Simpson Manufacturing Co., Inc. (SSD) Q3 2017 Earnings Report, Transcript and Summary

Greetings and welcome to the Simpson Manufacturing Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Kim Orlando. Thank you. You may begin.

Good morning ladies and gentlemen, and welcome to Simpson Manufacturing Company's third quarter 2017 earnings conference call. On this call, the Company may discuss forward-looking statements such as future plans and events. Forward-looking statements, like any prediction of future events, are subject to factors, which may vary and actual results may differ materially from these statements. Some of these factors and cautionary statements are discussed in the company's public filings and reports, which are available on the SEC's or the company's corporate web site. Please note that the company's earnings press was issued today at approximately 4:05 PM Eastern Time. The earnings release and a supplemental slide presentation are available on the company's web site, at www.simpsonmfg.com. Today's call is being web cast and a replay will also be available on the company's web site. Now I would like to turn the conference over to Karen Colonias, Simpson's President and Chief Executive Officer.

Thanks Kim and good afternoon everyone. We had a solid third quarter, with consolidated net sales of 13.6% year-over-year to $262.5 million, partially due to our recent acquisitions, driving growth in Europe, as well as increased sales volumes and average net sales unit prices in North America. As a reminder, based on our internal correlation assessment of our SKUs in relation to single and multifamily houses, we believe U.S. housing starts are a leading indicator for roughly 60% of our business. We continue to believe U.S. housing starts should improve at mid-single digit rate annually over the next few years, which is a positive indicator for our business. In regard to the recent hurricanes and fires, we are thankful that none of our locations in the affected areas were negatively impacted by these disasters. Our thoughts and prayers remain with our employees, who have suffered personal losses and with all the victims of these tragic events. We will be ready to support these communities, as they rebuild. Now I'd like to turn toward our primary focus for today's call. Following my prepared remarks, our CFO, Brian Magstadt, will walk you through our third quarter 2017 financials in greater detail. Please note, that a supplemental slide presentation accompanying today's call has been posted on the Investor Relations section of our web site at simpsonmfg.com. Today, we will focus on a discussion of both our near and long term objectives, which I will refer to as our 2020 plan, as outlined in today's earnings press release. We believe our execution on these objectives will create substantial value for all shareholders of Simpson Manufacturing Company. Throughout the past decade, our company has undergone a lot of change, including leadership transition and the passing of our founder, Barclay Simpson. One thing that has not changed however, has been our unwavering focus on our core business and unique differentiators, that make Simpson a strong company that it is today. We believe our ability to achieve industry leading margins from a gross profit and operating income standpoint is due to the high level of value added services that we provide to our customers. As we stated before, aside from our strong brand recognition and trusted reputation, Simpson is unique, due to our extensive product testing capabilities at our state-of-the-art test lab, strong customer support and education for engineers, builders and contractors, deep 40 year plus relationships with engineers that get our product specified on the blueprints and pull through to the job site. Product availability with delivery in typically 24 hours or less and an active involvement with code officials to improve building codes and construction practices. On our last call, we outlined a detailed explanation of our key growth initiatives, as well as the strategy behind them. As a reminder, these growth initiatives include increasing our market share and profitability in Europe, growing our share in the concrete space and continuing to developed our truss software to support our core wood product offering. We believe these initiatives are crucial to not only offer a more complete solution to our customers and bolster our sales of core wood connector products, but also to mitigate the cyclicality of the U.S. housing market. Increasing our market share in Europe, helps us mitigate exposure to U.S. housing starts, which have historically experienced lengthy peak-to-peak cycles, ranging from 10 to 17 years. At 12 years into the current cycle, we are still far below peak, at only a little over half of the housing starts compared to 2005. The most recent U.S. downturn would have been more detrimental to our business, had we not had exposure to other performing areas, such as product lines in concrete, fasteners and operations in Europe. In 2006, until the bottom of the decline in 2009, our revenue decreased 30%. However, with other diversified product lines, we believe it would have declined by nearly 45% and that our business, as depicted on the chart on slide 4, would have more closely paralleled the drastic decline in the U.S. housing starts. We remain committed to positioning Simpson for long term sustainable and increasingly profitable growth. That said, we acknowledge that our pursuit of our growth initiatives has contributed to suboptimal operating leverage in our consolidated financial results. In light of this, we recognize the need to provide additional transparency into our strategic plan and financial objectives, which we will begin to do so today. So with that, I'd like to spend this time to unveil our 2020 plan, as well as our path to achieve our anticipated goals. Simpson's 2020 plan is centered on three key operational objectives. First, a continued focus on organic growth. Second, rationalizing our cost structure, to improve company-wide profitability. And third, improving working capital management and balance sheet discipline. Through execution on the 2020 plan, we believe these objectives will substantially enhance a return on invested capital from 10.5% in 2016 to a range of 17% to 18% by 2020. In addition, we plan to more aggressively return capital to shareholders to optimize value creation and reward them for their confidence in Simpson. If we are not on track to meet the 2020 financial targets we are putting forth today, we will take more aggressive action, particularly as it relates to our strategic initiatives. Beginning with organic growth, while we have emphasized acquisitions as part of a dual fold approach to growth in the past, we would be more transparent and focused in our go forward strategy, with a strong bias towards organic growth, supported by strategic capital investments in the business. As such, we will deemphasize acquisitions activities going forward, especially as it relates to the concrete space. An exception may occur, if the right opportunity were to arise in our core fastener space, which is the particular area where we believe it will be beneficial to gain additional production capacity to support our wood business. Given the strategy, we expect to achieve an organic compound annual growth rate for our consolidated net sales of approximately 8% from our reported 2016 [ph] net sales of $861 million through 2020. Our target net sales, compounded annual growth rate, includes the assumption of steady organic growth in North America, with the expectation that U.S. housing starts should continue to improve at mid-single digit rate on an annual basis, as well as the previously announced $30 million opportunity for our mechanical anchor product line in the Home Depot. Further, we anticipate steady topline growth in Europe, driven by improved economic conditions and our focus on complete product offerings of connectors and fasteners in the Nordic and Western European markets. Further, our top line growth expectations include the assumption of increase in our concrete market share. In order to achieve this, we are reprioritizing our efforts in the concrete space, by focusing on higher margin product lines to help drive profitability. As a result, we made a strategic decision to cease development of our concrete repair lines, with the exception of bridge and marine repair products. This will shift our addressable market opportunity down from $3.5 billion to approximately $1.3 billion. We plan to grow our current approximate 10% share of this $1.3 billion addressable market to approximately 14% by 2020. The six key areas comprise our focused addressable market include light framed construction, retrofit, waste water treatment plants, direct to OEM, commercial cold-formed steel and bridge and marine repair. These product lines are all higher margin and align well with our core competencies, to best leverage our resources. Our second objective involves rationalizing our cost structure, to improve our total operating expenses as a percent of net sales, from 31.8% reported at the end of 2016 to a range of 26% to 27% by the end of 2020, reflecting an improvement of approximately 530 basis points at the midpoint. As a result, we expect to improve our already industry leading consolidated operating income margin from 16.2% in 2016 to a range of 21% to 22% by 2020. Moreover, we are expecting to hire a leading management consultant in the near term to take a fresh look at the business, and identify additional potential opportunities for cost savings. If we find additional opportunities for savings, we are committed to further improving our targets. In order to obtain this improved operating leverage, aside from top line growth, we will aggressively manage our total 2018 operating expenses to be less than the 2017 levels, in terms of absolute dollars. Excluding planned SAP implementation costs, our projected 2018 operating expenses will be reduced by approximately $8 million from 2017. We will implement this through a combination of zero-based budgeting and maintaining our headcount at a net neutral, adding employees where it makes sense to support our growth and reducing where applicable. We believe these actions will bring our total operating expenses as a percent of net sales down to the mid-29% level for 2018. In Europe, we plan to reduce total operating expense dollars in 2018 by $2 million through reductions in both headcount and other administrative expenses. As such, we are targeting an improvement in our operating income margin from 0.8% reported in 2016 to a range of 7% to 8% in 2018 and reaching 12% by 2020. Separately, we also divested Gbo Poland and plan to complete the divestiture of Gbo Romania this week. The sale of Gbo Poland, which closed on September 29, for a total of $10 million, resulted in a gain of $0.4 million. The sale of Gbo Romania is expected to close on October 31, for a minimal amount with no significant gain or loss. For the nine months ended September 30, 2017, Gbo Poland and Gbo Romania contributed $12.6 million of the total $35.2 million of acquired net sales. While we retain our Gbo operations in Norway and Sweden, we have chosen to divest of the operations in Poland and Romania, as the fastener products produced at these locations do not fit our market strategy. We believe this action will help us now and improve our focus on fasteners in Europe, to mainly the Nordic region and Western Europe, where we are best positioned to grow our market share. In our concrete business, we expect our gross profit margin to improve from 34.8% reported in 2016 to a range of 38% to 39% in 2018 and to over 42% by 2020. To that end, we anticipated $3 million reduction in total operating expenses but [ph] concrete in 2018, by no longer allocating dollars towards expanding our repair line of business, as well as through reductions to headcount and other professional services. Offsetting these reductions will be our continued investment in our truss software initiative of approximately $8 million per year, in addition to approximately $30 million to $34 million of spending through 2020 associated with our ongoing SAP implementation project, some of which will be capitalized. Our investments in software will continue, given its strategic importance. Without a truss offering specifically, we believe a meaningful portion of our market share in our core wood connector business will be at risk, as we may lose customers who value a bundled solution for all of their wood products and software needs. With the acquisition of CG Visions earlier this year, we gained additional expertise and resources to offer software solutions and services to both builders and lumber building material dealers. Further, CG Visions enables us to support ongoing development of integrated software component solutions to the industry. The absence of a software solution leaves our wood business highly vulnerable, as it is viewed as a critical component for builders to complete projects as efficiently and cost effectively as possible. Further, our competitors have ramped up efforts to cannibalize wood product sales by bundling software solutions, oftentimes at a discount or free of charge. Over 40% of our core connector business is tied to customers who require software. We have identified 35 accounts today, that we believe are at high risk of loss, if we were not offering a software solution to complement their purchases of wood connectors, fasteners and truss plates. Due to the increased sophistication of our software capabilities and solutions,, in 2018, we will begin focusing our efforts, primarily on converting medium sized component manufacture customers, who have roughly $200,000 to $700,000 in annual sales, while continuing to support the smaller component manufacturers we have already converted. We believe these small and medium component manufacturers represent over 40% of the truss market, and our ability to provide software solutions to these customers is critical to preserve and grow our core connector business. Our annual $8 million expense for truss R&D will be partially offset by our decision to consolidate our primary truss manufacturing facility, with existing manufacturing capacity. By the first quarter of 2018, we expect to have moved all the manufacturing activity for truss plates into our wood connector manufacturing plants. When completed, we expect to reduce our cost of sales by approximately $2 million annually. This action will not only help improve efficiency and lower cost and our manufacturing footprint, but it will also reduce freight time to move truss plates to our end customers. Our SAP implementation project has been progressing on-track and on budget. As previously discussed, this project will improve business analytics, inventory management, purchasing, as well as enhanced overall productivity. This multiyear project which began in 2016 will continue through 2019 in a series of four phases. When we entered the second phase in 2018, we estimate roughly $7 million to $8 million, including amortization of capitalized SAP costs, will be expensed for the year, which is up considerably from this year and 2016, as much of the activity to-date has involved pre-implementation configuration costs, which have been capitalized. Configuration will continue in 2018, as well as initial sites going live, and will require extensive training, which will be expensed as incurred. In 2019 and 2020, we estimate the associated expenses, including amortization of capitalized SAP costs, will approximately be $10 million and $4 million respectively. While Simpson maintains industry leading gross margins and operating margins, we believe we can more tightly manage our costs to drive further reductions in operating expenses. We believe that these goals represent targets that are aggressive, yet achievable, based on bottoms-up evaluations of our cost structure, in light of the support needed to maintain a superior gross margin profile, and accelerate our organic growth. However, in an effort to help us drive further improvements beyond our current 2020 plan, we intend to hire an external management consultant to perform an independent in-depth analysis of our operations, in an effort to identify additional opportunities, to enhance our operating efficiency. This engagement will allow us to benefit from their broad expertise and to benchmark our operations against our peers on a more granular level than we have done in the past. We look forward to benefitting from their expertise, and providing additional information to our shareholders in the coming months. Turning to our third objective, we will improve our working capital management and overall balance sheet discipline to reducing inventory, as well as other initiatives to improve our working capital, including payables and receivables. Through our near term focus on inventory, we have established an internal team to help better manage inventory levels, without impacting our competitive edge in regards to product availability standards, as a significant amount of our customers rely on receiving products in 24 hours or less, and we believe in part, allow us to earn above median gross margins. As a first step to reduce our inventory, we have identified approximately 25% to 30% of our SKUs we will be eliminating. We will eliminate two-thirds of these SKUs immediately, with the remaining one-third to be phased out over a transition time to meet customer need. In addition, through the implementation of our ERP system by 2019, we plan to further improve our management of inventory and purchasing practices, to enhanced operating efficiencies. Further, we estimate we have room for an additional reduction of approximately 30% of our current raw materials and finished goods over the next three years, without impacting our day-to-day production and shipping procedures. To ensure our facilities are run as efficiently as possible, we have engaged an additional external consultant, who specializes in lean principles, to ensure proper execution on this front, and to identify further ways to improve our inventory management. As a result, we expect to improve our inventory turn rate from the current of two times to four times by 2020. While we believe this inventory turn rate is significant improvement from our current rate, we will update shareholders at the appropriate time, regarding the findings of the external consultant, that we have engaged to review our operations. Lastly, our previous discussed plans to move some of our high volume connector production out of our plant in Riverside, California, to our other three connector manufacturing locations, in an effort to ensure we are operating as cost effectively as we can, has been completed. We were able to complete this endeavor one year ahead of schedule, in order to support our goal of 75% utilization on two full shifts at our U.S. connector manufacturing facilities, for future volume increases, without the need for additional incremental equipment. At today's sales levels, we are tracking at 60% utilization, which is up from 45% when we began this initiative. As discussed through the execution on the 2020 plan, we expect to be in a position to achieve a return on invested capital target of approximately 17% to 18% by 2020. As demonstrated on slide 15, this highlighted the critical components we will manage to achieve an improvement in our ROIC. Before I wrap up, I want to comment on our capital allocation strategy. We have a strong financial position, which affords us flexibility to continue investing in our long term strategy, to drive shareholder value, while simultaneously returning capital to our stockholders. As we have communicated previously, we remain committed to returning 50% of our cash flow from operations to stockholders in the form of dividends and share repurchases. During the quarter, we paid out $9.9 million in quarterly cash dividend and received approximately 36,000 shares as part of our 20 million accelerated share repurchase program. As of September 30, 2017, we had $201.5 million remaining for repurchases under our extended $275 million authorization by December 31, 2018. As we are confident, our execution on the 2020 plan will drive improved operational performance in our business, we plan to be more aggressive in repurchasing shares of our stock in the near future. Longer term, we intend to use the proceeds from our inventory reduction efforts and any additional balance sheet efficiency improvements towards share repurchases. To fund share repurchases beyond those enabled by our strong operating cash flow, we will be reviewing other owned real estate properties for potential sale or leaseback opportunities in the future. Beyond this, we will consider any benefit we may receive in the event of a tax repatriation holiday, or potential corporate rate reduction, as further funds for share repurchase. In summary, we are pleased to be able to share with our strategic plan going forward, as well as provide additional transparency around the operational drivers behind our financial targets. As it is a 2020 plan, we will provide updates and benchmarks along the way, to keep you informed on the execution of our growth initiatives and plans. As discussed, if we are not on track to meet these targets by 2020, we will take more aggressive action in the future. Here at Simpson, we are confident in our ability to remain an innovator in the industry, while providing best-in-class service to our customers, and generating value for our shareholders. We'd like to thank our shareholders for their continued support of Simpson, and look forward to updating you on our progress over the coming quarters. I'd now like to turn the call over to Brian, who will discuss our third quarter financial results in more detail.

Thank you, Karen, and good afternoon everyone. I am pleased to discuss our third quarter financial results with you today. Our consolidated net sales for the third quarter of 2017 were $262.5 million, up 14% compared to $231 million in the third quarter of 2016. Net sales in the third quarter included, $15.7 million from our recent acquisitions and were further driven by strong sales to contracted distributors, dealer distributors, home centers and lumber dealers, primarily due to increased home construction activity and average unit sale prices. Within the North Americas segment, net sales increased 8% year-over-year to $213.3 million, primarily due to increased sales volume and unit prices. In Europe, net sales increased 50% to $47.1 million, largely as a result of the recent European acquisitions of MS Dêcoupe and Gbo, as well as positive impacts from foreign currency translations. Wood construction products, including connectors, truss plates, fastening systems, fasteners and shear walls, represented almost 86% of total net sales in the third quarter; up slightly from 84% in the third quarter of 2016. Concrete construction products, including adhesives, chemicals, mechanical anchors, powder actuated tools and reinforcing fiber materials represented 14% of total net sales in the third quarter of 2017 compared to 16% in the prior year quarter. Our consolidated gross profit increased 6% to $119.9 million from $113.5 million in the third quarter of 2016, resulting in a consolidated gross profit margin of 46%, compared to 49% in the prior year period. Despite this year-over-year decline due both to the impact of our recent acquisitions and increased overhead costs, our ability to achieve an industry leading gross profit margin is directly attributed to our value added service offerings and uniquely engineered and tested product solutions. On a per segment basis, our gross profit margin in North America decreased slightly to 48% from 50% in the prior year quarter, due to increased material, labor and factory costs. In Europe, our third quarter gross profit margin decreased to 38% from 43% in the year ago period, primarily due to recent Europe acquisitions, whose gross profit margins averaged 24% for the quarter. From a product perspective, our gross profit margin on wood products was 47% compared to 50% in the prior year quarter and was 34% for concrete products, flat with the prior year quarter. Now turning to our third quarter cost and operating expenses; consolidated research and development and engineering expenses decreased 21% year-over-year to $8.7 million, primarily due to the lower personnel costs, cash profit sharing expense and stock based compensation. Contributing to lower personnel costs was a reclassification of $2.5 million in year-to-date expenses from engineering expenses to selling and general and administrative expenses, associated with our CG Visions acquisition. As Karen touched on earlier, included in research and development and engineering expense, is approximately $8 million per year for the ongoing development of our truss software initiative. Consolidated selling expenses increased 16% year-over-year to $28.2 million, primarily due to higher selling expenses, as a result of the recently acquired businesses, as well as higher personnel, advertising and amortization expenses. These increases were partially offset by decreased stock based compensation and cash profit sharing expenses. As mentioned, we reclassified $0.3 million in year-to-date expenses associated with CG Visions from engineering to selling. On a segment basis, compared to the prior quarter, selling expenses in North America increased by $2 million and increased by $1.8 million in Europe. General and administrative expenses increased 12% year-over-year to $36.5 million, including $5.2 million from the recently acquired businesses, as well as increased personnel, depreciation, legal and professional fees and software licensing expenses, which are partly offset by decreases in cash profit sharing expense and stock based compensation. General and administrative expenses, including the reclassification of $2.2 million in year-to-date expenses associated with acquisitions from engineering expense to general and administrative. On a segment level, general and administrative expenses in the North America segment increased $2.9 million and in Europe, G&A increased by $1.4 million compared to the prior year quarter. As Karen detailed in the 2020 plan, we are intently focused on reducing our total operating expenses as a percentage of net sales. For the third quarter of 2017, total operating expenses, as a percentage of net sales were under 28%, down 140 basis points from the prior year quarter. Our consolidated income from operations increased 2% year-over-year to $46.7 million compared to $45.8 million in the third quarter of 2016. In North America, income from operations decreased 1% year-over-year to $42 million, and in Europe, income from operations increased 32% to $5.1 million. On a consolidated basis, our operating margin declined by approximately 200 basis points from the third quarter of 2016, due to reduced gross margins and to the recent acquisitions, which contributed approximately $100,000 in income from operations, including purchase accounting expenses, such as intangible amortization. In addition, following the final valuation of the assets and liabilities for our Gbo Fastening System business acquired in January, we reported a $2.1 million reduction to our initial $8.4 million estimate for a gain on bargain purchase. This adjustment was non-taxable. Further, we reported a $0.4 million gain following the sale of Gbo Poland, which closed on September 29. Our effective tax rate increased to 37% from 35% in the third quarter of 2016. Our net income for the quarter was $28.2 million or $0.59 per fully diluted share, compared to net income of $29.8 million or $0.62 per fully diluted share in the prior year quarter. Now turning to our balance sheet and cash flow; at September 30, 2017, cash and cash equivalents totaled $204.2 million, an increase of approximately $63 million from June 30th levels. Capital expenditures were approximately $16.8 million for the quarter, and were primarily related to ongoing efforts to complete our Texas facility expansion and for improvements in our new chemical facility in West Chicago. Further, we invested in additional manufacturing equipment and software, as well as capitalized $2.4 million related to the ERP project. We remain debt-free, with only a small portion of capital leases, amounting to approximately $3.9 million. On September 28, our Board of Directors declared a quarterly dividend of $0.21 per share for shareholders of record as of January 4, 2018, which will be payable on January 25, 2018. We also received 35,887 shares during the quarter, completing the $20 million accelerated share repurchase agreement initiated earlier in the year. In total, the shares repurchased under the agreement had an average price of $43.39 per share. The remaining amount authorized under our repurchase program, which expires at the end of 2018, is $201.5 million. As Karen mentioned, given our confidence and our ability to execute the 2020 plan, we plan to aggressively repurchase shares of our stock in the near term. Before we turn it over to questions, I'd like to briefly discuss our outlook for the full year ending December 31, 2017. We are reiterating our previously provided guidance for consolidated gross profit margin, which we expect will be in the range of 45% to 46%. We are updating our previously issued guidance for the following; our depreciation and amortization expense is now expected to be in the range of $34 million to $36 million, of which $28 million to $29 million is pure depreciation. Capital expenditures are now expected to be in the range of $55 million to $60 million, including the completion of our Texas facility expansion and capitalized SAP costs. We estimate our annual effective tax rate to be in the range of 35% to 36%, and lastly, as a result of headcount reductions we have recently made in our Europe concrete and truss businesses, we estimate severance charges of approximately $3 million to $3.5 million will be recognized in the fourth quarter of 2017. In summary, we had a solid third quarter, and will update you over the coming quarters, as we execute on our 2020 plan. We have a great deal of confidence in our long term value proposition, as an industry leader for engineered structural connectors and building solutions and look forward to demonstrating the increased operating leverage and earnings power that exists in our business. Thank you for your time and attention today. We'd now like to open up the call to questions. Operator?

[Operator Instructions]. Our first question comes from Daniel Moore of CJS Securities. Please proceed with your question.

Good afternoon Karen. Good afternoon Brian.

Hey Dan.

Lot of ground covered. So apologize for a couple of really quick housekeeping questions. The 2020 goals that you outlined, are they inclusive -- they are inclusive of your incremental investment and trust, is that correct? And are you contemplating those goals being a run rate kind of exiting 2020? Or is that what we should think about actual reported results? And a follow-up, if I may?

So yes, they are inclusive of our truss [ph] run rate, and they should be thought of as a -- continuing, as we look through our 2020 run rate.

Appreciate it. And the top line goals, 8% organic growth you outlined, implied mid-single digit growth in housing, the opportunity at Home Depot of $30 million, the incremental penetration at concrete, any other sort of lynchpins to those? What sort of pricing expectations are embedded? What type of growth in Europe and any others, that we should think about? They are a little bit more aggressive than what we have achieved over the last few years, so just trying to triangulate that?

So it's all organic growth. There is no acquisitions in that revenue number. As you pointed out, growth rates from single digit, mid-single digit housing starts, we do have this opportunity with the Home Depot to finish placing our mechanical anchors that just started in 2017, and will continue through 2018. So some substantial opportunities there. As we mentioned, we are really focusing on fixed areas of the concrete business, rather than having sort of a very scattered approach in the past. Really focusing on those fixed areas, will help us get some market share improvements. And then also from a topline standpoint, we see the opportunities for our truss business growing.

Last one and I will jump back in queue. Just talk about the leverage, as far as your margin goals to that top line growth? In other words, with for whatever reason, the market [indiscernible] organic growth were 2% to 3% top line. What would that do to your 21%, 22% pre-tax margin goals? Thank you.

Yeah. Well that would obviously reduce those pre-tax margin goals. Again, this plan is really looking at today's economic conditions, and the improvement that we can put in place on the areas where we see we have -- again, some opportunities to gain market share and improve our bottom line.

Appreciate the color. Thanks again.

Thanks Dan.

Our next question comes from Steve Chercover with D.A. Davidson. Please proceed with your question.

Thanks. Good afternoon everyone.

Hey Steve.

I guess we are delighted to hear the 2020 strategy, so just interested, what prompted the new urgency? Was it the shareholder engagement?

I will say Steve that, we have really been -- over the past couple of years, been very active on our shareholder engagement, and really not only with the portfolio managers, but certainly the governance teams. We have listened very intently about some of the things that they were looking for and some changes that we needed to put in place, and I think certainly, you have seen some of those from the governance standpoint, and this is really our opportunity to show the investors, that we are listening, and that we want to give you some more clarity in our strategy and our goals going forward.

Cool. Well, we will look forward to the datapoints of progress. So quick question on Gbo; it looks like after getting rid of Poland and Romania, you are getting Norway and Sweden for free, so what revenues in those two markets remain?

Steve, it's Brian. So the Poland and Romania piece, it was about $12 million of the total, that we had for the year, which was -- bear with me a second.

I think it was $35 million.

Right, there you go. Thank you. Just wanted to make sure [indiscernible] the right number. So it was about a third of the total there.

So your cashback, you still have -- I am hoping the more lucrative element of the business, is that a fair way to say it? Are the margins better in the remaining markets?

Yeah. I think if you look Steve, the fasteners that were produced in Poland and Romania were specific to the metal building industry, which is not a market that we were interested in pursuing. So by divesting that, it really allows us to focus the fastener market that we have, both in Sweden and in Norway, which is more of structural screws and being able to have those structural screws complement our wood connectors. Again, putting that complete product offering of connectors and fasteners in the Nordic market, as well as moving the fasteners into the Western European market. So it really fine tunes on our strategy on what we are doing with both those product lines.

Okay, great. Now, you have got some pretty ambitious growth objectives. I am assuming that eliminating 30% of your SKUs doesn't mean that you are necessarily walking away from businesses, you just have to point your customers that the alternative that can satisfy their needs, that's the way to look at it?

Right. I mean, they certainly never want to walk away from business. But what we want to do is, look at that product mix, and certainly, we have some products that have just sort of aged out, and so they need to be deleted from our system. But as I mentioned, there is about a third of the products, where we will transition customers, and that's because we have got a better, more cost effective, more easy to install product for the end user. And so that takes a little white in the transition. But certainly not any plans to walk away from business opportunity.

But you have always been able to do custom work. So if someone says, listen, here is the reason why I need the ABC connector, can you hook me up? You will still be able to, I guess, fabricate it?

Yeah. Let me clarify. We will still be able to turn customer specials in a 24-hour turnaround time. These are more manufactured products from a volume standpoint, these aren't one-off type of products. So just again, as we have transitioned into different types of construction, more efficiency on how we manufacture our products to different models in itself, it's converting those. But yes, we will absolutely still have our special facility, because that's a great distinction on how we can service our customers, where maybe our competitors can't meet those needs. So it has nothing to do with not still making custom specials, we will still meet the needs of our customers.

Okay. Last question for me, is with respect to the repo, it sounds like your -- well, if I speak English, you are going to be aggressive in the near term. Does that mean you are willing to run with a significantly lower cash balance going forward?

Hey Steve, it's Brian. So we want to make sure that, we got the appropriate amount of cash for the seasonality of our business. But to the extent that, we have got some improved operating cash flows, we want to be able to use that for the return of capital. And looking at what those exact amounts are over how quickly we are still internally working those -- that is -- the goal is to work that cash balance down to a lower level than today.

All right. Thank you.

Welcome.

Thank you.

Your next question comes from Josh Chan of Robert W. Baird. Please proceed with your question.

Hi. Good afternoon Karen and Brian. Thanks for all the color around the 2020 plan. As you think about the different areas that you are working on for 2020, SG&A, inventory, previously, those were pointed to as areas where you can drive additional growth or you can service customers better. So just curious, in terms of your thinking, what changed and also kind of your confidence in the ability to still have product development and have customer service capability?

Yeah. So let's maybe take the SG&A piece of that first. I think, as you look at what we have mentioned, we have had a much clearer focus on what we are doing in the concrete space. So I think, the reduction we are having in SG&A there, is actually because we have been able to increase our focus on these fixed market spaces, and those are key, because we have got the complete product offering needed for those space. We have an excellent sales force ready to meet those customer needs. And so, we were able to take some SG&A costs out, really because we have fine tuned our focus in that concrete space. And very similarly in Europe, with this Gunnebo acquisition giving us a complete fastener line, it has really allowed us to take the connector and fastener strategy as a combined product offering, and have that as the complete focus there, as we are working through in Europe. So I think the elements that we have been able to reduce in SG&A, is really because we have focused the strategy in those couple of spaces. From the inventory turns standpoint, I think as I mentioned to you Josh, we have been working on some lean initiatives for quite a while, and so, we are able to meet a customer's needs without having to have so much inventory, and that's some work that we have been doing over the past couple of years, and we are really even pushing that further. So we still plan to be able to make these inventory changes, and be able to beat some higher turn numbers, and still meet our 24-hour turnaround and our customer's expectations. As I mentioned to you, I think we have about a 95% to 98%, from the time you offered to being delivered in the next day, and that's certainly a KPI that we will continue in our focus. Certainly, we believe that, not only the specials that we make, but the breadth of line and the ability to provide customers the product in a very timely manner, engineering support, all of those are key elements, that help us with that gross margin and that operating income margin, and we don't want to lose it, but we think we can fine tune to be even better.

All right. That sounds good. Also on the share buyback side, given that you are maybe deemphasizing acquisition a bit, is there a possibility that buybacks can be over 50% of operating cash flow, than if you don't spend that much money in acquisition, is that the way you are thinking about it?

I think that, as we are going in and looking at the balance sheet and deemphasizing away from some of the categories of acquisitions that Karen noted, to the extent that there is capital to deploy there via buybacks and dividends, we would go that route. But we are still maintaining that 50% target of cash flow from operations. But as you noted, it might be -- there could be opportunities to do that -- to do a little bit more there.

All right. And then last one for me, I think Karen, you mentioned the importance of software. So could you update us, in terms of where your software stands relative to competitors, and maybe with the -- as a result of your investments, when -- where do you think that will take you?

Yeah. So as we talk about software, I think we have been talking about this -- sort of the buzzword of the BIM solutions, which is building, information, modeling. And software in the building materials is really starting to cover various aspects of the builder's business, from doing a complete take-off to doing a complete engineered design from architectural look to auction management, what we are doing from a trust design. So software is becoming a more all encompassing part of the building industry. I would say, as normal in the construction industry, we are a little bit behind, where people are with the use of software. But it's certainly becoming a much-much larger part of our business. So it's not just about providing connector anymore, it's about providing software that makes -- whether it's a lumber yard from a takeout standpoint, or a truss manufacturer for their design, we have got elements, CG Visions, we acquired them last year. That's a small company. They help us with take-off, they help us with auctions management, and they tie into some of those elements that the builders are looking for, and of course, we are looking at our truss software, as we have that to be a design element. So today, I'd say from a standpoint with Simpson, we are behind in some of the efforts that we need from our software, and we are working very quickly to catch-up. But it has become very apparent over the past few years, that software in combinations with the actual product is what's needed to help meet, not only the large builder needs, but the engineering communities needs, as well as the lumber yards.

Okay, great. Thank you for the color and best of luck with regards to the plan.

Great. Thanks Josh.

Ladies and gentlemen, we have reached the end of our question-and-answer session. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.