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spk06: Greetings and welcome to the Simpson Manufacturing Company Incorporated third quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kim Orlando, from Addo Investor Relations. Thank you, Kim. You may begin.
spk01: Good afternoon, ladies and gentlemen, and welcome to Simpson Manufacturing Company's third quarter 2020 earnings conference call. Any statements made on this call that are not based on historical facts are forward-looking statements. Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties. Actual future results may vary materially from those expressed or implied by the forward-looking statements. We encourage you to read the risks described in the 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 www.cinsonmfg.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 Karen Colonius, Simpson's President and Chief Executive Officer.
spk02: Thanks, Kim, and good afternoon, everyone. I'm pleased to discuss our results with you today. I'll begin with a high-level summary of our third quarter results, and we'll then turn to a more detailed discussion on our key performance drivers and initiatives. Brian will then walk you through our financials and updated business outlook in greater detail. We delivered strong third quarter results with our sales increasing 17.5% year over year to $364.3 million on significantly higher volume. Compared to the second quarter of 2020, our sales increased 11.7%. Further, we achieved a considerable improvement in our gross profit margin to 47.6% from 44.4% in the prior year quarter primarily related to lower materials and labor costs. The strength in our gross profit margin, combined with our efforts in expense management and reduced costs from travel and other restrictions as a result of the COVID-19, helped drive a 49.8% year-over-year increase in our income from operations to $91.3 million and strong earnings of $1.54, per diluted share. I'd like to sincerely thank all of our employees for their perseverance and support through these unprecedented times. At Simpson, we value our employees' health, safety, and well-being as our top priority and strive for continuous improvement to ensure our company remains a safe and rewarding place to work. Our diligence, including strict adherence to protocols to help minimize the spread of COVID-19, has enabled us to continue operating our business with minimal disruptions from the pandemic. In regard to the recent hurricanes and wildfires, we are incredibly thankful that none of our employees or locations in the affected areas were negatively impacted by these disasters. We are prepared to play a key role in the rebuilding efforts with our mission of helping people build safer, stronger structures. Getting back to our results, the substantial increase in sales volume we experienced in the third quarter was primarily related to ongoing momentum in the repair and remodel space, which includes both our home center and co-op customers. We continue to benefit from a shift in consumer behavior toward home renovations as people are spending more and more time in their homes and outdoor living spaces as a result of the COVID-19 pandemic. We estimate sales from the home center channel, where we see much of our repair and remodel business improved 125% over the prior year period. As disclosed on our previous call, we're extremely happy to have Lowe's return as a home center customer in the second quarter, during which time we began shipping our product into their location. We continue to make progress on our product rollout during the third quarter. as of the end of September, all Lowe's stores had been set with our industry-leading connectors as the exclusive supplier. In addition, both our mechanical anchor and fastener product solutions were set in 987 stores, among other competing manufacturers. By the end of October, we expect our product sets to be nearly completed in all 1,737 Lowe's stores. In addition, While the Home Depot continues to carry our connector line, most of our mechanical anchor and fastener products are being phased out of the Home Depot locations throughout the remainder of this year. As a reminder, our mechanical anchor and fastener products were in some but not all Home Depot locations. Our sales were further supported by strong U.S. housing starts in 2020. In the third quarter of 2020, housing starts grew 11.4%. versus the comparable period last year, and grew 29.9% versus the second quarter of 2020. Notably, in the west and south, where we provide a meaningful amount of content into homes, third quarter starts grew 7.6% and 14.1%, respectively, year over year. Turning now to Europe. we saw our sales recover nicely with our facilities now operating at full capacity following government shutdowns in the United Kingdom and France due to the COVID-19 in late March. While much of the improvement in Europe was related to the benefit of foreign currency translation, sales still improved both year-over-year and quarter-over-quarter on slightly higher volumes. As part of our strategy to continue to grow our market share in Europe, subsequent quarter-ends we acquired a small connector manufacturer based in the United Kingdom with a complimentary product line. The acquisition closed early in October, and the acquired company's operations will be absorbed into our existing business. Overall, we expect this acquisition to benefit our market position in the region moving forward. I'd now like to shift our focus to our software strategy. As previously discussed, we believe the investments we've made over the years in software have enhanced our technological capabilities to remain competitive in the wood construction space by providing our customers with complete end-to-end product and software solutions. We estimate over 40% of our core wood connector sales are to customers with software needs and believe this figure will increase over time. To further our expertise in this area, we completed the purchase of a small software application for builders during the third quarter of 2020. Similar to our acquisition of LotSpec in 2018, which was a suite of software applications designed to optimize efficiency and productivity for home builders, this application expands our software choices for builders to help minimize costs and best align with their business needs. By expanding our technology offerings to provide our customers with more tailored and innovative software solutions, we believe we will strengthen our value proposition. Next, I'll return to an update on our SAP implementation, which has continued to progress despite travel limitations related to the COVID-19. Some of the benefits we've enjoyed so far include better forecasting tool to aid with working capital management and particular inventory management. Earlier this year, we successfully transitioned all of our U.S.-based sales organizations over to SAP. Immediately following the third quarter, we also completed two more locations, including our UK branch, which is now live. That said, given the duration and severity of the pandemic remains highly fluid and uncertain, we are unable to accurately predict how COVID-19 will continue to impact international travel, on-site meetings, and training requirements to complete the rollout in our remaining locations. As such, we currently anticipate a company-wide completion goal in 2022 versus near the end of 2021, though we will continue to monitor and update our timeline should circumstances change. Now, I'd like to briefly touch on our capital allocation strategy. As business continues to generate strong cash flow, we remain focused on appropriately balancing our growth and stockholder return priorities while also paying down debt. While our focus for the majority of the year has been on cash preservation to ensure our working capital needs during the pandemic could be met in the near term, over the past seven months, we have been very grateful to be able to operate as a supplier to other essential businesses, with only minimal disruptions to the COVID-19. As such, we are continuing to support our growth strategy in identifying M&A opportunities that would complement our existing product offering, manufacturing footprint, or strengthen our software capabilities. We were also very pleased to declare our quarterly dividends as we have done consistently since 2004. Before I conclude, I'd like to extend a warm welcome to Mike Oleski, our new Chief Operating Officer. As previously announced, Mike will be joining Simpson at the end of November after spending over 22 years in numerous leadership positions at Hinkle, a global chemical and consumer goods company. We are excited to have Mike on board, and he will be instrumental in helping us uncover new ways to remain innovative and seek opportunities for future growth. Mike replaces our former COO, Ricardo Arevalo, who retired in February of 2020 after 20 years of service to Simpson Strong Ties. While the search to find the right candidate took longer than anticipated, I could not be more pleased with our choice. In summary, we executed an excellent third quarter with strong financial performance across the board despite broader macroeconomic challenges that continue to plague our economy. The durability of our business model has continued to support us through this challenging time as a result of key elements, including our strong brand recognition and trusted reputation in the industry, our industry-leading, high-quality, and tested product solutions, our superior customer service standards, our disciplined capital allocation strategy, a strong balance sheet and liquidity position, which enables financial flexibility, and most importantly, our passionate and dedicated employees. Looking ahead, we believe the solid demand trends we experienced in third quarter of 2020 will continue through the duration of the year, aside from the seasonality we typically experienced during the fourth quarter due to holiday-related closures and winter conditions. I'd like to thank our talented and valued employees for their dedication and commitment to health, safety, and best-in-class customer service. And now I'd like to turn the call over to Brian to discuss our third quarter financial results and outlook in greater detail.
spk04: Brian? Thank you, Karen, and good afternoon, everyone. I'm pleased to discuss our third quarter financial results with you today. Before I begin, I'd like to mention that, unless otherwise stated, all financial measures discussed in my prepared remarks today refer to the third quarter of 2020, and all comparisons will be year-over-year comparisons versus the third quarter of 2019. Now, turning to our results. As Karen highlighted, our consolidated sales were strong, increasing 17.5% to $364.3 million. Within the North America segment, sales increased 19.4% to $316.9 million, primarily due to the return of a home center customer and increased repair and remodel activity, as well as from other sales distributor channels, which experienced increased new housing starts and repair and remodel activity. In Europe, sales increased 6% to $44.8 million, primarily due to higher sales volumes. Europe's sales benefited by approximately $2.1 million of positive foreign currency translations resulting from some Europe currencies strengthening against the United States dollar. In local currencies, Europe net sales still increased. Wood construction products represented 85% of total sales compared to 84%. and concrete construction products represented 15% of total sales compared to 16%. Gross profit increased by 25.9% to $173.2 million, which resulted in a strong gross margin of 47.6%. Gross margin increased by 320 basis points, primarily due to lower material and to a lesser extent reduced labor costs, which were partially offset by higher warehouse and shipping costs. As we continue to purchase steel to support heightened demand levels, we would expect our consolidated gross margin to normalize back down to a more appropriate run rate, which I will discuss in greater detail in our outlet shortly. On a segment basis, our gross margin in North America improved to 48.9% compared to 45.6%, While in Europe, our gross margin decreased to 37.9% compared to 38.4%. From a product perspective, our third quarter gross margin on wood products was 48% compared to 44.4% in the prior year quarter and was 42.1% for concrete products compared to 41.6% in the prior year quarter. Now, turning to our third quarter costs and operating expenses. Our strong third quarter performance and improved expectations for the full year 2020 resulted in higher performance-based compensation within our total operating expenses. Research and development and engineering expenses increased 2.6% to $12.3 million, primarily due to cash profit sharing and personnel costs. partly offset by lower capitalized software development costs. Selling expenses increased 6.2% to $29.4 million due to increases in cash profit sharing, sales commissions, personnel costs, and stock-based compensation, which were partially offset by lower travel, fuel and entertainment expenses, and advertising expenses. On a segment basis, selling expenses in North America were up 7.3%, and in Europe, they increased 1%. General and administrative expenses increased 8.7% to $40.3 million, primarily due to increases in cash profit sharing, stock-based compensation, depreciation and amortization, and insurance. partly offset by lower travel associated expenses. On a segment level, general and administrative expenses in North America increased 5.6%. In Europe, G&A slightly decreased. Total operating expenses were $82 million, an increase of $5.3 million, or approximately 6.9%. As a percentage of sales, Total operating expenses were 22.5%, an improvement of 220 basis points compared to 24.7%. Our solid top line performance combined with our strong gross margin and diligent management of costs and operating expenses helped drive a 49.8% increase in consolidated income from operations to $91.3 million. compared to $61 million. In North America, income from operations increased 53.7% to $87.4 million due to our strong sales and the strength of our gross profit margin. In Europe, income from operations increased 12.8% to $6.1 million, primarily due to increased gross profits. On a consolidated basis, our operating income margin of 25.1% increased by approximately 540 basis points. Our effective tax rate remained flat at 26.2%. Accordingly, net income totaled $67.1 million, or $1.54 per fully diluted share, compared to $43.7 million, or $0.97 per fully diluted share. Now turning to our balance sheet and cash flow. Our balance sheet remained healthy with ample liquidity to operate our day-to-day operations. At September 30th, cash and cash equivalents totaled $311.5 million, a slight decrease of $4 million compared to the balance at June 30th, after paying down $75 million on our revolving credit facility during the quarter. As a reminder, we drew down $150 million on a revolving line of credit during the first quarter of 2020 as a precautionary measure in order to preserve financial flexibility given the uncertainty of the length and impact of the COVID-19 pandemic. As of September 30th, approximately $225 million remained available for borrowing. Our inventory position of $260.1 million At September 30th, slightly decreased by $5.3 million from our balance at June 30th, as we strived to maintain inventory levels to service the increased construction activity we typically see in the summer and fall months, along with the unprecedented demand we've experienced through the pandemic. We continue to be focused on improving our inventory balance through diligent management and purchasing practices to ensure maximum efficiency while maintaining our high levels of customer service and on-time delivery standards. We generated strong cash flow from operations of $86.8 million for the third quarter of 2020, a decrease of $8.9 million, or 9.3%. During the third quarter, we used approximately $6.8 million for capital expenditures, which included a minimal amount for our ongoing SAP implementation project. In regards to stockholder returns, we paid $10 million in dividends during the third quarter. And on October 23rd, our board of directors declared a quarterly cash dividend of 23 cents per share, which will be payable on January 28th, 2021. to stockholders of record as of January 7th, 2021. Before we turn the call over to questions, I'd like to discuss our 2020 financial outlook. As a reminder, on our second quarter earnings call in late July, we reinstated our fiscal 2020 outlook based on improved visibility on the progression of pandemic-related restrictions and the impact of those restrictions on our operations. Today, we are updating our outlook to reflect an additional quarter of strong financial results, as well as the latest business trends and conditions as of today, October 26. As such, our current outlook for the full fiscal year ending December 31, 2020, is as follows. Net sales are estimated to increase significantly. in the range of 9% to 10% compared to the full year ended December 31, 2019. Gross margin is estimated to be in the range of approximately 45%, 46%. Operating expenses as a percentage of net sales are estimated to be in the range of 25% to 26.5%. And the effective tax rate is estimated to be in the range of 24.5% to 26%. including both federal and state income taxes. I would like to note that there continues to be a high level of macroeconomic uncertainty resulting from the COVID-19 pandemic. The potential economic impact related to COVID-19 on our operations, raw material costs, consumers, suppliers, and vendors may have a material adverse impact on our 2020 financial outlook should conditions materially change from the current environment. I would expect gross margins and operating margins to pull back as we exit 2020 as we anticipate costs directly related to customer engagement and investments in growth to increase. In closing, despite the ongoing macroeconomic challenges in the marketplace stemming from the pandemic, We were thrilled with our third quarter financial results and operating performance. I'd like to once again thank all of our employees who are dedicated to working safely and supporting our customers, whether remotely or on-site during these unprecedented times. We believe our industry-leading position, geographic reach, and diverse product offerings, combined with our strong balance sheet and liquidity position, give us confidence and our ability to continue executing against our strategic, operational, and financial initiatives. Thank you for your time and attention today. At this time, I'd like to open the call up for questions. Operator?
spk06: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions. Thank you. Our first question is from Daniel Moore with DSJ Securities. Please proceed with your question.
spk05: Thank you. Karen and Brian, good afternoon, and thanks for taking the questions, as always. Kim, maybe for starters, is it possible to quantify the revenue impact of the inventory selling at lows during the quarter? How much do we expect is left for October and and kind of the full year 2020 impact. So we kind of think about that as we start to think about modeling 2021.
spk04: Sure, Dan. The sell-in for Endolos in Q3 was we did a little bit in Q2 on fasteners and anchors, but that was more of those product lines, which, as you know, are smaller sets than the connector line. As Karen noted, there was a little bit of sets in those lines done in Q3. Combined for the quarter, the home center customers, Lowe's and Home Depot were up 125% compared to last year. So we're still getting a good idea of what the resell or the sell-in will be going forward compared to the initial load-in of those sets during Q2 and Q3. We'll be able to provide a little more information there, but just a little later. But just from that comparability perspective, those home center customers were up at 125%. 125% in Q3, correct? Right. Okay. And...
spk05: I guess just order of magnitude, more than half of that, kind of view it as a load-in, or is that way too high a thought process?
spk04: For Q3, no, it was not that extensive. Again, as I mentioned, the load-in on the fasteners and anchors, those were smaller sets. One thing I should mention would be as we look at revenue growth for the company or for North America for, for both of those, uh, without Lowe's, the company during the quarter and North America for the quarter would have both exceeded, uh, Q3 of 2019.
spk05: You would have been up year over year is what you're saying, um, without Lowe's, correct? Correct. Okay. Okay. Um, uh, Either of the two small token acquisitions contribute any revenue to the quarter and or meaningful revenue on an annualized basis?
spk04: No, we did those actually. Well, one, the software application, no real meaningful revenue there. It's, again, just a software application to be able to use with our builder customers. And then the... the small European acquisition was actually done at the very beginning of October, we would expect about a $3 to $3.5 million annual revenue from that particular acquisition. But that had zero impact in Q3. Got it. Okay.
spk05: And maybe just elaborate, Brian, on your final comments in the prepared remarks. I think you said, as we think about 21, expect gross margin and operating margins to pull back as we exit 2020. Is it mixed? Is it specific discrete investments? What is it that, you know, might obviously you've got some difficult comps, but what is it specifically that would cause margins to pull back?
spk04: and magnitude. Sure. 2020 obviously being a very interesting year with travel restrictions, being able to do some of the customer engagement efforts that we do, large meetings, us attending trade shows and the like. I think those we're expecting to ramp up next year and don't have the magnitude on that for you yet. And then also, as we think about growth initiatives and the like, we'll be taking the balance of the fourth quarter. to come up with our business plan and then be able to share that. But there may be some – there will likely be some of that as well as we look to grow in other areas.
spk05: Got it. Okay. So all of those more on OPEX as opposed to gross margin commentary, at least it would appear.
spk04: Correct. Although there may be a little bit in the gross margin –
spk05: area there as well. Okay. And last one, then I'll jump back in queue. Obviously, we can back into the applied Q4 guide given the full year revenue outlook, but maybe just talk about revenue trends thus far in October, what you're seeing in terms of the cadence, you know, what does that look like as far as growth on a year-over-year basis and your expectations for Q4 more generally?
spk04: Sure. So for Q4, The guide for the year would imply about a 3% Q4 growth over Q4 of last year, and we're about on pace with that so far in October.
spk05: Okay. I'll jump back with any follow-ups. Thank you.
spk06: Thanks. Thank you. Our next question comes from Tim Weiss from Baird. Please proceed with your questions.
spk07: Guys, nice job on Q3. Thanks, Tim. Maybe just kind of dovetailing on the last question, you know, if I kind of go through, could you just maybe elaborate how trends kind of pace through the quarter? Because if I recall, your revenue is up maybe 10% through kind of the early part of July. You obviously did, you know, call it 17, 18% here, which would imply that things accelerated through the quarter. So I just want to make sure that that 3% number is a year-over-year number, you know, like comparison to last year in October. So I just want to make sure we have the same number.
spk04: Sure.
spk07: And what would be driving that?
spk04: Okay. That 3% is Q4 2020 versus Q4 2019 in order to hit. about the midpoint of that revenue growth guide for the annual period. So if we're taking the year-to-date number and then growing Q4 by about 3%, we would hit that revenue guide. And so far in October, it's right on that number. So yes, you noted that Q4, Q3, when we were commenting about the quarter during the Q2 earnings release, those early July days were a little bit different compared to what we're seeing for October. I think it's just seasonality. There may be a little bit of that. Oh, Karen, do you have any other thoughts there?
spk02: Yeah, I think, as you mentioned, we're tracking pretty well to what we did. Fourth quarter, we always have winter conditions. We always have some of our customers actually close down for some of the holidays, whether it's the Thanksgiving or Christmas time. And, you know, as we've always said, our fourth quarter and first quarter typically are weaker compared to second and third. So I think we're just sort of seeing what we would consider more of a normalized fourth quarter.
spk07: Okay. Okay. I mean... Starts are still up double digits in most of your regions, and you're still seeing some pretty good R&R activity, right? So, I mean, I'm just trying to understand what might have driven that type of, I guess, deceleration versus the last couple of months.
spk02: Yeah, you're right, Tim. I mean, if you look at the start numbers, but if you remember what we've always said is we tend to trail that start number anywhere from two to four months, and that really puts us right in that winter type of season. So, we're still seeing nice numbers from the R&R standpoint. But again, we've already got places where we've got snow on the ground. So it's just really a function of the seasonality from both the winter and what we see from those holidays.
spk07: Okay. Okay. And I guess as you look at your distributors, how would you kind of characterize their inventory versus normal at this time of year?
spk02: We're not seeing any... increases or decreases. We're seeing our distributors pretty much normal type of ordering patterns.
spk07: Okay. Okay. And then I guess on the home center side of things, the 125% number that you quoted, is there any way to think about what POS was in your home center channel just to maybe reconcile what sell-in versus sell-out looks like?
spk02: Well, we do get those POS numbers, but it's a little bit early, especially as we look at the lows coming on as the new customer. So it would probably be something that we would have a little bit better idea as the year ends.
spk07: Okay. Okay. And then the last one I have is just on pricing as you think about 21. You know, you've seen decent demand here, you know, starts activities picking up. We have seen a little bit of an uptick in steel. How would you think about, you know, pricing expectations for next year?
spk02: Yeah, we mentioned this in the past. You're correct. We are seeing a little bit of an increase in steel pricing. And if we think there's some stability and consistency in that, then we would take a look at where we might need to do a price increase. At this point, we do not estimate doing a price increase throughout the rest of this year. But as we noted, you know, material is a key element in our cost of goods sold, and we continue to track that.
spk07: Okay. Sounds good. Thanks, guys. Good luck on the rest of the year.
spk00: Thank you, Tim.
spk06: Thank you. Our next question comes from Steve Sharecover from DA Davidson. Please proceed with your question.
spk08: Thanks. Good afternoon, everyone. Forgive me if I was multitasking and I missed it, but obviously, you know, you did exceed your expectations in Q3 from what you were predicting at the end of July. And that goes to not just sales, but also margins. So I don't think I'm being critical, but, you know, were you just too conservative? Like, where were you surprised? And did the margins just flow from the operating leverage?
spk04: Well, part of that, Steve, I think is there's the continued strength in that repair and remodel business that we're continuing to see. We know that that's definitely been a trend this year as people have been improving their homes and backyards and outdoor living spaces and indoor living spaces. But I think it was to the extent. And then just going back three months, just the amount of uncertainty that we're experiencing, whether it be another wave of COVID-related restrictions or what have you. So I think that was part of it. And then as we have been busier with COVID, more product running through the factories, running through the steel that we have on hand, better factory utilization, and continuing to, on the OPEX, or I guess even a little bit on the cost of sales, the reduced travel and other expenses that we would have normally as people are out More, not salespeople per se, because we've got salespeople out on the road visiting customers, but trade show attendants and other meeting attendants. We've just been meeting virtually. Many of us have been working virtually remotely from not at our offices. But I would call it the volume on the... through that home center and, you know, repair, remodel type of products that have continued to be very strong.
spk08: Okay. And I know it's early days and you'll articulate your 2021 objectives in due course, but, you know, as you listen to the home builders and, you know, get feedback, even if it's from virtual meetings from people your customers, it sure seems like suburban, low-density living might actually be a long-term beneficiary from COVID, kind of snatching victory from what we thought was increased urbanization. Presumably, that would be very good for you. Any comments on that front? Are you starting to see that maybe the tide is turning in terms of high density back towards low density living?
spk02: Yeah. Steve, when you obviously look at the housing starts, you see an increase in single-family starts and a decrease in multifamily. So, we've clearly seen it from those numbers. We've also, as we mentioned in the last quarter, hearing from some of the larger builders that they are seeing some of their first-time homeowners being those people who are moving from the city out to the suburban area because they want more space. So a couple indicators there that would tell you that single-family homes, again, and as we mentioned, we put our product in both single-family and multifamily, but on a per-unit basis, we'll typically put more content in single-family. So I think just the shift you see in the starts would indicate that that is what we're seeing, that move from urban high density out to suburban.
spk08: All right. Well, presumably that bodes well for you. And then finally, this English fastener company, I mean, if it's $3 million worth of sales, should we think of this almost just taking out a competitor? I can't imagine there's a lot of accretion.
spk02: Yeah, it's a connector company, not a fastener company. So we'll gain some market share there and also be able to run that production through our facilities. So a little bit of help on absorption.
spk08: Got it. All right. Best wishes for the rest of the year. Thank you.
spk02: Thanks, Steve.
spk00: Thanks, Steve.
spk06: Thank you. Our next question comes from Julio Romero from Sedodian Company. Please proceed with your question.
spk03: Hey, good afternoon. Hope you all are well. I guess if I could ask about the European business, you did see operating margins improve despite gross margins down year over year, which is excellent, but maybe just talk about what's working well there and do you see that strength kind of continuing into Q4?
spk02: Yeah, as we mentioned, Europe had a little bit tougher return from their first wave of COVID-19. Unlike the U.S., where housing and construction materials were considered essential. That was not the case in Europe. So not only was our UK and France facility closed down, many of our distributors were closed down. So the picking up of the business took a little bit longer than we saw in the U.S. I think in the third quarter, they were doing a nice job of kind of getting back to a more normalized rate for them. We've done a really nice job. The management team there has done a great job and is continuing to work on reduced OPEX, helping that bottom line. And certainly, as we mentioned, we had a little bit of a strategy change to get our sales force focused on those customers of ours that are looking to sell our entire breadth of line, so the connectors, the fasteners, and the anchors. And they're doing a good job of executing on that strategy. On the negative side, it looks like, and we're certainly hearing news reports as a potential second wave of COVID-19 in Europe. We've already seen some countries that have put some restrictions, not as steep as they were in earlier in the year, but we don't quite know what will happen as far as those operations. But we're certainly seeing an uptick of COVID-19 in those regions.
spk03: Got it. And I believe I asked this last quarter, but any update on the effects of lumber? Have you seen any issues at all related to your customers and tightness or cost of lumber on your customers and how that affects Simpson?
spk02: Well, from a standpoint of affecting us directly, obviously we have a wood wall product that we make, but that's not what I would call stick, you know, 2x4s and 2x6s. So we haven't been impacted by our supply needed for that particular product. From our customer standpoint, obviously if wood prices are going up or availability is reduced, that creates some slowdowns. I've certainly heard issues of housing prices going up. The latest I've heard is that pricing on lumber is kind of coming back down again. So that will certainly help as far as the cost of the house. But I haven't heard concern as far as shortage, more of just the price being pushed up and pushed on to the consumers. So Again, I think in this back half of the year, we're seeing those prices drop down a little bit, and that will help as far as affordability issues from the housing standpoint.
spk03: Got it. Maybe the last one for me is, would you expect cash flow to be up year over year in the fourth quarter?
spk04: I would think so. I think that, yes, our general expectation right now is that would be the case.
spk08: Thanks very much. Thanks, Julio.
spk02: Thanks, Julio. Thanks.
spk06: Thank you. Our next question comes from Daniel Moore from CSJ Securities. Please proceed with your question.
spk05: Sorry, I'm mute. Thank you again. Just pulling on the string a little more. Sorry to be redundant. You're targeting 25% or 26.5% OPEX this year now as a percentage of revenue. Given the initiatives and some of the expense normalizations, is that within that range of regional thought process as we think about 21, or are you kind of signaling that OPEX as a percentage of revenue is likely to rise next year as well?
spk02: Yeah, go ahead, Brian. We can both chime in on this one.
spk04: Sure. I'd say they expect it to likely rise in 2021.
spk05: Got it. That's helpful. And then one more, capital allocation priorities, shifting the focus back to M&A a little bit, obviously. If you said this and I missed it, I apologize. Do you still plan to stick to the goal of returning at least 50% of cash flow to shareholders that you had previously? How does that sort of factor in on a go-forward basis? given where we are now with the pandemic? Sure.
spk04: So one thing that we definitely want to do is get the remaining balance on the line paid down. We'd like to get that done by the end of the year. And then as we take a look at the other cash, returning cash to shareholders, in addition to the dividend, we'd evaluate whether share repurchases. But as we're thinking about it today, get that line paid down and then evaluate from there. We're still evaluating the 50% of cash flow from operations returned to shareholders on a go-forward basis beyond 2021 or beyond 2020. Certainly would like to put that to use in acquisitions that help us fulfill our company strategy and other internal investments that help us make this more efficient, more profitable, help us serve our customers even better. So that's where we're at today as far as that particular goal.
spk05: Okay. And is there a range or a sweet spot of acquisition size that you generally would be targeting?
spk02: You know, I think certainly a large acquisition is just as complicated as a small acquisition. We're really looking, Dan, for something that's in the building materials space. We've talked about this. We would be very interested in manufacturing, extending our manufacturing capabilities and market share in the fastener space. You saw we did a couple of small bolt-ons. Those are pretty easy to incorporate and to negotiate. So I don't think we have sort of a set price. We're more looking to what fits our strategy and why is Simpson the natural owner of whatever the company may be. What is it that we can do and why would it be the right acquisition target for us?
spk05: Okay, more to come, obviously. Thank you for your comments, and again, congrats on an obviously really strong quarter in operating leverage.
spk02: Great. Thank you.
spk05: Thank you.
spk06: There are no further questions at this time. This concludes today's program. You may disconnect your lines at this time. Thank you for your participation, and have a great day.
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