2020. Following the success of our SAP rollout at our second U.S. manufacturing and selling facility in April, we feel confident we are tracking towards a company-wide completion in 2021.

In summary, while our sales volume was negatively impacted during the first half of 2019 due to weaker overall demand, we are confident we have not lost market share in our core Wood connector business. For the remainder of the year, we are cautiously optimistic housing starts will pick up and enable healthier demand levels. And while we have revised some of our 2020 Plan targets, we still believe these goals represent significant improvements to our business. We remain committed to operational excellence through execution on our plan and other strategic initiatives and focusing on the areas of our business we can control to drive long-term shareholder value.

Finally, I'd like to thank all our employees for their continued dedication to Simpson. Best-in-class customer service, maintaining a safe workplace environment are key cornerstones of our culture, and we applaud their commitment to these efforts.

Now I'd like to turn the call over to Brian, who will discuss our second quarter financials.

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

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Thank you, Karen, and good afternoon, everyone. I'm pleased to discuss our second quarter financial results with you today. Our consolidated net sales for the second quarter of 2019 were $304.9 million, down 1% compared to $308 million in the second quarter of 2018. Within the North America segment, net sales were roughly flat compared to the prior year quarter at $259.1 million primarily due to lower sales volumes, which was partially offset by increases in average product prices.

In Europe, net sales decreased 5% year-over-year to $43.6 million primarily due to negative foreign currency translations resulting from Europe currencies weakening against the United States dollar. In local currency, Europe net sales increased primarily due to increases in average product prices.

Wood Construction products represented 85% of total net sales in the second quarter of 2019 compared to 84% in the second quarter of 2018. Concrete Construction products represented 15% of net sales -- of total net sales in the second quarter of 2019 compared to 16% in the second quarter of 2018.

Our consolidated gross profit dollars decreased by approximately 5% year-over-year to $134.2 million, resulting in a gross margin of 44%. Compared to the second quarter of 2018, our gross margin declined by 160 basis points. The year-over-year decline in gross margin was primarily due to increased raw material costs, tooling expense and factory overhead costs on lower production as well as higher labor costs resulting from tightening labor market conditions.

On a segment basis, our gross margin in North America was 45.1% compared to 47.6% in the prior year quarter. In Europe, our second quarter gross margin was 37% compared to 38.2% in the year ago period. From a product perspective, our second quarter gross margin on wood products was 43.4% compared to 46.7% in the prior year quarter, and concrete products improved to 44% from 37.2% in the prior year quarter.

Now turning to our second quarter costs and operating expenses. Consolidated research and development and engineering expenses for the second quarter declined 2% year-over-year to $11.1 million. Consolidated selling expenses for the quarter declined 2% year-over-year to $28.7 million primarily due to decreased cash profit sharing, sales commissions, advertising and promotional expenses and donations, which were partially offset by increased personnel costs and professional fees. On a segment basis compared to the prior year quarter, selling expenses in North America were slightly up by less than 1%. And in Europe, they decreased by 11% general.

General and administrative expenses in the second quarter increased 7% year-over-year to $41.3 million primarily due to increases in consulting and professional fees, some of which were success-based fees for our management consultant on work done in 2018 as well as expenses associated with the SAP project. These expenses were partially offset by reduced cash profit sharing and severance expenses. On a segment level, general and administrative expenses in North America increased by 13% compared to the prior year quarter. In Europe, G&A decreased by 23% year-over-year.

Total operating expenses in the second quarter of 2019 were $81.1 million, an increase of $1.8 million or approximately 2% compared to the prior year quarter. As a percentage of net sales, total operating expenses were 26.6% compared to 25.7% in the prior year quarter. The increase in operating expense dollars and as a percentage of net sales for the quarter was mainly due to higher consulting and professional fees associated with our lean and management consultants and SAP implementation project.

As a reminder, we expect the management consulting fees we incurred in 2018 and we'll continue to incur through 2019, such as the success-based fees I previously mentioned, will have a payback of 1 year or less and will conclude in 2019. Also it's worth mentioning that as we progress further into our SAP implementation, we are now expensing more of our costs versus primarily capitalizing them as we were last year and towards the beginning of the project. As of June 30, we've capitalized $18.8 million in total and have expensed $18.8 million of the costs associated with the SAP project.

Our consolidated income from operations for the second quarter decreased 13% year-over-year to $53.7 million compared to $61.4 million in the second quarter of 2018. In North America, income from operations decreased 17% year-over-year to $50.1 million primarily due to the reduction in our gross margin and increased general and administrative expenses on effectively flat revenue growth. In Europe, income from operations increased 28% year-over-year to $4.7 million primarily due to our cost reduction initiatives.

As a result, our consolidated operating income margin of 17.6% declined by approximately 235 basis points from the second quarter of 2018. Our effective tax rate decreased to 26.4% from 27.2% in the second quarter of 2018. Our consolidated net income for the second quarter was $39.6 million or $0.88 per fully diluted share compared to $44.1 million or $0.94 per fully diluted share in the prior year quarter.

Now turning to our balance sheet and cash flows. At June 30, 2019, cash and cash equivalents totaled $141.7 million, an increase of $28.3 million compared to our levels at March 31, 2019. Our inventory balance as of June 30, 2019, was approximately $266.1 million, an increase of nearly $8 million or 3% compared to our balance as of June 30, 2018. We remain debt free with only a small portion of capital leases.

We generated cash flow from operations of $44 million compared to $35.3 million in the prior year period. We used approximately $5.5 million for capital expenditures during the quarter and paid $9.9 million in dividends to our stockholders. Included in the second quarter, capital expenditures were $900,000 related to our ongoing SAP implementation project. As of June 30, 2019, we had approximately $70 million available under our $100 million share repurchase authorization, which remains in effect through the end of 2019. We expect to continue our approach of remaining opportunistic as it relates to repurchasing shares of our common stock.

In addition, I am pleased to announce that on July 25, 2019, our Board of Directors declared a quarterly cash dividend of $0.23 per share. The dividend will be payable on October 24, 2019, to stockholders of record as of October 3, 2019.

Before we turn it over to questions, I'd like to discuss our 2019 financial outlook. For the full year of 2019, we are updating our guidance for our consolidated gross margin to be in the range of 43.5% to 44% given higher material costs and the softer U.S. housing starts apparent in the first half of the year.

Further, we are reiterating our full year 2019 guidance for the following metrics: We expect total operating expenses as a percentage of net sales to be in the range of 27.5% to 28.5%; the effective tax rate to be in the range of 25% to 27%, including both federal and state income taxes; depreciation and amortization expenses to be in the range of $39 million to $41 million, of which $33 million to $35 million is for depreciation of fixed assets; and capital expenditures to be in the range of $30 million to $35 million, including approximately 25%, which will be used for maintenance CapEx.

In summary, while our second quarter results were pressured due to certain macroeconomic and weather-related factors, we remain focused on executing against our strategic operational initiatives to drive improved future financial performance. We look forward to updating you on our progress in the coming quarters. Thank you for your time and attention today.

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

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Questions and Answers

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Operator [1]

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

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

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I want to start with Q2 and then maybe shift to the guide. But in terms of the quarter in North America specifically, did you -- do you think you saw any -- I guess number one, can you break out more specifically price versus volume? I know it was mostly volume. And then number two, do you think you saw any inventory destocking across the sales channels? Did that play a role at all? Or do you think your volumes are pretty reflective of end market demand?

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Brian J. Magstadt, Simpson Manufacturing Co., Inc. - CFO & Treasurer [3]

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Dan, it's Brian. I would say on the first part of the question there, it was largely volumes. As we noted, we saw some increase on the concrete product side due to the additional rollout there into the Home Depot. But on the wood product side in North America, volumes were down, slightly offset there by the -- some price increase.

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [4]

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Yes. Dan, I would say from our customers' inventory, as you guys know, we don't have any vendor-managed inventory, so very tough for us to determine how much inventory they're holding. But it's pretty clear since we can supply them in a very short time frame that they're probably not holding as much inventory as they had in the past.

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Daniel Joseph Moore, CJS Securities, Inc. - Director of Research [5]

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Okay. Helpful. And then shifting to the 2020 goals, a lot of puts and takes, but essentially, the operating margin, 16% to 17% implies flat to a bit of a backup versus where you were in 2018. So I realize it's still a little bit of improvement versus where we were in '16. But to what extent did you maybe overearned in hindsight in 2018? And beyond the SAP implementations, what are some -- are there other incremental costs that you expect to incur going forward? It just appears to be rather conservative. Trying to understand some of the puts and takes beyond just steel as well.

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [6]

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Yes. I think we mentioned if you looked at 2016, right, we had gross margin of 48%. We also had an SG&A of over 31%. So if you look at the improvement really from the SG&A standpoint, that's really cost taken out of our system, not so much SG&A as a percent of sales, but we really did take quite a bit of dollars out of our SG&A from an expense standpoint. And if you look at where we are now with housing starts being probably in the 2% to 3% and not working through this higher steel that came into place in 2018, that's having a substantial impact on our gross margin. And obviously, that's rolling down to that operating income number.

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Daniel Joseph Moore, CJS Securities, Inc. - Director of Research [7]

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Okay. And maybe just to drill down on the gross margin. And this is sort of 2 questions in one. Would you say your 2020 goals of 20% operating margin are pushed out? Or do you think they just maybe were too aggressive or no longer achievable? I'm trying to understand if you think the gross margin gets back to mid- to high-40s over time if steel prices and other factors normalize or if we think this is the new norm.

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [8]

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No. I think if we've got some housing starts that are close or approaching to a mid-single-digit growth rate as well as we've got some stability into the steel and then how we're holding our SG&A cost down, I would think those would all obviously relate to a much better operating income margin than we're projecting right now. But that gross margin impact, again, compounded with the fact that we are very slow on housing starts has compounded that problem. And that's why you see us restating that operating income number.

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Daniel Joseph Moore, CJS Securities, Inc. - Director of Research [9]

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And lastly and I'll jump back. In terms of the top line guide, no change there. Obviously, you were running at 10%, but it still implies sort of a mid-single-digit for the next 6 quarters. So given what you just described in terms of a tougher housing start environment, what gives you the confidence in sustaining maybe not 8% but maybe 5% organic growth for the next, call it, 6 quarters or so?

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [10]

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Yes. I think we've seen improvement, again, on the top line of what we're seeing in the concrete part of our margin -- or excuse me, concrete part of our business, certainly looking for that to continue. We've seen some improvements in where we're going from here from a pricing standpoint. And also we have that price increase in 2018. And obviously, that's helping that grow -- or excuse me, that top line compounded annual growth rate.

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Brian J. Magstadt, Simpson Manufacturing Co., Inc. - CFO & Treasurer [11]

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Dan, one thing, just to clarify. So I think you noted the 10% compounded annual growth. That's our -- through the current period. We're saying we expect to achieve our 8% goal through the 2020 time frame, but we didn't say by how much. So I just want you to be clear on that one.

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Daniel Joseph Moore, CJS Securities, Inc. - Director of Research [12]

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Yes. I just -- it implies at least mid-single-digit growth for the remainder to sort of get there. And that's not what we're seeing in this quarter. So that's what I'm trying to understand. That's all.

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Operator [13]

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

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Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [14]

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One. So maybe if I could just kind of leapfrog on Dan's question a little bit. Just -- I guess as you look over the next, call it, 2 years, how much of the growth that you're expecting is really driven by the macro environment versus how much you may be able to get through various kind of internal initiatives? I'm just trying to understand if the prior kind of housing start number plus kind of internal initiatives, if that arithmetic changes at all.

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [15]

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Yes. I think certainly as we've talked about, the housing start number is the biggest part of the impact, over 60% of our business. We're -- you're seeing housing start projections all over. Maybe they're somewhere between 3% to 5%. The piece, I think, we have to take into account also is that R&R is up, and that's helping us from that growth standpoint. We -- as we've said in the past, we have not been able to actually triangulate exactly how much of our business goes through R&R, but certainly, as we look at our home center business and some of our co-op business as that R&R business tracks up, that's helping to offset what we're seeing on the housing start business.

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Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [16]

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Okay. Okay. And then is there a way for us to think about how year-over-year growth trended through the second quarter? Because if I go back to the last call, I think April started up okay, but obviously, we had some deceleration. So if you could just maybe help us kind of understand what the growth looked like as you kind of went through the quarter.

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Brian J. Magstadt, Simpson Manufacturing Co., Inc. - CFO & Treasurer [17]

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I think you hit it right there. It's -- a month out, the quarter was looking -- as we noted, looking well and then definitely slowed down through the latter part of the quarter. I would say that the -- April, again, was decent. May and June, I think, were fairly consistent. We -- lower given where we ended up. So I don't think it was necessarily a start strong and then finish slow. It was a good first month followed by 2 softer months.

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

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Okay. And have you -- in the updated gross margin guidance, have you contemplated any additional kind of under -- overhead of underabsorption?

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Brian J. Magstadt, Simpson Manufacturing Co., Inc. - CFO & Treasurer [19]

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There is, absolutely right. With lower volumes, there's -- absorption does play a factor in that. So material probably had the biggest impact. I think the factory and tooling, the overhead absorption was #2 in terms of rank order in the gross margin.

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

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For the guidance?

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Brian J. Magstadt, Simpson Manufacturing Co., Inc. - CFO & Treasurer [21]

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For the quarter and in general for the guidance, yes.

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

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Okay. But I guess my question was just are you baking in any sort of incremental underabsorption in the back half of the year in that kind of updated gross margin guidance. Or do you assume that your production looks more like sales?

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Brian J. Magstadt, Simpson Manufacturing Co., Inc. - CFO & Treasurer [23]

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I would say it's a little bit more of the former there, the -- assuming some underabsorption through the back half of the year.

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

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Okay. Got you. And then I guess last question just on -- so steel prices over the last, probably, call it, 2 or 3 months has moderated pretty meaningfully. So how should we think of just the industry pricing over the next couple of quarters with steel prices actually maybe starting to move lower on a year-over-year basis? Do you think the industry will be able to kind of maintain the prior price? Or do you feel like some of that has to go back to the end customer?

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [25]

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Yes, Dan, I think...

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Brian J. Magstadt, Simpson Manufacturing Co., Inc. - CFO & Treasurer [26]

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Tim.

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [27]

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I'm sorry, Tim.

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Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [28]

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That's okay.

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [29]

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I'm sorry, Tim. As we talked about when we -- because we have a 60-day notification, we actually put pricing in place last year, not at the point where steel was at its highest price. So as we work with our customers, distributors are selling our products. That's certainly one point. And the other point is that I would say that the steel market is still fluctuating. There were 3 to 4 price increases that came out last week. So we're still kind of in this up and down situation, and it's very difficult for our customers because we have so many parts to have price changes.

So we kind of like to see some stability before we would potentially have to give any of that pricing back. And right now, we're definitely -- have not given any of that pricing back because we are seeing steel pricing going up. Certainly, as you see from our gross margins, we still have some very expensive steel in-house.

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Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [30]

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Okay. And I lied. I have one more question. Just how should we think of inventory turns going forward? I mean I understand the dollar value versus the unit value that you've talked about. But similar to one of the prior questions, is 4x still attainable? Is there still a target for inventory turns? How should we think about that even in what I answered in 2020, even beyond 2020, how should we think about what inventory looks like?

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [31]

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Yes, it's a really great question. And certainly, as we've mentioned, we're doing quite a bit of work in our facilities to be much more efficient in our manufacturing and allowing us to hold less inventory. We're also doing some work on the front end with our SAP from forecasting. So we're much better at forecasting and getting our production through, and we'll continue to work on those elements. I think at some point, yes, 4x is still a reasonable approach for us when we get to some sort of normalization from -- as we talked about, on the cost of materials, it's just -- it's not a number we can track to as we see that we are having performance improvement by our pounds reduced.

So we'll continue looking at both the ROIC -- excuse me, the inventory turn calculation as well as looking at what we're really doing from a pound standpoint so that we can see that the efforts that we're putting in with our lean work is providing us some good results. And we'll just keep pushing on all those elements at our production facilities as well as what we're doing from buying our raw materials.

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Operator [32]

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

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [33]

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So my first question is with respect to the price hikes that are pending August 16, 7% on anchors and 7.5% on fasteners. How quickly do those get implemented? Is there a lag?

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [34]

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August 15. So we've already given our customers -- the August 15 is implementation date. We gave our customers notification in the June time frame. So basically, orders they put in after August 15, we'll have that price increase on.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [35]

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Okay. So anything ordered after that date. Do you expect that to be a big prebuy?

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [36]

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We don't move as much volume of fasteners and anchors as we would see in the connector space. So I wouldn't typically expect that. We certainly keep the same rules as far as some of the things we try and control on the prebuy. But I don't think we would see anything dramatic from an impact there.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [37]

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So the strength that you've seen in July shouldn't be confused with the prebuy, assuming your information is good.

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [38]

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Yes. Because the strength we can see which product grouping that's in. So not so much in the concrete space. We could see where the strength is in from a product grouping -- if that makes sense, from the wood product standpoint.

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Brian J. Magstadt, Simpson Manufacturing Co., Inc. - CFO & Treasurer [39]

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And I would add from a relative basis, I mean yes, we sell a lot of fasteners and a lot of mechanical anchors. But relative to the other wood products, right, they're a smaller piece. So we've got that increase on the smaller piece. And there may be a little bit of prebuy dollars in there, but the dollars aren't going to be as much as, say, what we would have -- what we think we experienced in Q2 of '18 when we did the connector increase. Does that answer the question?

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

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Maybe. But is there an increase on the connectors as well? I mean you mentioned mechanical...

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [41]

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No, no, no. Just anchors and fasteners -- and some fasteners.

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

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But your steel prices apparently continue to go up. So are you contemplating something on connectors? Or is what we got last year what we got?

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

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Yes. As we mentioned, steel pricing has actually come down from when we put our price increase in last year. So right now, we're seeing steel pricing go up again. So we're really kind of in a fluctuation of the steel pricing. We're not anticipating a steel price increase or decrease at this point for the remainder of 2019.

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

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And I mean with respect to the full year, you've given us the guidance that you can. Clearly, housing has been underwhelming and weather is a part of the factors. I mean do you think it's still possible to put up bottom line growth and let alone the top line objectives but legitimate bottom line growth considering through the first half, your trailing -- year-over-year, you're down?

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [45]

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Well, I think when we talk about the -- unless we start to see some pretty upticks in that housing. When we talk about housing, we need to keep in mind mid -- sorry, multifamily is up. Single family is down. And for us, obviously the bigger part of single family, it's down in the West and not -- it's also down from last year this time in the South. So if there is some pickup in those 2 regions, that would be significant for us. Again, that would help run through our more cost-effective -- our more expensive steel. We'd see an improvement on that gross margin line. But those are really the things we have to see, we need a pickup in the West and the South on single-family homes.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [46]

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So basically, both the geography and the product mix are working against you at present?

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [47]

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That is correct.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [48]

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Okay. And then with respect to the 2020 Plans, I mean when did -- I guess the question is when do you think it was appropriate to start walking back some of these objectives? Was it clear to you that some of these things would be unattainable? Perhaps going back a quarter or 2, for instance, there's a pretty substantial revision on consolidated operating margin.

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

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Yes. I think as we saw -- and if you remember, we thought we would be through the expensive steel based on a normalized volume in the second quarter. So we thought we'd see some gross margin improvement in the second quarter. And certainly, we're seeing housing starts even slower in the second quarter. So that is really what has initiated as we run through some models to realize that we needed to make some adjustments because the second quarter, now we're through the second half of 2019 and we have some -- a much clearer vision on what the rest of '19 probably looks like and going forward into '20.

So I think the turning point for us was the fact that we had a nice-looking April. As we said, we're pretty optimistic that, that was going to continue. We had a very wet May and partial of June. And that's certainly, as you see, in our revenue numbers. And that's -- that impact on our gross margin from not moving to that expensive steel or something that's going to continue now through the rest of the year.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [50]

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So last question, assuming you were to roll out this October in conjunction with Q3 the 2022 objectives, do you think that they would have similar numbers as you had in your original 2020 Plan? So in other words, are these objectives simply deferred? Or do you think that they're no longer attainable?

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [51]

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Yes. I would say that we have given some new statement of what the 2020 plan is. We will continue in all of these elements to keep pushing to be top tier on all areas, but we're not stating anything beyond 2020 at this time.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [52]

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Okay. But I'll just try that one more time. Do you think in the long run, you're still capable of getting, for instance, inventory turns towards that 2x target or operating margin of 21% to 22% in the long run?

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [53]

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Yes. I think as you look at the business model that we have, again, we've made significant progress, if we make these 2020 -- these revised 2020, significant progress over 2016. And we'll continue to push to those original 2020 targets. Many things out of our control, as you've heard me say, I cannot control housing starts, I can't control steel prices and I cannot control the weather. So if we get some good luck in all of those, I think we'll be to track pretty well in what those original 2020 targets were.

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Operator [54]

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(Operator Instructions) Our next question comes from the line of Julio Romero with Sidoti & Company.

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Julio Alberto Romero, Sidoti & Company, LLC - Equity Analyst [55]

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Could you talk anecdotally about what you're hearing on the ground from your salespeople, distributors and customers about what's maybe constraining housing specific to the geographical areas you're in? Obviously, the data is showing some slowdown there. But what are you hearing from the boots on the ground regarding affordability, overall global uncertainty, whether if you could maybe talk about that a little bit.

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [56]

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Yes. I think if you look at the national homebuilders, they actually think the back half of the year is going to be better obviously than the first half. Pretty consistent thought process on suppliers, whether they'd be wood suppliers or other suppliers of the building industry. Everybody seems to think the back half is going to be better. And a lot of that, again, they're based on the weather that we had in the first half. So if you look at the indicators from interest rates potentially going down again, we certainly know we have a shortage of houses, low unemployment, all the things that would lend us -- or lead us down the path that we're going to have good housing starts. So I think that's pretty much the sentiment on The Street. If the weather holds out, we feel the back half will be better than the first half of the year was.

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Julio Alberto Romero, Sidoti & Company, LLC - Equity Analyst [57]

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Okay. Maybe just switching gears to the European segment within the quarter. Can you maybe just talk about some of the operating leverage you're getting there? I mean you had a 10.8% op margin and you had your gross margins down year-over-year. So certainly doing something right there. If you could just discuss maybe some of the operational initiatives that are working there.

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Karen W. Colonias, Simpson Manufacturing Co., Inc. - President, CEO & Director [58]

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Sure. As we mentioned, we had a strategy change there. So we've had a little bit narrowing of our focus. That's what we did at about 18 months ago. We've had some consolidation of facilities, where we've been able to put some of our concrete business units into our wood manufacturing facility. So that's helped from costs. We've obviously had some severances from -- due to that management change. On the sell side, we've had several price increases that we've put in place in all parts of our business, all countries as well as both wood and concrete products, and still more levers that we're working on to get a much better EBIT number out of that European operation. But nice improvements of what we've seen so far, really have put that -- we're really looking at 18 months of that improvement that we've put in place so far.

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Julio Alberto Romero, Sidoti & Company, LLC - Equity Analyst [59]

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Okay. And then just last one from me here. So the guide is obviously incorporating more of a top line slowdown through 2020, right? So given that implied macro slowdown, like how do you think about your balance sheet when you're balancing cash versus being opportunistic on repurchases? How do you balance that trade-off there over the next 1.5 years or so?

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Brian J. Magstadt, Simpson Manufacturing Co., Inc. - CFO & Treasurer [60]

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I think that's exactly it. Julio, it's looking at the financial models of share repurchase at whatever that price is versus where we think the business is valued at and weighing that against any of the operational initiatives there. But as you see, our cash balance is up and we'll continue to be opportunistic there. We've got our goal to return 50% of cash flow from ops to shareholders. And over the last few years, we've been far in excess of that. But we take those both into account as we look at share repurchase.

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Operator [61]

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Our next question is a follow-up from Daniel Moore with CJS Securities.

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Daniel Joseph Moore, CJS Securities, Inc. - Director of Research [62]

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You just, I think, answered it. But the question is simply depending on share price volatility, would you be willing to -- and given the balance sheet and the cash generation of the business, would you be willing to go above or materially above that 50% of cash flow from operations for a period of time if the opportunity warrant it?

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Brian J. Magstadt, Simpson Manufacturing Co., Inc. - CFO & Treasurer [63]

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I would think so. I mean one of the key considerations there is the investment opportunities for the business, and that's always a key factor. But like we've done in the past few years, and we have far exceeded that 50% number, I would say that, that would be a possibility.

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Operator [64]

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Ladies and gentlemen, we have reached the end of the question-and-answer session. And this concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.