Simpson Manufacturing (NYSE: SSD) reported Q2 EPS of $0.88, $0.14 worse than the analyst estimate of $1.02. Revenue for the quarter came in at $304.85 million versus the consensus estimate of $323.71 million.

2019 Second Quarter Financial Highlights

All comparisons below (which are generally indicated by words such as "increased," "decreased," "remained," or "compared to"), unless otherwise noted, are comparing the quarter ended June 30, 2019 with the quarter ended June 30, 2018.

• Consolidated net sales of $304.9 million decreased 1.0% from $308.0 million.
  • North America net sales of $259.1 million decreased 0.3% from $259.8 million, primarily due to lower sales volume, partly offset by higher average product prices. Canada's net sales were negatively affected by foreign currency translation.
  • Europe net sales of $43.6 million decreased 4.7% from $45.8 million, primarily due to approximately $2.8 million of negative foreign currency translations resulting from some Europe currencies weakening against the United States dollar. In local currency, Europe net sales increased primarily due to increases in average product prices.
• Consolidated gross profit of $134.2 million decreased 4.5% from $140.6 million. Gross margin decreased to 44.0% from 45.6%.
  • North America gross margin decreased to 45.1% from 47.6%, primarily due to increases in material costs, factory and overhead costs (on lower production) and labor costs, each as a percentage of net sales.
  • Europe gross margin decreased to 37.0% from 38.2%, primarily due to increases in factory and overhead costs and material costs, each as a percentage of net sales. Europe gross profit was also negatively affected by foreign currency translation.
• Consolidated income from operations of $53.7 million decreased 12.7% from $61.4 million. The decrease in income from operations was primarily due to the reduction in gross profit and increased general and administrative expenses, including $5.4 million in higher consulting and professional fees, partially offset by $2.8 million in lower cash profit sharing and personnel expense. Consolidated income from operations for the second quarter of 2019 included a $0.4 million gain on sale as a result of the consolidation of two of the Company's operating facilities into a single location. Consolidated operating margin decreased to 17.6% from 19.9%.
  • North America income from operations of $50.1 million decreased 16.5% from $60.0 million, primarily due to the reduction in gross profit and increased general and administrative costs.
  • Europe income from operations of $4.7 million increased from $3.7 million, primarily due to lower operating expenses such as severance costs recorded in 2018, which were not repeated in 2019.
• The Company's effective income tax rate decreased to 26.4% from 27.2%.
• Consolidated net income was $39.6 million, or $0.88 per diluted share of the Company's common stock, compared to net income of $44.1 million, or $0.94 per diluted share.

Management Commentary

"Our 2019 second quarter net sales of $304.9 million were down 1% year-over-year primarily due to lower sales volume," commented Karen Colonias, President and Chief Executive Officer of Simpson Manufacturing Co., Inc. "U.S. housing starts remained soft throughout the first half of the year due to unusually wet and cold weather conditions across the U.S. This impacted sales volume as it relates to our wood products and offset any positive benefit we received from higher selling prices following the July 1, 2018 price increase we enacted in response to rising raw material costs. In addition, U.S. housing starts in the second quarter of 2018 were very strong, with the 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."

Mrs. Colonias continued, "Since unveiling our 2020 Plan in October 2017, we have made strides in providing transparency into our strategic plan and financial objectives to position Simpson for long-term sustainable and increasingly profitable growth. That said, the macro landscape has changed over the past seven quarters with tariffs and trade uncertainties contributing to a global growth slowdown. While we have made significant efforts to mitigate headwinds associated with these macro trends, rising raw material costs have continued to pressure our margins. As a result, we are updating our 2020 Plan expectations for our operating margin, inventory turns and return on invested capital. We believe these goals continue to represent significant improvements to our business."

Mrs. Colonias concluded, "While weaker overall market demand negatively impacted our sales volume during the first half of 2019, we are confident we have not lost 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. We remain committed to operational excellence through execution on our 2020 Plan and other strategic initiatives and focusing on the areas of our business we can control to drive long-term shareholder value."

2020 Plan

On October 30, 2017, Simpson released a 2020 Plan to position itself for long-term sustainable growth and improved operating leverage. In response to rising raw material costs, which have continued to pressure the Company's gross margin, today Simpson is updating the following components of the 2020 Plan as follows:

• The Company expects its consolidated operating margin to be in the range of 16% to 17% by fiscal 2020 from 16.4% in 2016. This is a downward revision from its prior 2020 target for consolidated operating margin of approximately 21% to 22%. Importantly, Simpson's success in rationalizing its cost structure has helped mitigate further downward pressure on this target.
• Due to a combination of rising raw material costs and then soon-to-be tariffed finished goods from China, the Company pro-actively built up its anchor inventory, bought an additional allotment of steel (in late 2018) in order to mitigate the potential impact of product availability and built-up inventory to ensure customer needs are met during the SAP roll-out. As a result, the Company no longer believes it can double its inventory turns from 2x in 2016 to 4x by fiscal 2020. The Company continues to focus on reducing its total SKU count and continues to implement Lean principles in all factories to improve working capital management.
• The Company now expects to achieve a return on invested capital (1) target within the range of 15% to 16% by the end of 2020 from 10.5% in 2016.

The Company is reiterating the remaining components of the 2020 Plan as follows:

• The Company expects to achieve organically a net sales compound annual growth rate of approximately 8% from $860.7 million reported in fiscal 2016 through fiscal 2020.
• The Company seeks to reduce its total operating expenses as a percent of net sales from 31.8% in fiscal 2016 to a range of 26.0% to 27.0% through fiscal 2020.
• The Company remains committed to continue returning 50% of its cash flow from operations in the form of both dividends and share repurchases to its shareholders through fiscal 2020.

Business Outlook

Based on current business trends and conditions, our outlook for fiscal year 2019 is expected to be as follows:

• 2019 full-year gross margin is estimated to be in the range of approximately 43.5% to 44.0%, lower than our previous estimate of 44.5% to 45.5%.
• 2019 full-year operating expenses, as a percentage of net sales, is estimated to be between approximately 27.5% and 28.5%.
• 2019 full-year effective tax rate is estimated to be between approximately 25% to 27%, including both federal and state income tax rates.

For earnings history and earnings-related data on Simpson Manufacturing (SSD) click here.