Simpson Manufacturing - Q2 2023
July 24, 2023
Transcript
Operator (participant)
Greetings, welcome to the Simpson Manufacturing Co., Inc.'s Q2 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kimberly Orlando, with ADDO Investor Relations. Thank you, Ms. Orlando. You may begin.
Kimberly Orlando (Senior Managing Director)
Good afternoon, ladies and gentlemen, and welcome to Simpson Manufacturing Company's Q2 2023 Earnings Conference Call. Any statements made on this call that are not statements of historical fact are forward-looking statements. Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties. Actual future results may vary materially from those expressed or implied by the forward-looking statements. We encourage you to read the risks described in the company's public filings and reports, which are available on the SEC's or the company's corporate website. Except to the extent required by applicable securities laws, we undertake no obligation to update or publicly revise any of the forward-looking statements that we make here today, whether as a result of new information, future events, or otherwise.
Please note that the company's earnings press release was issued today at approximately 4:15 P.M. Eastern Time. The earnings press release is available on the investor relations page of the company's website at ir.simpsonmfg.com. Today's call is being webcast, and a replay will also be available on the investor relations page of the company's website. Now, I would like to turn the conference over to Mike Olosky, Simpson's President and Chief Executive Officer.
Mike Olosky (President and CEO)
Thanks, Kim. Good afternoon, everyone, thank you for joining today's call. With me today is Brian Magstadt, our Chief Financial Officer. My remarks today will provide an overview of our financial results, key growth initiatives, and capital allocation priorities. Brian will talk you through our Q2 financials and our fiscal 2023 outlook in greater detail. We delivered solid performance in a difficult operating environment with Q2 net sales of $597.6 million, which is an increase of 0.7% over Q2 2022. North American volumes increased 2.3%, leading to a growth in net sales of 2% year-over-year to $465.5 million. To further break down our performance, national retail showed double-digit improvements year-over-year from a buying standpoint due to our business model and an improving market environment.
We have dedicated teams working with our national retail customers that provide training and merchandising support. In our residential market, while our volumes were down in the low single-digit range, we experienced notable strength in the Midwest and Northeast regions of the U.S over the prior year, with sales in the Southeast region holding relatively flat in a challenging market. Multifamily continues to be an area of strength. Sales in the West recovered nicely following the significant precipitation that led to materially softer sales in the Q1 of 2023. While 2023 housing starts will finish below 2022 levels, the market continues to improve relative to our earlier outlook, in part due to a high share of new single-family home sales as a % of all single-family sales.
We continue to believe in the sustainable strength of the housing market in the mid to long term, given the shortage of new housing. We are confident key attributes of our business model will help stem some of the short-term downward pressure, given, first, our increasing diverse portfolio of products and software and a commitment to developing complete solutions for the markets we serve. Second, our long-standing reputation, relationships, and engagement with engineers, building officials, and contractors to design safer, stronger structures and improve construction practices. Third, a dedication to innovation, extensive product engineering, and rigorous research and testing in our 9 state-of-the-art labs. Fourth, best-in-class field support, technical expertise, digital tools, and training to make it easy to select, specify, install, and purchase our products. Fifth, industry-leading product availability and delivery standards on our vast product offering across multiple distribution channels with typical delivery within 24-48 hours.
Sixth, a deep commitment to trades education and partnering with organizations that provide training and career opportunities to attract more people to the construction industry and alleviate labor shortages. Turning to Europe, our Q2 sales totaled $127.8 million, down 4.1% year-over-year on lower volumes. ETANCO continues to perform well in a challenging market with relatively flat sales. Our business associated with the residential housing market was down modestly due to lower housing starts. We continue to believe in the longer-term potential of the European market, given the ongoing housing shortage, increasing use of wood construction, and new regulations that drive new applications and specifications. Our consolidated gross margin for the Q2 improved to 48.1%, primarily reflecting lower raw material costs, partially offset by higher costs in our production facilities.
Brian will further elaborate on the key drivers of our margin performance shortly. I'll now turn to an update on our key growth initiatives within our five end-use markets, which help fuel our ambition to be the partner of choice. Residential. Beginning with our residential market, our long-standing relationships and high service levels resulted in many new customer wins with both single-family and multi-family builders and our channel customers that serve them. As a reminder, we have 26 of the top 30 U.S. home builders, along with several hundred smaller regional builders on our program that specify our connector products and other solutions. Commercial. In the commercial market, our solutions are specified for the first ventilated facade application on a building in New York City, demonstrating the early implementation of energy conservation regulations by several cities and states in the U.S that are similar to those adopted in Europe.
The facade will be built with products already available in the U.S., highlighting the future opportunity to roll out the ETANCO product line in the U.S. OEM. In the OEM market, to further support the mass timber initiative, our team designed, manufactured, and installed many critical connections in the construction of a 112-foot wood building that was used for the world's tallest shake table test. The building suffered no significant damage after withstanding 100 large-scale earthquakes. It's another example of our rigorous research and testing effort that is consistent with our mission to build safer, stronger structures. National retail. Within the national retail space, we have successfully expanded our product line and off-the-shelf merchandising efforts with the home center channel, which has resulted in improved sales volume.
Our Outdoor Accents decorative hardware line has been a strong contributor to our success, with double-digit sales growth year-over-year in 2023 versus last year. Building technology. Finally, in building technology, we continue successfully converting new component manufacturers over to Simpson's truss software, truss plate, and connector solution set. The software critical to this market segment has improved substantially over the last couple of years. Our strong business model has also helped us become the partner of choice for several new customers. We are pleased with the traction we've made on our growth initiatives to date, as we seek to extend our mission to help people design and build safer, stronger structures into new applications. Throughout all of our operating segments, we believe our ambition to outperform the U.S. housing market will be supported by our comprehensive strategies specific to each market segment and product line.
Turning now to capital allocation. Our priorities remain centered on growth opportunities, both organically and through M&A, returning value to our stockholders via quarterly dividends and opportunistic share repurchases, and paying down the debt we incurred to finance the acquisition of ETANCO. As it pertains to organic growth, we've been making key investments to not only strengthen our business model, but to also expand our operations in order to enhance our manufacturing capacity and supply chain efficiencies and uphold our best-in-class customer service standards. To that end, we have identified a new greenfield opportunity to replace our facility in Gallatin, Tennessee. In addition, we are continuing to evaluate potential M&A opportunities to accelerate traction on our key growth initiatives, the majority of which are smaller opportunities to expand our product line or solution set and help us achieve better manufacturing and supply chain efficiencies.
We remain focused on our company ambitions, which include strengthening our values-based culture, being the partner of choice, being an innovation leader in the markets we operate, continuing above-market growth relative to US housing starts, continuing to expand our operating income margin to remain in the top quartile of our proxy peers, and continuing to expand our ROIC within the top quartile of our proxy peers. Before I conclude, I'd also like to highlight that as part of our customer-centric approach to be their best vendor, we are thrilled to have achieved a very positive response on our internally conducted customer satisfaction survey. We are genuinely thankful for the recognition of the everyday efforts we put in to provide them with the exceptional service they deserve.
This further validates the superior level of service we provide across all of our branches and inspires us to continue to work harder to raise the bar. With that, I would like to turn the call over to Brian, who will discuss our Q2 financial results in greater detail.
Brian Magstadt (CFO)
Thank you, Mike. Good afternoon, everyone. I'm pleased to discuss our Q2 financial results with you today. Before I begin, I'd like to mention that unless otherwise stated, all financial measures discussed in my prepared remarks refer to the Q2 of 2023, and all comparisons will be year-over-year comparisons versus the Q2 of 2022. Now, turning to our Q2 results. As Mike highlighted, our consolidated net sales increased 0.7% to $597.6 million. Within the North America segment, net sales increased 2% to $465.5 million, primarily due to higher sales volumes. In Europe, net sales decreased 4.1% to $127.8 million, primarily due to lower sales volumes.
Wood construction products represented 86.2% of our total Q2 sales, compared to 86.7%, and concrete construction products were 13.6% of total sales, up from 13.2%. In North America, wood product volume was up 2.4%, and concrete product volume was up 1.6%. Consolidated gross profit increased 10.8% to $287.5 million, which resulted in a gross margin of 48.1%, compared to 43.7% last year. On a segment basis, our gross margin in North America increased to 51.2% compared to 48%, primarily due to lower raw material costs, which were partially offset by higher factory and tooling costs as a percentage of net sales.
Our gross margin in Europe increased to 37.4% from 29.3%, also primarily due to lower raw material costs as a percentage of net sales. As you may recall, our raw material costs in the prior year period included a $9.2 million inventory fair value adjustment for the acquisition of ETANCO, representing 6.9 percentage points of Europe gross margin. From a product perspective, our Q2 gross margin on wood products was 48.4% compared to 43.7% in the prior year quarter, and was 45.9% for concrete products, compared to 43.2% in the prior year quarter. Turning to our Q2 costs and operating expenses.
Total operating expenses were $140.7 million, an increase of $20.3 million, or approximately 16.9%, driven primarily by increased personnel costs to support our growth, as well as higher variable compensation. As a percentage of net sales, total operating expenses were 23.6% compared to 20.3%. Our Q2 research and development and engineering expenses increased 27.1% to $21.5 million, primarily due to higher personnel costs in pursuit of our future revenue-generating opportunities aligned with our strategic growth initiatives. Selling expenses increased 11.9% to $50.4 million, primarily due to increased personnel and commissions in North America, and on a segment basis, selling expenses in North America were up 15.6%, and in Europe, they were up 2.1%.
General and administrative expenses increased 17.7% to $68.8 million, primarily due to professional fees, personnel costs, and variable compensation. Integration expenses associated with ETANCO were down $4 million. As a result, our consolidated income from operations totaled $145 million, a meaningful increase of 9% from $133.1 million. In North America, income from operations increased 4.5% to $143.4 million, primarily due to higher gross profit, partly offset by increased personnel and variable compensation, as well as professional fees. In Europe, income from operations was $14 million, compared to $5.6 million, primarily due to higher gross profit and lower year-over-year acquisition and integration costs, which were partially offset by higher variable compensation.
On a consolidated basis, our operating income margin was 24.3%, an increase of 184 basis points from 22.4%. Our effective tax rate decreased to 25% from 26%. Accordingly, net income totaled $107.2 million, or $2.50 per fully diluted share, which is inclusive of $0.7 million of net interest expense. This compares to $93.6 million or $2.16 per fully diluted share. Now, turning to our balance sheet and cash flow. Our balance sheet remained healthy, with cash and cash equivalents totaling $408 million at June 30, 2023, up $155.4 million from our balance at March 31st, 2023.
Our debt balance was approximately $566.8 million, net of capitalized finance costs, and our net debt balance was only $158.8 million. We have $300 million remaining available for borrowing on our primary line of credit. Our inventory position at June 30, 2023, was $522.2 million, which was down $54.3 million compared to our balance at March 31, 2023. Our focus on effective inventory management remains paramount to ensure the strong levels of service and on-time delivery standards that our customers depend on in the current uncertain economic environment. During the Q2, we generated cash flow from operations of approximately $194 million, compared to $93.8 million.
We invested approximately $21 million for CapEx and paid $11.1 million in dividends to our stockholders. While we did not repurchase any shares of our common stock, we continue to evaluate opportunistic share repurchases as part of our capital allocation strategy. I'd like to discuss our 2023 financial outlook. Based on business trends and conditions as of today, July 24th, we are updating certain elements of our guidance for the full year ending December 31, 2023, as follows: We now expect our operating margin to be in the range of 20.5%-21.5%. Key assumptions include lower US housing starts impacting our top line, albeit at a lesser rate of decline versus our initial expectations earlier in the year. Higher overall gross margin compared to 2022.
Increased operating expenses, we believe, are necessary to position the company to make meaningful share gains in our markets and growth initiatives, and $6-$8 million in expected total integration of costs associated with ETANCO. We are continuing to make progress on our integration efforts for ETANCO in order to realize previously identified offensive and defensive synergies in the years ahead, subject to macroeconomic changes, which will delay the realization of some of the offensive synergies. Our 2023 effective tax rate is expected to be in the range of 25%-26%, including both federal and state income tax rates, and again, assuming no tax law changes are enacted. We now expect capital expenditures to be in the range of $105 million-$115 million.
In summary, we were very pleased with our financial performance in the Q2 amidst the ongoing challenging macroeconomic environment. We remain focused on executing our growth initiatives and integrating the ETANCO acquisition, while being mindful of expense and inventory management as we look to grow our share. Thanks again to our team at Simpson for the continued strong performance and to all our stakeholders for your continued support of the company. I'd like to turn the call over to the operator to begin the Q&A session. Operator?
Operator (participant)
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions. Thank you. Our first question is from Daniel Moore with CJS Securities. Please proceed with your question.
Daniel Moore (Partner, Director of Research)
Thank you. Good afternoon, and thanks for taking the questions. Congrats on obviously another strong quarter. Maybe just start with North America. You know, margins continue to outperform expectations. If we look at the outperformance in the quarter, as well as the upward revision and guidance for the full year, how much of it reflects stronger volumes than expected, versus maybe lower input costs versus what was embedded previously in your guide?
Mike Olosky (President and CEO)
Dan, thanks for the question. North America, overall revenue for us was up 2%. Volume impact, 2.4, so 0.4%, basically, downward pricing pressure. When we look at North America as a whole, we're pretty excited that four out of our five market segments all had positive development in terms of revenue and volume. Our Midwest and Northeast regions are having very good growth, again, especially considering a difficult market. Southeast, also flat in a difficult market, so we're pretty happy with that. The western part of the U.S. is recovering. When you look at, you know, some other individual spots in there, we're pretty happy with how multifamily continues to go for us this year.
Brian Magstadt (CFO)
I would add that, you know, volumes were greater than where we were 3 months ago, based on, you know, the things that Mike had just talked about, and the less negative, if you will, or slightly better outlook, for housing, compared to where we were at the beginning of the year. Definitely saw, compared to prior guidance, you know, better volumes in North America.
Daniel Moore (Partner, Director of Research)
That's helpful. A quick follow-up: You know, obviously, over the last several years, done an excellent job of driving down OpEx as a % of revenue. It ticked a little bit back higher, back from the sort of low 20s into the mid-20s with ETANCO and is working its way back down. Just where do you see that metric in 2 to 3 years once full synergies are achieved? Just remind us maybe what your kind of longer-term targets look like.
Mike Olosky (President and CEO)
Yeah. Dan, we're gonna continue to invest in our growth initiatives, because we need the salespeople, engineering people, and other team members to realize those. We'll continue to invest in it. That also helps us continue to provide great service as far as the metrics go. Brian?
Brian Magstadt (CFO)
From a, you know, OpEx as a % of revenue, you know, seeing where we are from a revenue perspective today, you know, the guide that we have increased slightly for the balance of this year, you know, would indicate a, you know, run rate a little bit higher than where we were this time last year or, you know, for the balance of the year. Then going forward, we're, you know, in a scenario where, again, all things being equal, relatively flattish from a % of revenue perspective.
Daniel Moore (Partner, Director of Research)
Understood. Last one for me, and I'll jump out. Just getting a sense of the cadence going into Q3, North America volume is up a little over 2% for the quarter. How has that trended thus far, you know, in Q3 from what we've seen, quarter-to-date?
Brian Magstadt (CFO)
As we're looking at July, just as a reminder, you know, July last year was somewhat soft, and we're around that again, so far in the first few weeks of the month. Couple of the interesting things there with July, with the holiday falling on July 4th holiday falling on a Tuesday, I think we've got 1 less selling day in July. Then also, that activity, that first week, a little softer than normal due to, I think a lot of people in the industry taking that whole week off, again, due to the timing of the July 4th holiday in here.
Daniel Moore (Partner, Director of Research)
Understood. I'll jump back with any follow-ups. Thank you.
Brian Magstadt (CFO)
Thanks, Dan. Thanks, Dan.
Operator (participant)
Thank you. Our next question is from Timothy Wojs with Baird. Please proceed with your question.
Timothy Wojs (Senior Research Analyst)
Hey, good afternoon, guys. Nice job.
Brian Magstadt (CFO)
Hey, Tim.
Timothy Wojs (Senior Research Analyst)
Maybe just to start off, on the revenue line. I know that, you may be expecting, you know, starts activity to be, you know, less bad than maybe you thought 6 months ago or even 3 months ago. I guess, as you kind of think about the overall, you know, kind of revenue number, you know, for 2023, I mean, even with the starts, you know, seemingly kind of down in the Q2 for you guys, you still posted revenue growth. I guess my question is: Even if starts are less bad than they were before, I mean, is it possible you can grow the top line organically in 2023?
Brian Magstadt (CFO)
Well, from a, just to remember, to level set, 23 has got the full 4 quarters of ETANCO versus 22 only having the 3 quarters, company-wise, company-wide. Then, taking that out of the equation, let's see. Let me pull that up. Gonna be relatively flat on a like-for-like basis when we take the ETANCO extra quarter into consideration, which would be up compared to where we were entering the year.
Timothy Wojs (Senior Research Analyst)
Yep. Okay.
Brian Magstadt (CFO)
As-
Timothy Wojs (Senior Research Analyst)
Is the difference there, like, retail and some of the growth drivers? Because I think that would be, I guess, more positive than I think I would have expected, just given where starts are kind of at even year to date.
Brian Magstadt (CFO)
Tim, let me go back to the market. When we were budgeting for this year, we were thinking the residential starts would be definitely more than 10% down. Now, we're thinking based off everything we've heard from our customers, it's going to be 10-ish, think maybe right around that 10% down. Again, less bad. On the national retail home center story, we were also expecting that to be a negative market, but with the lower lumber costs, a lot of projects that have been sitting on the side are coming in. We actually expect that market to be market again, positive. The strategies we have to drive growth in the national retail segment, we're pretty excited about, and we think that's helping us drive above-market growth in that area.
If you look at the other market segments that we're in, OEM, albeit still small, we're still driving good growth in that segment, volume and revenue perspective. On the commercial side, you know, we still think we're in good shape on that area as well. You know, add it all up, the market is getting better than we had budgeted, and we think the strategies that we have in place are delivering.
Timothy Wojs (Senior Research Analyst)
Yep. Yep, understood. Then maybe just on the margin line. I think last quarter, Brian, you talked about kind of EBIT margins being kind of flat year-over-year in Q2 and Q3, and then, you know, maybe being down a little bit in the Q4. I guess, how are you thinking about the back half margins now? I think if I kind of assume they're flattish in Q3 and Q4 for the rest of the year, I'm kind of at or maybe even above the updated EBIT guidance.
Brian Magstadt (CFO)
Yeah. From a operating income perspective, Q3, pretty comparable to prior year. Then I would think Q4, and let's see. You know, again, fairly comparable.
Timothy Wojs (Senior Research Analyst)
Okay, okay, good. Then just the last one on the Gallatin or the Tennessee facility. Could you just kind of step back and kind of give us some kind of color on, you know, why you're kind of replacing that facility and what kind of the benefits to Simpson would be, and then also maybe just kind of the total capital outlay for that?
Mike Olosky (President and CEO)
Yeah. The fasteners business, Tim, has been a big growth driver for us. We continue to expand the top line and the margins in that area. We think we've got a differentiator product offering, and right now.
We make some of our products in our Gallatin facility today. We import some of our products for that area as well. The focus here is we want to localize more of our fastener production. We also want to vertically integrate more of our fastener production. We think that'll better help us serve and support our customers. If you go back to some of our growth initiatives like mass timber, those tend to be projects you either get it or you don't. If you get it, you need to be able to respond quickly. Having production in the U.S., we believe will help us better respond to our customers in those areas as well.
Brian Magstadt (CFO)
Yes, and the total project cost or, you know, fine-tuning numbers and estimates and depends on land development, you know, how far along a piece of property may be versus, you know, how quickly it can be developed on. About $100 million, you know, net of selling our existing facility. We're a bit landlocked in our current site there. To Mike's point, being able to insource more of the activities around getting raw wire into finished good, we're gonna be able to have on site there. $100 million, the outlay would be, you know, mostly 2024 and forward, 2024, 2025, a little bit this year. We would presume that we're finding land, maybe starting to get that ready to build on.
Timothy Wojs (Senior Research Analyst)
Okay.
Brian Magstadt (CFO)
The bulk of where to spend would be in the next couple of years.
Timothy Wojs (Senior Research Analyst)
Okay, gotcha. Where's Columbus at?
Mike Olosky (President and CEO)
Columbus is still pretty early from an improvement perspective. We acquired adjacent land there that needed to be graded, and we're continuing to work that. We've not spent a lot of money on that one yet. Still have been going through a lot of the permitting process, approval process. The land is getting ready to be able to get foundations in and get walls up and the like. Still pretty early in that process as well, although we would expect through the balance of this year to be able to see some pretty good improvement in the project phases for that facility.
Timothy Wojs (Senior Research Analyst)
Okay. Okay, good. Well, thanks for your time, guys. Good luck on the rest of the year.
Brian Magstadt (CFO)
Thanks, Tim.
Operator (participant)
Thank you. Our next question is from Kurt Yinger with D.A. Davidson. Please proceed with your question.
Kurt Yinger (SVP, Research Analyst)
Great, thanks, good afternoon, Mike and Brian.
Brian Magstadt (CFO)
Hi, Kurt.
Kurt Yinger (SVP, Research Analyst)
Just 2 quick ones for me. I guess first, I would just love to hear kind of your latest thinking on pricing environment and pricing risk. Are there any areas where you're getting more pushback from customers or the competitive environment is getting to a point where you're having to make any concessions or not so much?
Mike Olosky (President and CEO)
Yeah. Kurt, we are actively managing and monitoring our pricing on a regular basis. Really the emphasis on us is more on our business model, and that's making sure that we're investing in products that deliver value for our customers, driving innovation, providing exceptional service, doing the training and all the things associated with that business model. We believe that that business model helps us have a modest premium. Key word here again, modest, and we're actively monitoring that pricing as we, as we speak.
Kurt Yinger (SVP, Research Analyst)
Got it. Okay, thanks for that. Second, can you just talk a little bit more about the component manufacturer wins? I mean, presumably that's a tailwind to the truss plate business, and I'd just love to hear, you know, what's kind of changed from a software perspective that's maybe helped catalyze that.
Mike Olosky (President and CEO)
We're talking specifically about the truss market. Here, we've been spending a lot of time and effort over the last 3 years to really develop our software into a one fully integrated program that's easy to use and hits our customers' needs. We've made a lot of progress, Kurt. We think there's still some room for improvement. We're now coupling that development efforts in the software with, you know, everything else we do from a business model perspective, meaning making sure that we're providing great service and support to our customers. We have been picking up truss customers over the last 2 years, in part because we believe one of our competitors had some significant delivery problems. They ended up putting customers on allocations. They did that in a growing market.
That obviously had an impact, and I think, you know, we've had several customers approach as a result of that. Now we are taking a very measured and cautious approach with how we onboard our new customers. We wanna make sure that goes very well, going forward with them. We think that's also gonna be a nice growth driver for us. Everything that we've been doing in that area the last couple of years has been working out very well, according to how we planned it.
Kurt Yinger (SVP, Research Analyst)
Got it. Thanks for that, Mike. Just quickly, I mean, is the software piece of it now, I guess, capable of fully supporting the full suite of products like wall panels and things like that? If I'm remembering correctly, at least that was kind of a hindrance in the past. Is that still the case, or?
Mike Olosky (President and CEO)
We do have a couple of gaps, and there are some areas we're working on it. The customers that we're working with, we're doing basically a fit analysis with them, trying to make sure we understand what they need and what we're capable of doing, and we're customizing and develop the software to make sure we hit the needs. We aren't exactly where we want to be to date, but we do have, I believe, very good plans to get there.
Kurt Yinger (SVP, Research Analyst)
Got it. Well, thanks for that. Appreciate all the details, and good luck here in the second half, guys.
Mike Olosky (President and CEO)
Thanks, Kurt.
Operator (participant)
Thank you. Our next question is from Julio Romero with Sidoti & Company. Please proceed with your question.
Julio Romero (Senior Equity Research Analyst)
Hey, good afternoon, Mike and Brian.
Brian Magstadt (CFO)
Hello, Julio.
Mike Olosky (President and CEO)
Hi, Julio.
Julio Romero (Senior Equity Research Analyst)
Hey, good afternoon. Could you talk about the trend on North American volumes throughout April, May, and June? You know, was it a gradual improvement throughout the quarter or more of a sharper step up in June?
Mike Olosky (President and CEO)
June was a real nice month for us. I mean, each month got better in the Q2.
Julio Romero (Senior Equity Research Analyst)
Gotcha. you know, has the magnitude of the improvement in June, maybe changed any behaviors, either from your customers or competitors at all?
Mike Olosky (President and CEO)
No. I mean, we continue to think again that the market is improving, and we're hearing from a lot of our customers that their business is getting better. At the same time, Julio, we continue to pick up new applications and new customers. You know, I think a combination of that is the reason why you see the numbers develop the way they've developed versus the market.
Julio Romero (Senior Equity Research Analyst)
Got it. If we could talk about maybe steel for a second. I think steel prices have kind of inflected downward since your last call in April. If you could just maybe talk about the impact of that on your cost of sales expectations for the back half of the year.
Brian Magstadt (CFO)
Julio, it's Brian. part of our operating margin guidance for the year incorporates, you know, where we, where we see material as a, as a, you know, large component of cost of sales. you know, as consistent, we don't disclose how much material or steel is as a % of cost of sales, but it is the largest component of that. you know, we feel it's, you know, should be pretty consistent on a go-forward basis, you know, based on the, on the steel markets where we're purchasing, where we are, positioned with inventory and the volume assumptions that we have for the, for the back half of the year on how much we're gonna consume of that.
Julio Romero (Senior Equity Research Analyst)
Got it. That's helpful. Just last one for me would be just on the CapEx guide. Just talk about the step up in the guide, and is that related to the Tennessee facility or any other kind of capital projects?
Brian Magstadt (CFO)
Mostly due to the Tennessee facility. We still have a fair amount of spend for this year that we anticipate for the Ohio expansion, and then some spend for the fastener factory, you know, land acquisition and some associated costs with that.
Julio Romero (Senior Equity Research Analyst)
Really helpful. Thanks very much for taking the questions.
Brian Magstadt (CFO)
You're welcome.
Operator (participant)
Thank you. Thank you. We have reached the end of our question and answer session. With that, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.