Simpson Manufacturing (SSD) Q4 2021 Earnings Call Transcript

Simpson Manufacturing (SSD 0.71%)
Q4 2021 Earnings Call
Feb 07, 2022, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to the Simpson Manufacturing company's fourth quarter 2021 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] Please note, this conference is being recorded. I will now turn the conference over to your host, Kim Orlando with ADDO investor relations. Thank you. You may begin.

Kim Orlando -- Managing Director, Addo Investor Relations

Good afternoon, ladies and gentlemen, and welcome to Simpson Manufacturing Company's fourth quarter and full year 2021 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 may 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 Karen Colonias, Simpson's chief executive officer.

Karen Colonias -- Chief Executive Officer

Thanks, Kim, and good afternoon, everyone, and thank you for joining us today. I'll begin with a summary of our full year 2021 results before turning to a discussion of our fourth quarter performance drivers, key growth initiatives, and capital-allocation priorities. Brian will then walk you through our financials and fiscal 2022 business outlook in greater detail. I'm extremely pleased with our financial and operational performance in 2021.

In a year burdened by a challenging macroeconomic landscape due to ongoing supply chain constraints, increasing steel costs and availability, as well as a tight labor market, we continue to deliver on the key elements of our business model to ensure we met the needs of our customers by providing them with our trusted products and solutions. We experienced solid business momentum with sales growth supported by the implementation of four price increases throughout the year to help offset our rising material costs. As a result, we generated strong full year net sales of $1.57 billion and earnings of $6.12 per diluted share. In addition, in March of 2021, we unveiled new five-year company ambitions for Simpson, along with strategic growth initiatives which we believe will promote continued growth in our business and create incremental value for all key Simpson stakeholders.

Our performance would not have been possible without our valued employees. I'd like to thank all of them for their hard work and dedication as they strive to achieve our five-year ambitions, as well as their commitment to operating in a safe environment. Turning to the fourth quarter. Net sales of $418.6 million were once again very strong and increased 42.4% over the prior-year period.

Sales growth was primarily driven by the implementation of four price increases in April, June, August, and October of 2021. These price increases range from mid-single digits to mid-teens depending on the product mix of our wood connectors, fasteners, and concrete products in the U.S. market. Our sales were further supported by mild winter weather conditions and higher sales volumes throughout our various distribution channels.

Specifically, sales volumes in our home center channel began to normalize in the fourth quarter as we lapped the difficult year-over-year comparison with the return of Lowe's as a home center customer in 2020 which drove high volumes associated with our product load-in. As a reminder, the home center channels include both our home center and co-op customers and is where we see much of our repair and remodel and DIY business. We also experienced solid volume growth in our other distribution channels to contractors and lumber yards. Our consolidated net sales in Europe for the fourth quarter decreased slightly year over year, primarily due to foreign currency translation.

We experienced another quarter of strong gross margins. Supported by our product price increases, our consolidated gross margin increased 530 basis points to 47.4%, compared to 42.1% in the year-ago period. As a result, we grew our income from operations to $97.1 million, resulting in strong fourth quarter earnings per diluted share of $1.61. After building a strong foundation for our company through the execution of our 2020 plan which was comprised of aggressive three-year financial targets to help maximize operating efficiencies, we unveiled new five-year company ambitions for Simpson last March which are as follows: strengthen our values-based culture, be the partner of choice, be an innovative leader in the markets we operate in, continue our above-market growth relative to U.S.

housing starts, expand our operating income margin to remain within the top quartile of our proxy peers and expand our return on invested capital to remain within the top quartile of our proxy peers. We also announced five key markets which we believe will help us achieve ambition No. 4, continuing our track record of above-market growth relative to U.S. housing starts, through a combination of organic and inorganic opportunities.

We are focused on growing in the OEM, R&R, and DIY, as well as mass timber markets where we are striving to be a leader in engineered load-rated construction fastening solutions given that each of these markets have a broader product opportunity within fastening solutions. We're also focused on building out our presence in our concrete construction, as well as structural steel. That's a new market for Simpson. And finally, we're working to become a leader in building technology space which hits upon all of our key growth initiatives.

Today, each of our key growth initiatives remains in different phases of implementation. While we have existing products, testing results, distribution, and manufacturing capabilities in place for all of these initiatives, we have been taking advantage of organic opportunities through expansion into new markets within our core competencies of wood and concrete products, as well as inorganic opportunities through licensing, purchasing IP and traditional M&A. It will be a multiyear endeavor to ensure we have all the proper testing, validation, and product lines in place. We are pleased with our progress in 2021, notably, our efforts to expand our sales and marketing functions, to promote our products to different end users and distribution channels.

Recent developments in our growth initiatives include the acquisition of a product line, J EDGE, which will promote expansion in our structural steel business. For mass timber, we are securing additional business opportunities, for example, a shipping warehouse that will utilize our fastener products. And in concrete, we formed a strategic alliance with Structural Technologies, a design and installation company that will utilize Simpson's products. We will continue to provide updates on our progress in future quarters.

Today, I'm very pleased to note we remain on track to achieve our company ambitions and strategic growth initiatives by 2025. In late December, we announced another growth driver for Simpson, the acquisition of Etanco Group, a leading designer, manufacturer, and distributor of fixing and fastening solutions for the building construction market throughout Europe, for approximately USD 818 million. Etanco's business model and core product offering align perfectly with Simpson and will support continued growth in our European business, including expansion into geographies, sales channels, and commercial building offerings. Last week, we announced the securities purchase agreement was signed.

We expect this acquisition to close on April 1, 2022, and our integration activities are already underway. For additional details regarding the Etanco acquisition, I encourage you to read the press release and supplemental presentation that we issued on December 29, 2021, as well as listen to the conference call we held on Tuesday, January 4, 2022, all of which are available on the investor relations page of our company website. Turning now to capital allocation. Our strong earnings and effective working capital management has enabled us to continue generating strong cash flows to fuel our growth and stockholder return priorities.

In 2021, we returned 61% of free cash flow to stockholders through the payment of $41.6 million in dividends and the repurchase of $24.1 million of common stock, well exceeding our capital return target of 50% of free cash flow. We plan to reevaluate our 50% target once the Etanco acquisition is closed. Our capital-allocation priorities in 2022 will focus on organic growth, returning value to stockholders in the form of quarterly dividends, debt repayment to maintain our conservative leverage profile, and selectively repurchasing our shares. In regard to growth, we remain dual-focused on both organic growth and M&A opportunities.

To facilitate growth organically, we are investing in areas such as engineering, marketing, sales personnel, and testing capabilities across all areas of our business. As originally noted on our Analyst and Investor Day last year, we also plan to invest in facility expansions to support our growth. In regard to M&A, we are most broadly focused on product line expansion in order to develop complete solution for the markets in which we operate. This may also include opportunities in areas that support our key growth initiatives, so we will stay hyper-focused on integrating Etanco.

Before I conclude, I'd like to take a moment to congratulate Mike Olosky, our chief operating officer, on his recent promotion to President and COO of the company. I will continue to serve as CEO of Simpson. Mike has been a true asset to Simpson since joining the company in late 2020 in helping to shape our growth strategies. His responsibilities remain the same as he continues to lead our market segment initiatives to expand our product portfolio and brand presence globally.

In summary, we are very pleased with our strong 2021 results both financially and operationally. Aside from headwinds that may result from tightening labor and supply chain conditions, we believe underlying demand should remain strong in the first half of 2022 supported by strong U.S. housing starts which increased 15% year over year in 2021. I'd like to recognize all the Simpson Strong-Tie employees for their commitment to health, safety, and outstanding customer service to ensure we provide our customers with the highest-quality solution set to build safer, stronger structures.

I'd also like to thank our customers, suppliers, and stockholders for your continued support of Simpson. Now I'd like to turn the call over to Brian, who'll discuss our fourth quarter financial results and 2022 outlook in greater detail. 

Brian Magstadt -- Chief Financial Officer

Thank you, Karen, and good afternoon, everyone. I'm pleased to discuss our fourth quarter 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 today refer to the fourth quarter of 2021, and all comparisons will be year-over-year comparisons versus the fourth quarter of 2020. Now turning to our fourth quarter results.

As Karen highlighted, our consolidated net sales increased 42.4% to $418.6 million. Within the North America segment, net sales increased 49.8% to $373.2 million, primarily due to four price increases that took effect in 2021 to offset rising material costs along with higher sales volumes. Canada's net sales also increased primarily due to higher sales volumes and were positively impacted by foreign currency translation. In Europe, net sales decreased 1% to $41.4 million, primarily due to lower sales volumes and were negatively affected by approximately $1 million in foreign currency translation related to Europe's currencies weakening against the United States dollar.

Wood construction products represented 87% of total sales compared to 85%, and concrete construction products represented 13% of total sales compared to 15%. Consolidated gross profit increased by 60.3% to $198.3 million which resulted in another strong gross margin quarter at 47.4%. Gross margin increased by 530 basis points, primarily due to the aforementioned price increases which were partially offset by higher material costs. When compared to the third quarter of 2021, our consolidated gross margin declined by approximately 250 basis points as our average inventory costs are beginning to more accurately reflect the cost of higher-priced raw material, as well as increased labor and overhead costs.

On a segment basis, our gross margin in North America increased to 49.3% compared to 43.2%. However, in Europe, our gross margin declined to 31.2%, compared to 35.3% largely due to higher material, labor and factory, and tooling costs. From a product perspective, our fourth quarter gross margin on wood products was 47.5%, compared to 41.8% in the prior-year quarter and was 42.7% for concrete products, compared to 39.6% in the prior-year quarter. Now turning to our fourth quarter costs and operating expenses.

As a reminder, last year, we implemented various cost savings and other measures in light of the uncertainty surrounding the impact of the COVID-19 pandemic. Total operating expenses were $101.4 million, an increase of $17.1 million or approximately 20.3%. As a percentage of net sales, total operating expenses were 24.2%, an improvement of approximately 450 basis points, compared to 28.7%, primarily due to the increased spend relative to the price-increased revenues. For the full year of 2021, total operating expenses as a percent of net sales improved by approximately 100 basis points over 2020 to 24.6%.

Our fourth quarter research and development and engineering expenses increased 24% to $16.1 million, primarily due to cash profit sharing, incentives, and personnel expense on higher headcounts. Selling expenses increased 29.5% to $36 million due to commissions, personnel expenses on higher headcounts, and travel and entertainment expenses. On a segment basis, selling expenses in North America were up 18%. And in Europe, they were up 9.7%.

General and administrative expenses increased 13.2% to $49.4 million, primarily due to consultants and other professional fees, IT support costs, and bad debt reserve costs. Our interest expense and other expenses for the quarter of $4 million included approximately $2.3 million of professional fees associated with our pending acquisition of Etanco. Our solid top-line performance, combined with our stronger Q4 gross margin, helped drive a 146% increase in consolidated income from operations to $97.1 million compared to $39.5 million. And in North America, the increase was 170.4% to $97.7 million primarily due to the increase in gross profit partly offset by higher operating expenses, including cash profit sharing, sales commissions, and stock-based compensation expense, resulting from favorable operating performance in the fourth quarter.

Europe reported a loss from operations of $1.5 million, compared to income from operations of $1.3 million, primarily due to the lower gross profit. On a consolidated basis, our operating income margin of 23.2% increased by approximately 980 basis points from 13.4%. Our effective tax rate decreased to 25% from 25.6% due to the release of foreign valuation allowances in 2021. Accordingly, net income totaled $69.8 million or $1.61 per fully diluted share, compared to $29.6 million or $0.68 per fully diluted share.

Now turning to our balance sheet and cash flow. Our balance sheet remained healthy. At December 31, cash and cash equivalents totaled $301.2 million, an increase of $26.5 million compared to December 31, 2020. As a reminder, we intend to fund the acquisition of Etanco with a combination of $100 million of existing cash and new debt by increasing our existing revolving credit facility from $300 million to $450 million, in addition to a commitment for a $450 million unsecured term loan.

As of December 31, 2021, all $300 million on our primary credit line was available for borrowing. Our inventory position of $443.7 million at December 31 increased $58.2 million from our balance at September 30, the vast majority of which was related to higher pricing. We continue to be selective in regard to inventory purchases through careful management and purchasing practices while, at the same time, ensuring we maintain ample product availability in order to provide our customers continued high levels of customer service and on-time delivery standards which are key cornerstones of our value proposition. As a result of our improved profitability and effective working capital management, we generated strong cash flow from operations of $29.2 million for the fourth quarter of 2021.

Turning to capital allocation. We remain dedicated to supporting the growth of our business, as well as providing strong capital returns to our stockholders through both dividends and share repurchases. We invested $12.5 million for capital expenditures during the quarter, as well as paid $10.8 million in dividends. We did not repurchase shares of our common stock during the quarter.

On January 20, 2022, our board of directors declared a quarterly cash dividend of $0.25 per share. The dividend will be payable on April 28, 2022, to stockholders of record as of April 7, 2022. The board authorized a new $100 million share repurchase authorization through the end of 2022, replacing the prior authorization which expired at the end of 2021. We may make opportunistic share repurchases in 2022.

Finally, I'd like to discuss our 2022 financial outlook. Please note that this guidance currently excludes the acquisition of Etanco which is expected to be completed on April 1, 2022. Based on business trends and conditions as of today, February 7, we are initiating guidance for the full year ending December 31, 2022, as follows. Operating margin is estimated to be in the range of 17.5% to 19%.

The effective tax rate is estimated to be in the range of 25.5% to 26.5%, including both federal and state income tax rates and assuming no tax law changes are enacted. And capital expenditures are estimated to be in the range of $65 million to $70 million. In regard to our 2022 operating margin outlook, we are anticipating continued and escalating raw material cost pressure on our cost of goods sold throughout the year. As we work through our on-hand inventory and continue to buy raw material prices higher than our historical averages, our anticipated cost of goods sold is expected to increase significantly, especially in the second half of the year, even as prices for raw materials begin to decline which will adversely affect our margins.

This is because the impact from averaging raw material costs typically lags our price increases which we enacted throughout 2021. We began to see the sequential margin deceleration occur during the fourth quarter, with our gross margin declining by roughly 250 basis points Q3 to Q4. As such, we continue to expect our operating margin for the full year of 2022 will decline by approximately 500 basis points from 2021. Despite this short-term macroeconomic headwind, we continue to believe we can maintain an industry-leading operating margin in the high teens range annually long term which is a key objective of our five-year company ambitions.

Further, we expect to incur costs associated with the Etanco acquisition, and we'll report those throughout 2022. Some of those costs will be reported in the interest expense and other expenses line, along with interest and financing costs associated with our borrowings to fund the acquisition. In regard to our 2022 capital expenditures outlook, we estimate roughly 20% will be dedicated to maintenance capital expenditures. Our growth investments will be primarily focused on purchases of new equipment to support increased productivity and efficiencies, enhancements to our existing facilities to expand our manufacturing footprint in line with increasing customer needs, as well as investments for adjacencies and key growth initiatives.

We look forward to providing additional details as the year progresses. In summary, we were very pleased with our financial and operational performance in 2021 despite the turbulent macroeconomic landscape. As meeting and exceeding our customers' needs remain paramount to our success, we look forward to expanding the breadth of our product and service offerings through our key growth initiatives and the pending acquisition of Etanco in Europe which were made possible by our strong balance sheet. We believe our tremendous efforts in executing the 2020 plan and unveiling the five-year ambitions for 2025 help lay the proper foundation for continued growth and success in our business and position us well to maintain and enhance our industry-leading position in the building products space.

With that, I'd like to turn the call over to the operator to begin the Q&A session. 

Questions & Answers:

Operator

Thank you. At this time, we will be conducting a question-and-answer session. [Operator instructions] Our first question is from Daniel Moore of CJS Securities. Please proceed with your question.

Daniel Moore -- CJS Securities -- Analyst

Thank you. Good afternoon, Karen, Brian, and Mike if you're on, congratulations as well. Maybe start with, obviously, you saw significant tremendous growth really with pricing, but it sounds like volume picked up as well. Any more specificity in terms of price versus volume, specifically in North America in Q4?

Brian Magstadt -- Chief Financial Officer

Sure, Dan. Thanks. And the growth, for the total, about 87% of that was price, so a little less than $110 million in the quarter. So there was a little bit of FX impact, so volume attributed about 5.5% of growth. 

Daniel Moore -- CJS Securities -- Analyst

That's total company or North America?

Brian Magstadt -- Chief Financial Officer

Total company. And the bulk of that, of course, is North America.

Daniel Moore -- CJS Securities -- Analyst

Yeah, absolutely. And for each of those price increases, I think, Karen, you've referenced mid-single digits to mid-teens. That's for each of the price increases, not a cumulative number for the year, correct? 

Karen Colonias -- Chief Executive Officer

Yeah, that is correct. And the size of the price increase really is a function of which of our products, right? Those involving more steel, obviously, were more impacted by the raw material price increases. So it varies depending on the type of product line.

Daniel Moore -- CJS Securities -- Analyst

Yeah, understood. And it sounds like the outlook for 2022, you've talked about the margin pressure a lot. But on volume, it still sounds very healthy. You referenced the strong housing starts in '21.

Obviously, the last two years have been noisy with the sell-in to Lowe's last year and then the tough comp this year. Any factors entering '22 that we should be thinking about beyond sort of overall market growth, and hopefully a little bit better than that, that might impact your growth either H1 or full year in '22?

Karen Colonias -- Chief Executive Officer

Well, we certainly think the first half of the year looks very promising and, certainly, what we're hearing from our customers, as you know, high demand. We still run into some headwinds when it comes to supply chain and, obviously, labor. And I think there's some anticipation that we'll run into a little bit of affordability headwinds as we see interest rates start to spike up. But from the customer standpoint, feeling pretty comfortable about the first half of the year, certainly, a little cloudy as we get to the second half.

Brian Magstadt -- Chief Financial Officer

If I can add to some of the trends that we're seeing, so January numbers are looking good there. Obviously, still early in the quarter, but this January versus last year January, we've got the full impact of the price increase. But we're seeing some volume increase there as well relative, again, January to January. 

Daniel Moore -- CJS Securities -- Analyst

Perfect. And then lastly for me, you gave obviously a lot of good color about the cadence of margins and, specifically, COGS and how that might impact you. I guess do you see it as more of a step function down H1 to H2 or just kind of a gradual compression over the course of the year? Thanks again for the color.

Brian Magstadt -- Chief Financial Officer

It's probably a bit more of the former there, the step-down. Of course, it will trend there. But as we use up more of the steel and bring in steel at today's prices, which we feel are about two, two and a half times where they were at the end of 2020, we'll experience that back-half-of-the-year margin compression, margin pressure.

Daniel Moore -- CJS Securities -- Analyst

Very good. I'll jump back for any follow-ups. Thanks.

Karen Colonias -- Chief Executive Officer

Thanks, Dan.

Operator

Our next question is from Josh Chan of Robert W. Baird. Please proceed with your question.

Josh Chan -- Robert W. Baird -- Analyst

Hi. Good afternoon. Karen, Mike, Brian, congrats on the strong quarter and the year.

Karen Colonias -- Chief Executive Officer

Thanks, Josh. 

Brian Magstadt -- Chief Financial Officer

Josh, thank you. 

Josh Chan -- Robert W. Baird -- Analyst

I guess my question is on the gross margin comment, following up from the last question. Could you kind of talk through how come it takes you so long for the cost to work all the way through to the P&L? Is it just because that's how long it takes to average its way through your inventory? And if so, could you kind of give us a sense of maybe where gross margin could trough, just on a ballpark basis, in the second half of this year?

Brian Magstadt -- Chief Financial Officer

Hey, Josh, so to answer the first part of the question, because we carry a fairly large amount of inventory in order to meet our customer needs and provide that exceptional customer service, it does take a long time for current purchases to average up the cost of steel in our inventory. Although we don't break out steel as a percent of our revenues or of our COGS, I can tell you that at Q4 to Q3, it was a higher percentage and a bit higher than Q4 of last year, all as a percent of revenue. So we are seeing that impact starting to flow through. But as I mentioned to Dan's question a moment ago, we would expect that to really impact in second half of 2022.

Josh Chan -- Robert W. Baird -- Analyst

All right. That's fair. Thanks for the color there. And then could I ask about from an operational perspective, how big of an impact omicron is or was in your factory? And then also in the operations of your customers, like could you kind of talk about that impact for us a little bit?

Karen Colonias -- Chief Executive Officer

Sure. I mean I think all of our factories have, as we've mentioned, done a really nice job of putting safety precautions in place. But omicron, just as how it's impacted everybody else, has obviously impacted Simpson. We currently have all of our factories running and most shifts filled, but there's sort of a revolving door, if you will, on this omicron COVID pandemic.

So we have not had problems meeting our customer needs, but it has certainly been difficult as we have some employees who are out sick with this.

Brian Magstadt -- Chief Financial Officer

For example, as Karen noted, certain areas in the operation, and we don't necessarily believe it's being passed within our operations, but we did see a bit of an impact into our shipping departments, creating a bit of that headwind, if you will. But for the most part, we're back to normal.

Josh Chan -- Robert W. Baird -- Analyst

Great. Thanks for the color and thanks for your time.

Karen Colonias -- Chief Executive Officer

Thanks, Josh.

Brian Magstadt -- Chief Financial Officer

Thanks, Josh.

Operator

Our next question is from Kurt Yinger of D.A. Davidson. Please proceed with your question.

Kurt Yinger -- D.A. Davidson -- Analyst

Great. Thanks, and good afternoon, everyone.

Brian Magstadt -- Chief Financial Officer

Hi, Kurt.

Kurt Yinger -- D.A. Davidson -- Analyst

To start off on the supply chain, I mean how are you guys feeling about overall steel availability and then lead times on some of your outsourced products? And any impact that might have on your own volume trends? And then, I guess, within the capex budget, any notable projects there to call out in terms of building out capacity in the system? 

Karen Colonias -- Chief Executive Officer

Well, let me take the first half of the question, then I'll turn capex over to Brian. From a supply chain, there are still some constraints. I think it's easing slightly, but we're certainly still seeing constraints. But as we've talked about, from the standpoint of what we do at Simpson, is we want to ensure that we don't run out of our steel raw material and we also want to ensure that we can meet our customer needs.

So we're in good shape as far as our particular steel that we have and having it produced to meet our customer needs. We're still seeing some slowness in product coming out of some of our sourcing offices, particularly the Taiwan sourcing office, our products from Taiwan, we still see that as a pretty slow product coming in. And then we still have a little bit of supply chain constraints when it comes to some of our raw materials used for our adhesives. But it's easing a little bit.

It's far from not being a daily problem, but it is easing a bit.

Brian Magstadt -- Chief Financial Officer

And those supply chain issues out of Taiwan Karen was mentioning are primarily fasteners. Looking at capex, so the second part of your question there, so supply chain is impacting that as well. It takes much longer to get items for our capex projects. For example, forklifts and other equipments used to be few months' lead time, now we're here in 12 to 18 months.

So our capex spend in 2021 was lower than what we originally planned for this time last year. So 2021, capex, about $44 million. The original plan was $55 million to $60 million. So a bit of carryover there into 2022.

A lot of that capex is for capacity, improvements in equipment, and then just replacing equipment. So as our volumes have increased over the last few years, ensuring that our manufacturing sites have equipment in order to meet those customer needs has been an area of focus and investment for us.

Kurt Yinger -- D.A. Davidson -- Analyst

Got it. OK. That's all super helpful. And then just on the margin side, I mean you guys have been kind of consistently outpacing the outlook here in 2021, so congrats on that but I mean, even exiting the year, still well ahead of 20% on the operating margin side.

I guess, first, what would you kind of call out as the biggest drivers of upside here in the last couple of quarters? Or what maybe has surprised you? And then as you look ahead to the 2022 outlook, what do you kind of think of as the biggest variables in terms of potential upside or downside risk there kind of excluding what we might see on the steel side?

Brian Magstadt -- Chief Financial Officer

Yeah, you hit it in there, Kurt. Steel, that is going to be a big driver. One of the things that we've noticed -- well, not noticed, but as a result of the top-line price increases -- the leverage on operating expense spend has certainly benefited operating margin. So operating expenses in dollars are expected to increase a little bit in 2022 versus 2021 but, as a percent of revenue, will be down just because of that dynamic of the price increase in the revenue relative to the opex spend.

And what we look at there from an opex spend perspective is investing in those projects and areas that help drive those key initiatives and those key market areas that we laid out about a year ago. So that's been one of the dynamics. But I think to the beginning point there, that steel dynamic and how it rolls through our cost of sales will be that big driver going forward.

Kurt Yinger -- D.A. Davidson -- Analyst

Got it. OK. Well, appreciate all the color and good luck here in the new year.

Brian Magstadt -- Chief Financial Officer

Thanks, Kurt.

Operator

Our next question is from Julio Romero of Sidoti and Company. Please proceed with your question.

Julio Romero -- Sidoti and Company -- Analyst

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

Karen Colonias -- Chief Executive Officer

Afternoon, Julio.

Brian Magstadt -- Chief Financial Officer

Hi, Julio.

Julio Romero -- Sidoti and Company -- Analyst

So you mentioned that you saw your North American volumes benefit from better home center sales, better contractor and lumber yard sales, and mild weather, among other things. Can you just go through each of these and maybe discuss the momentum for each of those drivers and, I guess, minus the weather, how sustainable those are as we go into '22?

Brian Magstadt -- Chief Financial Officer

Well, coming out of Q3 talking about home centers, we noted in Q3 that they had paused a bit there early in that quarter and then, toward the end of the third quarter, in September, got back to a more normal run rate. We certainly experienced that in Q4, the growth in home centers, mostly price-based but there was some volume there, again, price-based due to the significantly higher input steel costs that we were experiencing from some of the other channels.

Karen Colonias -- Chief Executive Officer

Yeah. I think, certainly, as we talk about housing starts, we had some pretty strong housing starts in the back half of the year. And because weather was fairly mild, that certainly helps us when we think about how that's growing. And we're also starting to see some nice inroads in some of our adjacency markets.

Kind of specifically like the OEM basis, we're making some nice inroads there. So I think just a combination of those starts, obviously, as Brian mentioned, and then the DIY type of business. Fairly flat quarter for Europe, so most of that growth was coming out of the U.S. or North America.

Julio Romero -- Sidoti and Company -- Analyst

OK. Got it. And I guess my second question is on the steel headwind that should eventually flow through the P&L. You mentioned that, from an earlier question, you expect that to really hit in the second half of '22.

And when that steel headwind does hit the P&L to the extent that it should, how long do you expect to work through those elevated COGS? Do you expect, I don't know, like a six-month period, a nine-month period? Any help on how long those elevated COGS should last through the P&L?

Brian Magstadt -- Chief Financial Officer

That's a really, really good question, Julio. Part of that is tough to answer right now. Right now, with steel prices just moderating off of their highs just a little bit and holding steady, we'll have to see what the -- we're expecting additional steel production volume that come online here in 2022, and the tariff changes in Europe should help there a little bit. But that one is a really tough one to answer.

It's taken longer on the head and up direction. So I don't think we have a really good answer for you right now. I think, if steel were just remain flat where it is today, obviously, they'll continue to hold steady for that long period. So it really just depends.

I wish I had a better answer for you there.

Julio Romero -- Sidoti and Company -- Analyst

No, even that's helpful. I mean even the fact there's uncertainty as to how long it should last is helpful, I think. And I guess just one last one for me, just one clarification about Etanco. One of your longer-term targets is to improve your EU segment's EBIT margins by 500 basis points.

Are you using 2020's 5% EBIT margins for the segment or 2021's 7% EBIT margin as the base for that improvement?

Brian Magstadt -- Chief Financial Officer

We are looking at the trailing 12 months through 9/30 as the metric. And it's a combination that the combined entities' number relative to Simpson Strong-Tie Europe's number there is the metric and the delta.

Julio Romero -- Sidoti and Company -- Analyst

OK. Got it. Thanks very much for taking the questions and best of luck in 2022.

Karen Colonias -- Chief Executive Officer

Thanks.

Brian Magstadt -- Chief Financial Officer

Thanks, Julio.

Operator

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

Daniel Moore -- CJS Securities -- Analyst

Thank you. Again, just wanted to pull on one of the strings of one of the comments earlier, you mentioned you might revisit the 50% of operating cash flow target, returning cash to shareholders after Etanco closes. I'm wondering if you just might maybe expand on that. Your balance sheet is obviously exceptionally strong even after that deal.

Are you considering lowering the target if there more M&A opportunity opening up? Just how you weigh that versus opportunities like the market sort of giving us with this equity market pullback to be more aggressive, so any thoughts on that where you might go with that would be helpful.

Karen Colonias -- Chief Executive Officer

Yeah. I mean I would start off, Dan, by saying we'll certainly be discussing this with the board in our upcoming April board meetings. But we will always focus on that cash to grow the business, continue that dividend which will be something, again, we discuss. Typically, we do that with the board in the April time frame.

Paying back the loan from the Etanco standpoint and then, as we mentioned, we have some pretty significant capex projects that we have in place really to help us continue our growth. So we'll have to just look at all those factors and see what we come up with as to what that percent return will be.

Brian Magstadt -- Chief Financial Officer

And to the extent that there are opportunistic share repurchases, we'll take a look at that, and we'll evaluate that.

Daniel Moore -- CJS Securities -- Analyst

OK. You certainly have the balance sheet firepower and cash flow firepower to do it. Thanks for the color again.

Brian Magstadt -- Chief Financial Officer

You're welcome. Well, one thing I wanted to add on that relative to 2022 to 2021, one of the areas that gives us some comfort there are the price increases that were put into effect in 2021 relative to our expectations in 2022. And we know that in 2021, they were all phased in, and they're all here now. And having probably around $300 million of price increase over 2021's phase-in gives us that comfort of using that strong balance sheet.

Operator

We have reached the end of the question-and-answer session. [Operator signoff]

Duration: 53 minutes

Call participants:

Kim Orlando -- Managing Director, Addo Investor Relations

Karen Colonias -- Chief Executive Officer

Brian Magstadt -- Chief Financial Officer

Daniel Moore -- CJS Securities -- Analyst

Josh Chan -- Robert W. Baird -- Analyst

Kurt Yinger -- D.A. Davidson -- Analyst

Julio Romero -- Sidoti and Company -- Analyst

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