Q3 2023 Simpson Manufacturing Co Inc Earnings Call
Participants
Brian J. Magstadt; CFO & Treasurer; Simpson Manufacturing Co., Inc.
Kimberly Orlando; SVP; ADDO Investor Relations
Michael L. Olosky; CEO, President & Director; Simpson Manufacturing Co., Inc.
Daniel Joseph Moore; MD of Research; CJS Securities, Inc.
Julio Alberto Romero; Equity Analyst; Sidoti & Company, LLC
Kurt Willem Yinger; VP & Research Analyst; D.A. Davidson & Co., Research Division
Timothy Ronald Wojs; Senior Research Analyst; Robert W. Baird & Co. Incorporated, Research Division
Presentation
Operator
Greetings. Welcome to the Simpson Manufacturing Company Third Quarter 2023 Earnings Conference Call. (Operator Instructions) Please note this conference is being recorded.
I will now turn the conference over to your host, Kim Orlanda, with ADDO Investor Relations. You may begin.
Kimberly Orlando
Good afternoon, ladies and gentlemen, and welcome to Simpson Manufacturing Company's Third Quarter 2023 Earnings Conference Call. Any statements made on this call that are not statements of historical facts are forward-looking statements. Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties. Actual future results may vary materially from those expressed or implied by the forward-looking statements. We encourage you to read the risks described in the company's public filings and reports, which are available on the SEC's or the company's corporate website.
Except to the extent required by applicable securities laws, we undertake no obligation to update or publicly revise any of the forward-looking statements that we make here today, whether as a result of new information, future events or otherwise. Please note that the company's earnings press release was issued today at approximately 4:15 p.m. Eastern Time. The earnings press release is available on the Investor Relations page of the company's website at ir.simpsonmfg.com. Today's call is being webcast, and a replay will also be available on the Investor Relations page of the company's website.
Now, I would like to turn the conference over to Mike Olosky, Simpson's President and Chief Executive Officer.
Michael L. Olosky
Thanks, Kim. Good afternoon, everyone, and thank you for joining today's call. With me today is Brian Magstadt, our Chief Financial Officer. My remarks today will provide an overview of our financial performance, key growth initiatives, and capital allocation priorities. Brian will then walk you through our Q3 financials and fiscal 2023 outlook in greater detail.
We delivered another quarter of solid performance in a challenging operating environment with third quarter net sales of $580.1 million, increasing 4.8% over Q3 2022. North American volumes increased approximately 7%, partially offset by price decreases earlier in 2023, leading to a growth in net sales of 4.4% year-over-year to $456.8 million.
To further break down our North American performance, we achieved double-digit volume improvements year-over-year in our commercial, national retail, and building technology markets. We have continued to execute on our strategies, enabling us to win new applications and customers.
In our residential market, our volumes improved in the low-single-digit range with notable strength in the Southwest and Southeast regions of the U.S. compared to last year.
While 2023 U.S. housing starts will likely finish below 2022 levels, we continue to believe in the sustainable strength of the housing market in the mid to long-term given the shortage of new housing. In fact, we estimate a shortage of approximately 2 million homes in the U.S. after more than a decade of under-building.
Further, we are confident our unique business model will enable us to continue to outperform the market given. First, our increasingly diverse portfolio of products and software and a commitment to developing complete solutions for the markets we serve.
Second, our longstanding reputation, relationships, and engagement with engineers, building officials, and contractors to design safer, stronger structures and improve construction practices.
Third, a dedication to innovation, extensive product engineering, and rigorous research and testing in our 9 state-of-the-art labs.
Fourth, best-in-class field support, technical expertise, digital tools, and training to make it easy to select, specify, install, and purchase our products.
Fifth, industry-leading product availability and delivery standards on our vast product offerings across multiple distribution channels, with typical delivery within 24 to 48 hours.
And sixth, a deep commitment to trades education and partnering with organizations that provide training and career opportunities to attract more people to the construction industry and alleviate labor shortages.
Turning to Europe, while our third quarter sales were relatively flat year-over-year on a local currency basis, our Europe gross margin has continued to improve versus historical levels. As reported, Europe sales totaled $119 million, up 6.4% year-over-year, primarily due to the benefit of $7.9 million in foreign currency translation.
ETANCO continues to perform well in a challenging market with relatively flat sales, while our integration efforts continue to progress. Our business associated with the residential housing market was down due to lower housing starts. We continue to believe in the longer-term potential of the European market, giving ongoing housing shortage, increasing use of wood construction, and new regulations that drive new applications and specifications.
Our consolidated gross margin for the third quarter improved to 48.8%, primarily reflecting lower raw material costs offset by higher fixed costs in our factory tooling and warehouses. Brian will further elaborate on the key drivers of our margin performance shortly.
I'll now turn to an update on our key growth initiatives within our 5 end-use markets in line with one of our key company ambitions to be the partner of choice. Beginning with the residential market, we continue to improve our market share by completing the conversion of a large 13 location pro-dealer chain in the Northeast.
In addition, we are pressing forward on a shorter path to market by completing the opening of 3 regional warehouses in the Northwest. In the commercial market, our announced alliance with structural technologies continues to drive record revenue of our concrete strengthening solutions.
In the OEM market, our dedicated OEM team remains focused on new opportunities, including wood-to-wood connections for shed manufacturers. It's an opportunity for us to sell our complete product line and offer a broad range of solutions, including truss plates, fasteners, connectors, and our new EasyFrame saws. We've had a couple of nice wins validating that approach.
Also in the OEM space, we continue to focus on mass timber construction. We are launching new solutions specific to mass timber, including fasteners, connectors and our new timber drive fastening system, which won the 2023 Pro Tool Innovation Award.
Within the National Retail space, we are very pleased to have been named the 2023 Vendor Partner of the Year for the Building Materials Division by Lowe's. Vendor Partner of the Year status awarded to those partners who support Lowe's vision by putting customer's needs first, bringing innovation, fresh ideas, and value to the market, delivering on commitments, and investing in Lowe's journey and contributing to their success.
And finally, in Building Technology, we continue to make good progress with new and existing truss component manufacturers, including the conversion of a top 10 component manufacturer based in the Midwest with 15 locations. We are pleased with the traction we've made on our growth initiatives to-date as we seek to extend our mission to help people design and build safer, stronger structures into new applications.
Further, we remain focused on implementing our company ambitions, which include strengthening our values-based culture, being the partner of choice, being an innovation leader in the markets we operate, continuing above-market growth relative to U.S. housing starts, maintaining our operating income margin within the top quartile of our proxy peers, and integrating a ETANCO and returning our ROIC to be within the top quartile of our proxy peers.
Turning now to capital allocation. Our priorities remain centered on growth opportunities, both organically and through tuck-in M&A and returning value to our shareholders via quarterly dividends and opportunistic share repurchases and paying down the debt we incurred to finance the acquisition of ETANCO.
Our organic growth initiatives have been aimed at further strengthening our business model and expanding our operations and manufacturing capacity to achieve greater supply chain efficiencies and uphold our best-in-class customer service standards.
As noted previously, we are continuing to evaluate potential M&A opportunities to accelerate traction of our key growth initiatives, the majority of which are smaller opportunities to expand our product line or solution set, or help us achieve better manufacturing and supply chain efficiencies.
Before I conclude, I'd like to briefly comment on the cybersecurity incident that occurred a couple of weeks ago. While our operations were mostly down for approximately 3 days throughout most of the company, our swift actions and commitment to our customers led us to make up for the downtime and allowed us to resume shipments to clear a backlog within just 1 week. I'd like to thank our dedicated Simpson team for all of the hard work that made this possible, as well as our valued customers for their support during this time.
In summary, I am very pleased with our third quarter performance in a challenging market. Based on the current interest rate environment and the resultant impact on the housing market, we anticipate that our fourth quarter 2023 results will start reflecting some downward pressure due to these factors.
In addition to typical seasonality relative to the third quarter of 2023, though we expect the fourth quarter to be up compared to the prior year quarter. Looking ahead, we continue to believe that we have ample opportunities to pursue our growth initiatives and enhance stockholder value over time.
With that, I'd like to turn the call over to Brian, who will discuss our third quarter financial results in greater detail.
Brian J. Magstadt
Thanks, Mike, and good afternoon, everyone. Thank you for joining us to discuss our third quarter financial results today. Before I begin, I'd like to mention that, unless otherwise stated, all financial measures discussed in my prepared remarks refer to the third quarter of 2023, and all comparisons will be year-over-year comparisons versus the third quarter of 2022.
Now, beginning with our third quarter results. As Mike highlighted, our consolidated net sales increased 4.8% to $580.1 million. Within the North America segment, net sales increased 4.4% to $456.8 million, primarily due to higher sales volumes. And in Europe, net sales increased 6.4% to $119 million, primarily due to the positive effect of $7.9 million in foreign currency translation, which was partly offset by lower sales volumes.
Wood construction products represented 85.4% of our total third quarter sales compared to 86.4%. And concrete construction products were 14.5% of total sales up from 13.5%. And in North America, wood product volume was up 7.6% and concrete product volume was up 3.3%.
Consolidated gross profit increased 15.7% to $282.9 million, resulting in a gross margin of 48.8% compared to 44.2% last year. On a segment basis, our gross margin in North America increased to 51.8% compared to 47.5%, primarily due to lower raw material costs, which were partially offset by higher warehouse and freight costs as a percentage of net sales.
Our gross margin in Europe increased to 37.9% from 31.5%, also primarily due to lower raw material costs as a percentage of net sales. As you may also recall, our raw material costs in the prior year period included a $2.9 million inventory fair value adjustment for the acquisition of ETANCO, representing 2.6 percentage points of Europe gross margin.
From a product perspective, our third quarter gross margin on wood products was 49.1% compared to 44.1% in the prior year quarter and was 47.9% for concrete products compared to 43.8% in the prior year quarter.
Now, turning to our third quarter costs and operating expenses. Operating expenses were $141.9 million, an increase of $22 million or approximately 18.3%, driven primarily by increased personnel costs to support our growth, as well as higher variable compensation. As a percentage of net sales, total operating expenses were 24.5% compared to 21.7%.
Our third quarter research and development and engineering expenses increased 44.9% to $24.8 million, primarily due to our strategic growth initiatives, including higher personnel costs and software development initiatives to further our building technology offerings.
Selling expenses increased 23.2% to $52.4 million, primarily due to increased commissions and personnel in North America. On a segment basis, selling expenses in North America were up 26% and in Europe, they were up 14%. General and administrative expenses increased 7.4% to $64.8 million, primarily due to professional fees, personnel costs and software licensing.
As a result, our consolidated income from operations totaled $140.2 million, a significant increase of 14.2% from $122.8 million. In North America, income from operations increased 6.5% to $135.6 million, primarily due to higher gross profit, partly offset by increased personnel and variable compensation.
In Europe, income from operations was $15.5 million, compared to $6.1 million due to higher gross profit, partly due to the prior year's $2.9 million inventory fair value adjustment as well as lower year-over-year acquisition and integration costs, which were partially offset by increases in personnel, costs and variable compensation.
On a consolidated basis, our operating income margin was 24.2%, an increase of 200 basis points from 22.2%. Our effective tax rate increased slightly to 25.7% from 25.3%.
Accordingly, net income totaled $104.2 million, or $2.43 per fully diluted share, which is inclusive of $1.3 million of net interest income. This compares to $88.2 million, or $2.06 per fully diluted share, which included $3 million of net interest expense.
Now, turning to our balance sheet and cash flow. Our balance sheet remained healthy, with cash and cash equivalents totaling $571 million as of September 30, 2023, up $163 million from our balance as of June 30, 2023. Our debt balance was approximately $561.6 million, net of capitalized finance costs, and our net cash position, ex-debt, was $9.4 million. We have $300 million remaining available for borrowing on our primary line of credit.
Our inventory position as of September 30, 2023 was $504.4 million, which was down $17.7 million compared to our balance as of June 30, 2023. Effective management of the on-hand volume and cost of our inventory remains a key element of our business model as we strive to ensure on-time delivery standards and superior customer service levels that set Simpson apart.
During the third quarter, we generated cash flow from operations of $204.6 million compared to $124.9 million. We invested $22.5 million for capital expenditures and paid $11.5 million in dividends to our stockholders. While we did not repurchase any shares of our common stock during the quarter, we continue to evaluate opportunistic share repurchases as part of our capital allocation strategy.
Next, turning to our 2023 financial outlook. Based on business trends and conditions as of today, October 23, we are updating certain elements of our guidance for the full year ending December 31, 2023 as follows. We now expect our operating margin to be in the range of 22% to 22.5%. Key assumptions include higher U.S. housing starts relative to our assumptions earlier in the year. Although, we expect our fourth quarter will be slightly stronger than the prior year period, we are starting to see additional headwinds for the first half of 2024.
Higher overall gross margin based on improved volumes as noted above and material cost assumptions. Increased operating expenses we believe are necessary to position the company to make meaningful share gains in our markets and growth initiatives. $6 million to $7 million in expected total integration costs associated with ETANCO. We are continuing to make progress on our integration efforts for ETANCO in order to realize previously identified offensive and defensive synergies in the years ahead, subject to macroeconomic changes, which will delay the realization of some of the offensive synergies.
Next, our 2023 effective tax rate is expected to be in the range of 25% to 26%, including both federal and state income tax rates and assuming no tax law changes are enacted. Lastly, we now expect capital expenditures to be approximately $100 million, subject to possible weather delaying the construction of our Columbus expansion and supply chain related issues.
In summary, we were pleased with our financial and operational performance during the third quarter in a challenging operating environment. We remain focused on providing excellent value, innovation and service to our customers by expanding our broad solution set throughout our 5 key end use markets. We are continuing to diligently manage our expenses as the macro environment evolves and our strong balance sheet and cash flow enable us to make investments to support our organic growth initiatives.
Thanks again to our team at Simpson for the strong performance and to all of our stakeholders for your support of the company.
With that, I would like to turn the call over to the operator to begin the Q&A session.
Question and Answer Session
Operator
(Operator Instructions) Our first question comes from the line of Daniel Moorewith CJS.
Daniel Joseph Moore
Start with your core markets, North American housing operations. You said Q4 would start to reflect some of the downward pressure in the housing market, but you also said that, it would be up versus prior year. I assume you're referring to consolidated revenue when you say it will be up versus prior year, and maybe just talk a little bit more about your expectations for market growth versus share gains, and whether you see some of that pressure perhaps persisting into the first quarter or 2 of '24?
Michael L. Olosky
Good question, Dan. So let me start with where it is today and how we think the market's going to finish the year. So housing starts roughly down 12% year-to-date. We think it'll finish the year down 12%. And then when you look at our business, July and August for us was pretty strong versus prior year. September started to slow down a little bit, and October's off a little soft. We do think on a consolidated level, fourth quarter will be above prior year fourth quarter. And then when we look out into next year, what we're hearing from our customers is the first half is expected to be a little soft. Second half is expected to pick up, depending upon interest rates, the economy, and a bunch of other stuff, Dan. That's kind of how we see it today.
Daniel Joseph Moore
And when you say a little soft, is there any way you can sort of compare that to the down 12 that we've experienced so far, just in terms of your expectations?
Brian J. Magstadt
Yes, right now, Dan, it's Brian. Just down slightly from October of last year -- October this year, October of last year. And as we're thinking about the balance of the quarter, to Mike's point, having a pretty good quarter compared to Q4 last year, both on the revenue and the operating margin, which leads us to that updated guidance on operating margin that we provided.
Daniel Joseph Moore
Okay, helpful. Maybe looking at the markets you've targeted for increased penetration and are seeing some pretty good success, I think you called out commercial, national retail, and building tech. Can you just maybe dig a little deeper into each of those 3, describe in each market where you're seeing success, what's enabling you to take share, and in your confidence, those tailwinds will continue as we look into next year?
Michael L. Olosky
Yes, so Dan, we're pleased to say, actually across all 5 market segments in quarter 3, revenue growth was above prior year Q3. So we're seeing good performance in all of them, again, in a challenging environment. In the commercial space, one of the things that we touched on was our partnership with Structural Technologies. So that's using our concrete repair systems to work with Structural Technologies to go after infrastructure repair opportunities. We're seeing good growth there.
On the national retail side, we continue to invest in people to send into our national retail customers, to help train their sales associates to work on the sets, to clean them up, and make sure they're easy to shop, to work with our customers on merchandising and cap opportunities. And we're seeing that investment continue to pay off with those customers by seeing good point-of-sales data from our national retail customers.
Daniel Joseph Moore
Got it. Last for me, and I'll jump out of the queue for now, at least, just, guidance implies, by my math, gross margin somewhere in the 47% range, give or take, for the year. Just talk about the biggest puts and takes in your mind that would cause that to move higher or lower as we look to 2024. Certainly, we're going to finish the year above where, well above where we started from an expectations perspective. But when you look at, steel costs, the overall macro, et cetera, mix, your thoughts, if any, as we kind of look out beyond maybe one more quarter.
Brian J. Magstadt
Sure. So as we're thinking about the full year and the various volume assumptions that we're making, the traditional Q4 seasonality, which means we're not absorbing as much overhead as we would during, say, second and third quarter, we're continuing to look at, steel market where we're expecting costs to be at current levels or higher in the future, versus some of those headwinds that Mike had mentioned.
So the volume assumptions we're making, the product mix, all are factoring into a fourth quarter that we're expecting to be a little bit better from an operating margin perspective than Q4 of 2022. And with a, continued focus on looking at those opportunities where we're making investments into building technology solutions, or Mike had mentioned a number of other initiatives to support our customers in order to continue to further our, those additional markets we're going after to grow and capture additional market share.
Daniel Joseph Moore
Very good. I'll jump back with any follow-ups or offline.
Operator
Our next question comes from the line of Tim Wojs with Baird.
Timothy Ronald Wojs
Nice job. Maybe just to start off on SG&A and trying to think about, as you kind of go forward over the next year, maybe 2 years, just how are you kind of thinking about kind of SG&A as a percentage of sales and kind of incremental investments? And I guess how would you kind of think about managing that if you were in kind of a tougher environment? I mean, I think, this year we're maybe kind of flattish in North America on sales and SG&A is up, kind of nearly 20%. So could you maybe help us, with kind of how you would think about managing that SG&A expense on kind of a go-forward basis relative to sales?
Brian J. Magstadt
Sure. So one of the things that we want to reinforce is that we're hiring to support those growth initiatives that we believe there's a lot of opportunity in front of Simpson. But we are mindful of those expenses in order to go capture those. So as we think about a top quartile within our proxy peers from an operating income margin perspective, we're looking at balancing how we fund those investments for the growth initiatives versus, again, we want to continue to position ourselves in that top quartile.
And we do note that in Q3, R&D and engineering expenses increased a pretty significant amount. Some of that included investment in some building technology solutions, some additional costs that I wouldn't necessarily expect to repeat. But as we think about how we are winning in the marketplace and building technology and retail, et cetera, it does take some of that above average investment.
We also, as Mike noted, continue to add to our national retail team and really want to make sure we're supporting those customers with, the various tools that enable them to better serve their customer in addition to the merchandising efforts that Mike mentioned. So as we think about the funding of those things, we're really looking to balance where we see ourselves in that mid to long-term versus where we are today from a top quartile performance perspective and really want to be mindful of what we're investing in that's going to drive that long-term growth.
Timothy Ronald Wojs
Okay, okay, that's helpful. I mean, would you say you're still kind of in the phase of maybe over investing or investing ahead of sales or do you think you're kind of at a point where you can maybe invest kind of in conjunction with the sales growth rate?
Michael L. Olosky
Yes, we are over investing relative to revenue growth at this point, Tim, again, because we see a lot of things that are right in front of us from a growth opportunity. We want to make sure we get the people in place to do it. And we're all doing that under the mindset of being in the top quartile from a operating income perspective.
Timothy Ronald Wojs
Okay. Okay. Got you. And then just maybe on ETANCO, I know just with the environment in Europe, I think it's -- you've kind of pushed out some of the synergies there, but is there a way to maybe give us an update on kind of where the synergies kind of stand, in terms of maybe what's been captured and, kind of compare that to what your initial targets were?
Michael L. Olosky
Yes. So when we look at ETANCO overall, we're still pleased with how things are developing. Again, we very much like their business model relative to the market. They're doing fairly well at ETANCO, so we're happy with that. Some of the synergies that we're working on from a defensive perspective, we realized a couple of smaller ones, more to come on the bigger ones over the next couple of years. The offensive synergies, we've started all the cross-selling efforts. We've got things in place to make that happen. We're rolling those out now.
We've been a little bit slow, Tim, on investing in some of the things that drive offensive synergies because we're very much trying to balance short-term profitability with the longer-term plan. So that's why we're managing it that way, to make sure that we also have good development of operating margin in Europe, and you see that in our European business, where we're 400 basis points above year-over-year in Q3 operating margin.
Timothy Ronald Wojs
Yep.
Brian J. Magstadt
And that -- that was assuming that some of the charges we had last year were not in there, so on a like-for-like basis.
Michael L. Olosky
Yes, like-for-like.
Timothy Ronald Wojs
Yes, yes, perfect, okay. And then just the last one, some of the share gains that you're kind of calling out in terms of the conversions of some of the dealers and component dealers and things like that, I mean, is there any sort of consistent driver of why you're able to kind of accrue those share gains? Is there any specific reason, or is it all just kind of a bunch of smaller things that kind of add it up in a share gain?
Michael L. Olosky
No, Tim, I think it really comes from our people and our strong business model. I mean, we've got people that are experts in the field, they're long-term partnering with the customers, we've got a great business model, we're driving specifications, we're training a bunch of people. You add all that up with superior customer service, and it's just helping us pick up these customers one at a time, and that continues to be a focus for us.
Timothy Ronald Wojs
Okay, okay, good. We'll good luck on the rest of you guys.
Operator
Our next question comes from Kurt Yinger with D.A. Davidson.
Kurt Willem Yinger
Mike, you had talked about in the first half of next year starting to think things would soften a little bit. Are those comments just what you're hearing from your builder customers, or is that customers in some of these different market segments and cohorts as well?
Michael L. Olosky
Yes, it's across the board. So certainly, since 50% of our business is linked to the residential market, that's got the biggest say in it, but when you look at these other markets, plus or minus, again, across the board, first half, we see weakness, and I think a lot of that is really just driven by the uncertainty associated with the current economic environment.
Kurt Willem Yinger
Okay. Makes sense. And then I just wanted to go back to the conversation around component manufacturers, and I guess you maybe just frame how you think about the current opportunity set, because it is a very large market and one where you guys don't have a ton of share at the moment. And then, I guess separately, are the customers that you're converting and winning over, are those moving to like a dual-source model, or is that single-source with Simpson versus some of those truss plates?
Michael L. Olosky
Yes, so it is a good-sized market for us. A lot of these people are also buying connectors and other products from us, so there's some opportunity to leverage our relationships we have with these customers to pick-up the truss side of the business. We continue to invest like crazy into the software space, and we've made a lot of progress in that area.
We're adding people to provide service and support into that area. And then, again, you combine that, Kurt, with our typical service levels, and also making sure that we've got an open environment, meaning if people use our software, they can decide where they want to buy their truss plates. We think customers prefer that going forward.
And we are very mindful of how we're bringing customers on. We want to make sure that when we do bring them on, that we provide that great experience, that great service, that great support, so that they are successful at the end of the day. And we do believe that we're going to continue that forward into 2024.
Kurt Willem Yinger
And is that when you convert some of these component manufacturers? I mean, do you think there's the opportunity for a greater attach rate with your own connectors, or just given your dominant market share there, that's probably not much of a sales synergy?
Michael L. Olosky
So the opportunity with these customers for truss plates is fairly significant. In some cases, there is the opportunity to combine it with some additional connector business, but we're, in a lot of these, we're really just talking about the software and the truss plate business.
Kurt Willem Yinger
Got it. Makes sense. And then, just lastly, on national retail, with some of the shelf space changes there the last couple of years, has the load-in of products to new stores been a meaningful contributor to growth at all this year, or has that largely been kind of set, and you're just reaping the rewards of some of the investments in merchandising and the like?
Michael L. Olosky
Yes, I think it's lots of small things adding up to good growth. So certainly, the load-in, as we've picked up a couple of customers, has helped. We continue to work with our customers that get additional shelf space. We continue to work on off-shelf merchandising that makes sense. The attachment rate is a big focus for us. We're also investing in e-commerce, and we see good growth in e-commerce with our national retail partners. And as I mentioned, just sending people into the stores, helping them clean up the set, helping them merchandise, helping train the associates, you add all that up, and that's helping us get good growth in that market segment.
Kurt Willem Yinger
Got it. Okay, well, appreciate all the color, Mike, and good luck here in Q4, guys.
Operator
Our next question comes from the line of Julio Romero with Sidoti & Company.
Julio Alberto Romero
Mike and Brian, hey, so just a couple of quick questions for you here. Just first of all, I wanted to ask about some of the inflationary pressures you guys called out aside from steel. You talked about some higher warehouse and freight costs, I believe, in both North America and Europe. Do you see some of those costs moderating, or have they reached kind of a level where they're here to stay, and elevated warehouse and freight costs are just kind of a fact of life?
Michael L. Olosky
Yes, Julio, how about I start? Some of the increase in costs that we're seeing in warehousing is associated with our effort to go direct to our customers to eliminate the 2-step distribution process. We need to have warehouses close to our customers so that when we ship product out, they get it the next day, and we also want warehouses in big markets in case they want to get the product the same day, we can either arrange shipping or they can come in and pick it up. So that's driving some of the costs. Brian will go through the next set of details.
Brian J. Magstadt
So as part of that, setting up those warehouses, that's going to come a little bit ahead of the revenue associated with those. So yes, there would be a bit higher warehousing costs as a percent of revenues, just because the revenues won't really start to come in. That was the latter part of the third quarter and then forward.
From a freight perspective, it was getting a lot of that product into those locations. And on a go-forward basis, it ought to be pretty consistent with a normal run rate. So a bit of getting those additional locations set up in the Northwest to be able to continue to execute on what we call our path to market initiative.
Julio Alberto Romero
Got it, that's helpful there. And then just talk about, you ended the quarter in a net cash position, pretty strong cash position overall here. And you talked about some organic growth opportunities and some M&A you're also evaluating, a little bit sounds like more of a tuck-in in nature type of opportunity set. And at the same time, you've got some uncertainty on the macro front. Just talk about how that considering all those factors that kind of shapes up how you're thinking about cash deployment?
Michael L. Olosky
Yes, so our capital allocation strategy remains on really driving growth. And obviously, we're investing a lot in our factories and our warehouses it very much aligned with our business model to provide high service for our customers. We are also, when we look at M&A perspective, Julio, for the most part, we're talking about small tuck ins that compliment our business model that help us provide service to our customers that in some cases maybe help us vertically integrate. There just aren't that many actionable targets that are large that are a good fit for us. So the major of the focus is small opportunities when they arise.
Brian J. Magstadt
And then just to follow-up on that, we've got some larger investments within the business that we've talked about over the last few quarters, expanding our Columbus, Ohio facility, building a new facility in Tennessee to again, part of the business model of providing that really excellent service to our customers. But some larger cash outlays here coming up over the next couple of years, in addition to the debt repayment that we'll continue doing.
As we noted, we didn't repurchase any shares during the quarter and on a comparable basis. That was one of the reasons why cash was up. So just a bit of working capital that will, I would say, start to get back to traditional normal levels here going forward.
Julio Alberto Romero
Really helpful.
Operator
And our next question comes from the line of Daniel Moore with CJS Securities.
Daniel Joseph Moore
Just 1 or 2 quick housekeeping follow-ups. I know you said immaterial. Can you quantify any expense impact you expect in Q4 as a result of the cybersecurity breach and anything measurable in terms of incremental spend/margin impact on a go-forward basis?
Brian J. Magstadt
Dan, Its Brian. I wouldn't expect it to be immaterial amount or we're still working through the process to evaluate and investigate, but as we noted, we were able to catch-up with a lot of the orders that had come through that Mike had noted, but we're still investigating and evaluating it. Again, from an operating income perspective, I wouldn't expect it to be a material amount.
Daniel Joseph Moore
Perfect. And then just following-up on the capital allocation question, obviously been out of the market in terms of buybacks, you have some significant investments, but, you're still cash is building quickly and already in a net cash position. So, would you look to be opportunistic again here and maybe weigh that versus continuing to pay down the remaining debt? Just any thoughts there?
Michael L. Olosky
Sure, so we're going to look at all of those definitely. So, a little bit of debt repayment, likely at the end of the year, similar to what we did last year and continue to evaluate the share repurchase from an opportunistic perspective.
Operator
And we have reached the end of the question-and-answer session. And this also concludes today's conference and you may disconnect your line at this time. Thank you for your participation.
