Simpson Manufacturing Co., Inc. (SSD) Q2 2019 Earnings Report, Transcript and Summary

Greetings, welcome to the Simpson Manufacturing Company Second Quarter 2019 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, Kim Orlando, with ADDO Investor Relations. Please proceed with your conference.

Good afternoon, ladies and gentlemen, and welcome to Simpson Manufacturing Company's second quarter 2019 earnings conference call. On this call, the Company may discuss forward-looking statements such as future plans and events. Forward-looking statements like any prediction of future events are subject to factors, which may vary and actual results may differ materially from these statements. Some of these factors and cautionary statements are discussed in the Company's public filings and reports, which are available on the SEC or the Company's corporate website.Please note that the Company's earnings press release was issued today at approximately 4:15 PM Eastern Time. The earnings press release is available on the Company's website, at www.simpsonmfg.com. Today's call is being webcast and a replay will also be available on the Company's website.Now, I would like to turn the conference over to Karen Colonias, Simpson's President and Chief Executive Officer.

Thanks Kim and good afternoon everyone. I'm pleased to discuss our results with you today. Net sales for the second quarter of 2019 totaled $304.9 million, down 1% year-over-year, primarily due to lower sales volume. U.S. housing starts which are a leading indicator for approximately 60% of our business remained soft throughout the first half of the year due to unusually wet and cold weather conditions across the U.S. In fact, according to the National Weather Service the first six months of the year were the wettest on record over the past 125 years of tracking history. This negatively impacted sales volume as it relates to our wood products. The wet weather conditions also offset any positive benefit we received from higher pricing following the July 1, 2018 price increase, which we enacted on the bulk of our U.S. wood connector products in response to rising raw material costs.As a reminder, U.S. housing starts in the second quarter of last year were very strong, with south and west up 14% and 8% year-over-year respectively. Compared to the south up only 5% and the west down 6% year-over-year in the second quarter of 2019. We also believe the second quarter of 2018 included some pre-buying activity have the price increase which helped support higher volumes last year. That said, our sales volume in the concrete space was up nicely over last year, mainly due to the continued rollout of our mechanical anchor products into the Home Depot stores. Aside from the slow start to 2019, we believe there are many underlying factors to support healthy growth in U.S. housing starts going forward. Including strong consumer confidence, extremely low unemployment rates, declining interest rate and low level of housing stock availability. Looking ahead to the third quarter, we expect demand to recover given improved weather conditions, the month of July is off to a solid start.Our second quarter gross margin of 44% declined by 160 basis points year-over-year, mainly due to increased material and labor costs as well as unabsorbed factory costs attributable to lower volumes. Due to lower than expected volumes that is taking us longer to work through some of the higher price raw material we purchased during the fourth quarter of 2018, to ensure we had sufficient supply during a turbulent market. We expect material cost to negatively affect our gross margins for all of 2019. Partially offsetting this will be the implementation of price increases effective August 15th of 7% on mechanical anchor product and 7.5% on certain of our fastener products in the United States.Our customers were informed of this increase back in mid-June in line with our typical 60 day notification window. While material costs have continued to pressure our cost of sales, we managed to maintain one of the highest gross margins in the industry due to long standing brand reputation we've built throughout our proprietary trusted testing capabilities, deep industry relationships and superior level of customer service.Since unveiling our 2020 plan in October of 2017, we've made strides in providing transparency into our strategic plan and financial objective to position Simpson for long-term sustainable and increasingly profitable growth. We're very pleased with the progress we've made to date and look forward to making further advances as time goes on.That said, the macro landscape has changed quite a bit over the past seven quarters with tariff and trade uncertainties contributing to a global growth slowdown. While we've made significant effort to mitigate headwinds associated with these macro trends, I'd like to spend some time today walking you through some necessary updates to our 2020 planned goal.As you may recall our plan is based on three key aggressive operational objectives. Our first objective centers on our continued focus on organic growth with the goal of achieving a compounded annual growth rate in net sales of approximately 8% from 2016 through 2020. To date since 2016 organic net sales have grown at a compounded annual growth rate of 10%. So we feel confident we can achieve this 8% goal.Our second objective involves rationalizing our cost structure to improve companywide profitability. We're continuing to work towards reducing our operating expense as a percent of revenue from 31.8% in 2016 to a range of 26% to 27% by the end of 2020.Aside from topline growth we've been tracking towards this target to a combination of zero-based budgeting, the reduction of indirect procurement cost and cost-reduction measures we've taken in both Europe and our concrete business. Offsetting these reductions will be our ongoing investment in our software initiatives, as well as the expenses associated with our SAP implementation.Leaving the degradation that we've experienced in our gross margin due to higher raw material costs, today we are recasting our 2020 target for improving our operating income margin to a range of 16% to 17% by the end of 2020. This is revised down from our prior 2020 target range of 21% to 22% and in line to slightly up compared to our operating margin of 16.4% in 2016. As a reminder our gross margin was almost 48% in 2016 when we initiated our 2020 plan in October of 2017, it did not factor in macro events out of our control such as volatile steel market in connection with the 232 tariffs and other trade events.While the gross margin pressure has caused us to revise this goal, it's important to note that our success in rationalizing our cost structure has helped us mitigate further downward pressure to this target.We're also recasting operating margin for Europe from a target of 12% excluding incremental costs associated with SAP implementation to a range of 8% to 9% in 2020, excluding SAP. Higher material costs have also contributed to this revision and it still reflects a 700 to 800 basis point improvement from 2016 and substantial progress in the region.Our third objective is focused on improving working capital management and overall balance sheet discipline, primarily by reducing inventory by implementing Lean principles in our factories. This included improving our inventory turn rate from 2 times in 2016 to 4 times by 2020. As we've stated in the past this was one of our most aggressive targets. When we initially disclosed the 2020 plan, we believed we could achieve an additional 25% to 30% reduction of our raw materials and finished goods inventory through 2020 without impacting day-to-day production and shipping procedures.When looking at the decrease in pounds on hand, which is the element we can control, we have been making solid progress. We are pleased that since December of 2016 we've reduced our product inventory in North America which is the bulk of our total inventory by over 12% in terms of pounds on hand. Including raw materials, which have come down by approximately 10%. In fact, in constant dollars we would have seen almost a $40 million reduction in inventory in North America alone. We accomplished this even as we proactively built up our anchor inventory in anticipation of tariffs on finished goods from China. We also bought an additional allotment of steel in late 2018 in order to mitigate potential impact of product availability and we built up inventory to ensure we could meet our needs during SAP rollout. In that same time frame since December of 2016, our weighted average cost per pound of total inventory on hand and raw materials on hand, which we cannot control, increased approximately 25% and over 35% respectively.Unfortunately, this has not translated into marked improvement in our inventory terms based on dollars. As a result, we no longer believe we can achieve an inventory turn rate of four times by the end of 2020. That said, we will continue to leverage the great work we are doing with our Lean initiatives and will continue to strive towards reducing our inventory and everything that we can control.Given the pressure on gross margins we are updating our expectations for return on invested capital to be in the range of 15% to 16% by 2020, comparing to only 10.4% in 2016. Many of our key operating initiative stem from the 2020 plan, including those focused on growing our market share, rationalizing our cost structure to drive improved profitability without sacrificing our competitive edge and improving our technology and systems to provide best in class service to our customers. We continue to expand our market share in the concrete space through the introduction of our mechanical anchor products into the Home Depot stores.Our mechanical anchor sets were available for purchase in 1025 Home Depot locations, as of today, with an additional 25 stores scheduled to be set at the end of 2019. We continue to seek additional products and footage in current location as well as an additional 800 stores. Importantly, the 1050 confirmed stores sets we will have by the end of the year, versus the 1900 stores we were targeting is not expected to affect our 2020 plan target for compounded annual sales growth.While on the subject of concrete products, I'd also like to note that through our revised strategy and diligent work by the team, our concrete gross margin is on track to improve from 34.6% in 2016 to approximately 42% by the end of 2020.In Europe we are pleased to increase our net sales in local currencies over the prior year period through a combination of volume improvement and higher selling prices. In addition, we expect to realize additional cost savings following the consolidation of two of our facilities near Frankfurt, Germany into a single location giving the duplicative operations performed.Finally, in terms of improvements to our technology infrastructure, we are continuing the remaining roll out of our U.S. selling branches through early 2020. Following the success of our SAP roll-out at our second U.S. manufacturing and selling facility in April, we feel confident we are tracking toward a companywide completion in 2021.In summary, while our sales volume was negatively impacted during the first half of 2019 due to weaker overall demand, we are confident we have not lost market share in our core wood connector business. For the remainder of the year, we are cautiously optimistic, housing starts will pick up and enable healthier demand levels. And while we have revised some of our 2020 plan targets, we still believe these goals represent significant improvements to our business. We remain committed to operational excellence through execution on our plan and other strategic initiatives and focusing on the areas of our business we can control to drive long term shareholder value.Finally, I'd like to thank all our employees for their continued dedication to Simpson. Best-in-class customer service, maintaining a safe workplace environment are key cornerstones of our culture, and we applaud that commitment to these efforts.Now, I'd like to turn the call over to Brian who'll discuss our second quarter financials.

Thank you, Karen, and good afternoon, everyone. I'm pleased to discuss our second quarter financial results with you today. Our consolidated net sales for the second quarter of 2019 were $304.9 million down 1%, compared to $308 million in the second quarter of 2018. Within the North America segment, net sales were roughly flat compared to the prior year quarter at $259.1 million, primarily due to lower sales volumes, which was partially offset by increases in average product prices.In Europe, Net sales decreased 5% year-over-year to $43.6 million, primarily due to negative foreign currency translations resulting from Europe currencies weakening against the United States dollar. In local currency, Europe net sales increased primarily due to increases in average product prices. Wood construction products represented 85% of total net sales in the second quarter of 2019, compared to 84% in the second quarter of 2018.Concrete constructions products represent a 15% of net sales of total net sales in the second quarter of 2019, compared to 16% in the second quarter of 2018. Our consolidated gross profit dollars decreased by approximately 5% year-over-year to $134.2 million, resulting in a gross margin of 44% compared to the second quarter of 2018, our gross margin declined by 160 basis points. The year-over-year decline in gross margin was primarily due to increased raw material costs, tooling expense and factory overhead costs on lower production, as well as higher labor costs resulting from tightening labor market conditions.On a segment basis, our gross margin in North America was 45.1% compared to 47.6% in the prior year quarter. In Europe, our second quarter gross margin was 37% compared to 38.2% in the year ago period. From a product perspective, our second quarter gross margin on wood products was 43.4% compared to 46.7% in the prior year quarter. And concrete products improved of 44% from 37.2% in the prior year quarter. Now turning to our second quarter cost and operating expenses. Consolidated research and development in engineering expenses for the second quarter declined 2%, year-over-year to $11.1 million.Consolidated selling expenses for the quarter declined 2% year-over-year to $28.7 million, primarily due to decreased cash profit sharing, sales commissions, advertising and promotional expenses and donations, which were partially offset by increased personnel costs and professional fees. On a segment basis compared to the prior year quarter, selling expenses in North America were slightly up by less than 1% and in Europe they decreased by 11%.General and administrative expenses in the second quarter increased 7% year-over-year to $41.3 million, primarily due to increases in consulting and professional fees, some of which were success based fees for our management consultant on work done in 2018, as well as expenses associated with the SAP project. These expenses were partially offset by reduced cash profit sharing and severance expenses. On a segment level, general and administrative expenses in North America increased by 13% compared to the prior year quarter. In Europe, G&A decreased by 23% year-over-year.Total operating expenses in the second quarter of 2019 were $81.1 million, an increase of $1.8 million or approximately 2% compared to the prior year quarter. As a percentage of net sales, total operating expenses were 26.6% compared to 25.7% in the prior year quarter. The increase in operating expense dollars and as a percentage of net sales for the quarter was mainly due to higher consulting and professional fees associated with our Lean and management consultants and SAP implementation project.As a reminder, we expect the management consulting fees we incurred in 2018 and we'll continue to incur through 2019, such as the success based fees I previously mentioned, will have a payback of one year or less and we'll conclude in 2019. Also, it's worth mentioning that as we progress further into our SAP implementation, we are now expensing more of our costs versus primarily capitalizing them as we were last year and toward the beginning of the project. As of June 30th, we've capitalized $18.8 million in total and of expense $18.8 million of the costs associated with the SAP project.Our consolidated income from operations for the second quarter decreased 13% year-over-year to $53.7 million, compared to $61.4 million in the second quarter of 2018. In North America, income from operations decreased 17% year-over-year to $50.1 million, primarily due to the reduction in our gross margin and increased general and administrative expenses, an effectively flat revenue growth.In Europe income from operations increased 28% year-over-year to $4.7 million, primarily due to our cost reduction initiatives. As a result, our consolidated operating income margin of 17.6% declined by approximately 235 basis points from the second quarter of 2018. Our effective tax rate decreased to 26.4% from 27.2% in the second quarter of 2018. Our consolidated net income for the second quarter was $39.6 million or $0.88 per fully diluted share, compared to $44.1 million or $0.94 per fully diluted share in the prior year quarter.Now, turning to our balance sheet and cash flows, at June 30th, 2019 cash and cash equivalents totaled $141.7 million, an increase of $28.3 million compared to our levels at March 31st 2019. Our inventory balance as of June 30th, 2019, was approximately $266.1 million, an increase of nearly $8 million or 3% compared to our balance as of June 30th, 2018. We remain debt free with only a small portion of capital leases. We generated cash flow from operations of $44 million compared to $35.3 million in the prior year period.We used approximately $5.5 million for capital expenditures during the quarter and paid $9.9 million in dividends to our stockholders. Included in the second quarter, capital expenditures were $900,000 related to our ongoing safety SAP implementation project. As of June 30th, 2019, we had approximately $70 million available under our $100 million share repurchase authorization, which remains in effect through the end of 2019.We expect to continue our approach of remaining opportunistic as it relates to repurchasing shares of our common stock. In addition, I'm pleased to announce that on July 25th, 2019, our board of directors declared a quarterly cash dividend of $0.23 per share. The dividend will be payable on October 24th, 2019 to stockholders of record as of October 3rd, 2019.Before we turn it over to questions, I'd like to discuss our 2019 financial outlook. For the full year of 2019, we are updating our guidance for our consolidated gross margin to be in the range of 43.5% to 44% given higher material costs and the softer U.S. housing starts apparent in the first half of the year.Further, we are reiterating our full year 2019 guidance for the following metrics. We expect total operating expenses as a percentage of net sales to be in the range of 27.5% to 28.5%. The effective tax rate to be in the range of 25% to 27%, including both federal and state income taxes. Depreciation and amortization expenses to be in the range of $39 million to $41 million, of which $33 million to $35 million as per depreciation of fixed assets and capital expenditures to be in the range of $30 million to $35 million, including approximately 25%, which will be used for maintenance [indiscernible].In summary, while our second quarter results were pressured due to certain macroeconomic and weather related factors. We remain focused on executing against our strategic operational initiatives to drive improved future financial performance. We look forward to updating you on our progress in the coming quarters. Thank you for your time and attention today.We'd now like to open up the call for questions. Operator?

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

Karen and Brian, good afternoon. Thanks for taking the questions.

Hello Dan.

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

Dan it's Brian, I would say on the first part of the question there, it was largely volumes. As we noted, we saw some increase on the concrete products side due to the additional roll out there in The Home Depot but on the wood product side in North America volumes were down slightly offset there by the suffice increase.

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

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

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

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

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

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

I think we've seen improvements, but again, on the top line of what we're seeing in the concrete part of our business. Certainly, looking for that to continue, we've seen some improvements in where we've gone from Europe from a pricing standpoint, and also we have that price increase in 2018. And obviously that's helping that top line compound annual growth rate.

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

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

Got it.

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

Hi, good afternoon, everyone.

Hello Tim.

Hello Tim.

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

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

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

I think you hit it right there Tim. A month out of the quarter was looking as we noted, looking well and then definitely slowed down through the latter part of the quarter. I would say that the April again was decent. May and June I think were fairly consistent, the lower given us where we ended up. So, no, I don't think it was necessarily a start strong and then finish slow. It was a good first month followed by two softer months.

Okay. And have you -- in the updated gross margin guidance, did you contemplated any additional kind of under overheads or under absorption?

There is, absolutely right, with lower volumes there is absorption does play a factor in that. So, the material probably had the biggest impact. It's actually tooling that the overhead absorption was number two in terms of rank order in the gross margin...

For the guidance?

Oh, for the quarter end, in general for the guidance. Yes.

Okay. But I guess -- I guess my question is, are you taking in any sort of incremental under absorption in the back half of the year and that kind of updated gross margin guidance, or do you assume that your production looks more like sales?

And I would say it's a little bit more of the, the former there, we assuming some under absorption in the back half of the year.

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

Dan, I think. As we talked about when we, because we have a 60 day notification we actually put pricing in late last year, not at the point where steel was at its highest price. So as we work with our customers, distributors who are selling our product, that's certainly one point. And the other point is that, I would say that the steel market is still fluctuating, there were three to four price increases that came out last week. So we're still kind of in this up and down situation and it's very difficult for our customers because we have so many parts to have price changes. So we are kind of like to see some stability before we would potentially have to give any of that pricing back in and right now, we're definitely have not given any of that pricing back because we're seeing steel pricing going up. Certainly, as you see from our gross margins, we still have some very expensive steel in-house.

Okay, and one more question. Just how should we think of inventory return going forward? I mean, I understand that the dollar value versus the unit value that you talked about, but it is similar to one of the prior questions. Is four times still attainable? Is there still a target for inventory returns? How should we think about that even in, to what I answer in 2020 and beyond 2020, how should we think about what has been total impact?

Yes, it's a really great question and certainly, as we've mentioned, we're doing quite a bit of work at our facilities to be much more efficient in our manufacturing and allowing us to hold less inventory. We're also doing some work on the front end with our SAP from forecasting. So we're much better at forecasting and getting our production through and we'll continue to work on those elements.I think at some point, yes, four times is still a reasonable approach for us when we get to some sort of normalization from -- as we've talked about the cost of the materials, it's just -- it's not a number we can track to as we see that we are having performance improvements by our pounds reduced. So we'll continue looking at, both the, the inventory returned calculation as well as looking at what we're really doing from a pound standpoint, so that we can see that the efforts that we're putting in with our Lean work is providing us some good results. And we'll just keep pushing on all those elements at our production facilities as well as what we're doing from buying our raw materials.

Our next question comes from the line of Steve Chercover with DA Davidson. Please proceed with your question.

Yeah, thanks and good afternoon, everyone.

Hi Steve.

Hi Steve.

So, I think my first question is with respect to the price hikes that are pending August 15. 7% on anchors and 7.5% on fasteners. How quickly do those get implemented during lag?

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

Okay, so anything ordered after that date. Do you expect there to be a big pre-buy?

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

So the strength you've seen in July shouldn't be confused with pre-buy, like assuming your information is good?

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

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

Maybe, but is there an increase on the connectors as well? I mean, you mentioned mechanical…

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

But your steel prices apparently continuing to go up. So are you contemplating something on connectors or is what we've got last year, what we got?

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

And I mean, with respect to the full year, you've given us the guidance that you can, fairly housing has been underwhelming and where there's a part of factors. I mean, do you think it's still possible to put up bottom line growth, that well along the top line [indiscernible]? But legitimate bottom line growth considering through the first half of trailing to year-over-year, down?

Well, I think when we talk about the -- unless we start to see some pretty upticks in that housing, when we talk about housing, we need to keep in mind, multi-family is up, single-family is down and for us, obviously, the bigger part of single families it's down in the West and North, South was down from last -- last year, this time in the south. So if there's some pickup in those two regions, that would be significant for us. Again, that would help run through or more cost effective or more expensive steel. We see an improvement on that gross margin line, but those are really the things we have to see as we need a pickup in the West and the South on a single-family homes.

So, basically both the geography and the product mix are working gains.

That is correct.

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

I think as we saw and if you remember, we thought we would be through the expensive field based on a normalized volume in second quarter. We thought we'd see some gross margin improvement in the second quarter and certainly we're seeing housing starts even slower in the second quarter. So that is really what has initiated as we've run through some models to realize that we needed to make some adjustments because, the second quarter, now we're through the second half of 2019 and we have some, a much clearer vision on what the rest of '19 probably looks like in going in over into '20. So, I think the turning point for us was the fact that we had a nice looking April, as we said, we were pretty optimistic that -- that was going to continue. We had a very wet May and partial June and that certainly as you see in our revenue numbers. And that impact on our gross margin from not moving through that expensive steel or something that's going to continue now through the rest of the year.

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

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

Okay, but I'll just try that one more time. Do you think in the long run you -- you're still capable of getting, for instance, in your inventory turning toward that two times target or operating margin of 21% to 22% in the long run?

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

Okay, thank you.

[Operator Instructions] Our next question comes from the line of Julio Romero with Sidoti & Company. Please proceed with your question.

Hi, good afternoon, everyone. Can you talk anecdotally about what you're hearing on the ground from your sales people, distributors and customers about what's maybe constraining? Housing is specific to the geographical areas you're in. Obviously, the data is showing some slowdown there, but what are you hearing from the boots on the ground regarding affordability. Overall, global uncertainty, whether if you could maybe talk about that a little bit. Thank you.

Yeah, I think if you look at The National Home Builders, they actually think the back half of the year is going to be better obviously than the first half, pretty consistent thought process on suppliers, whether there would be wood suppliers or other suppliers of the building. Industry or everybody seems to think that the back half is going to be better, and a lot of that, again, they're based on the weather that we had in the first half. So if you look at the indicators from interest rates potentially going down again, we certainly know we have a shortage of houses. Low on employment, all the things that would lend us or lead us down the path that we're going to have good housing starts. So I think that's pretty much the sentiment on the street is it weather holds out, we feel the back half that we have covered in the first half figures.

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

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

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

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

Got it. Thanks for taking the questions.

Thanks.

You're welcome.

Our next question is a follow from Daniel Moore with CJS Securities. Please proceed with your question.

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

I don't think so. I mean, one of the key considerations there is the investment opportunities for the business, and that's always a key factor, but like we've done in the past few years and have far exceeded that 50% number. I would say that, that would be a possibility.

Understood. Thank you.

You're welcome.

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