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Text: Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties.
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Now, I would like to turn the conference over to Karen Colonias, Simpson's President and Chief Executive Officer.
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 material and labor costs.
The strength in our gross profit margin combined with our efforts in expense management and reduced cost from travel and other restrictions, as a result of the COVID-19 helped drive a 49.8% year-over-year increase in our income from operations to $91.3 million and strong earnings of $1.54 per diluted share.
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 protocol to help minimize the spread of COVID-19 has enabled us to continue operating our business with minimal disruptions from the pandemic.
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 continued 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 in our previous call, we are extremely happy to have Lowe's return as a home center customer in the second quarter, during which time we began shipping our products into their locations.
We continued to make progress on our product rollout during the third quarter.
As of the end of September, 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 set 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 US 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 translations, sales still improved both year-over-year and quarter-over-quarter on slightly higher volume.
As part of our strategy to continue to grow our market share in Europe, subsequent to quarter end we acquired a small connector manufacturer based in the United Kingdom with a complementary product line.
The acquisition closed early in October and the acquired company's operations will be absorbed into our existing business.
Overall, we expect this acquisition to benefit our market position in the region moving forward.
I'd now like to shift our focus to our software strategy.
As previously discussed, we believe that the investments we 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 homebuilders, this application expands our software choices for builders to help minimize costs and best align with their business needs.
By expanding our technology offering 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 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 US based sales organization 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 uncertainty, we are unable to accurately predict how COVID-19 will continue to impact international travel, on-site meeting, and training requirements to complete the rollout in our remaining location.
As such, we currently anticipate a companywide completion goal in 2022 versus near the end of 2021, though we will continue to monitor and update our time line 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 dividend as we have done consistently since 2004.
As previously announced, Mike will be joining Simpson at the end of November after spending over 22 years in numerous leadership positions at Henkel, a 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-Tie.
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 solution, 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'm pleased to discuss our third quarter financial results with you today.
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% 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 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 outlook 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 expense.
On a segment basis, selling expenses in North America were up 7.3% and in Europe they increased 1%.
General and administrative expenses increased 8.7% to $40.3 million primarily due to increases in cash profit sharing, 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 topline 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 profit.
On a consolidated basis, our operating income margin of 25.1% increased by approximately 540 basis points.
Our effective tax rate remained flat at 26.2%.
Accordingly, net income totaled $67.1 million or $1.54 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 30, cash and cash equivalents totaled $311.5 million, a slight decrease of $4 million compared to the balance at June 30, 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 30, approximately $225 million remained available for borrowing.
Our inventory position of $260.1 million at September 30, slightly decreased by $5.3 million from our balance at June 30, 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 23, our Board of Directors declared a quarterly cash dividend of $0.23 per share, which will be payable on January 28, 2021 to stockholders of record as of January 7, 2021.
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 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% to 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.
We believe our industry-leading position geographic reach and diverse product offerings combined with our strong balance sheet and liquidity position, give us confidence in our ability to continue executing against our strategic, operational, and financial initiatives.

user
compname says q3 sales $364.3 million.
q3 earnings per share $1.54.
q3 sales $364.3 million versus refinitiv ibes estimate of $316.4 million.
updating full year 2020 financial guidance on improved demand outlook.

assistant