Simpson Manufacturing Co Inc (SSD) 2018 Q2 法說會逐字稿

Greetings, and welcome to the Simpson Manufacturing Q2 2018 Earnings Conference Call. (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 go ahead.

Good afternoon, ladies and gentlemen, and welcome to Simpson Manufacturing Co.'s Second Quarter 2018 Earnings Conference Call. On this call, the company may discuss forward-looking statements, such as future plans and events. Forward-looking statements, like any prediction of future events, are subject to factors which may vary, and actual results may differ materially from these statements. Some of these factors and cautionary statements are discussed in the company's public filings and reports, which are available on the SEC's or the company's corporate website.

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 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 second quarter results with you today. We had an excellent second quarter with our net sales up 17% year-over-year to $308 million. Positive demand trends primarily drove this increase and resulted in high growth in sales volumes throughout almost all areas of our company. This demand was supported by strong North America housing starts.

We do not believe our growth in the second quarter sales volume was a result of significant prebuying activity in advance of the 11.5% average price increase for the majority of our U.S. wood connector products, which became effective on July 1. After announcing the price increase, we provide our customers with a notification period and a clause that prohibits significant prebuying in order for us to properly manage our inventory levels.

So far, in the third quarter, demand remained strong, a further indication that significant prebuying did not occur. U.S. housing starts, which are a leading indicator for approximately 60% of our business, increased in the mid-single-digit range for the second quarter versus comparable period last year. Importantly, housing starts were more active in the western and southern regions of the U.S. with substantial activity on the West Coast and in the state of Florida. This is very significant for Simpson, as we supply more meaningful amounts of content into homes in these areas, which have stricter building design requirements due to wind and earthquake concerns compared to other regions of the United States. We continue to expect U.S. housing starts will increase at an annual mid-single-digit rate over the next few years with repair remodel market also expected to grow at a similar rate.

Sales in Europe were also healthy due to improving economic conditions in the western region, which led to an increase in government building projects, especially related to our concrete business. As a reminder, our net sales in Europe in the second quarter last year included $4.3 million of sales from Gbo Poland and Gbo Romania, which we divested in the third and fourth quarters of 2017, respectively.

We're quite pleased to see growth in our European sales even without the additional benefit from these 2 operations. Also contributing to our solid second quarter results was demand for our truss products, including truss software. Truss sales were up quarter-over-quarter supported by volume and price increases as well as continued conversions from customers who purchase our truss plates and utilize our proprietary software. We remain highly focused on our software conversion efforts, specifically for medium-sized component manufacturers with approximately 2 dozen conversions completed or in process so far this year.

During the second quarter, we also successfully launched a major software update focused on further improving performance and overall user experience.

As I mentioned previously, software is critical to the preservation and growth of our core wood connector business with over 40% of our customers requiring software solutions to efficiently conduct their business.

During this quarter, we introduced our mechanical anchor products into 15 additional Home Depot stores, bringing our total count to 345 locations across the U.S. as of June 30.

Compared to our previous expectations, the rollout is occurring at a much slower pace, mainly due to space constraints at the Home Depot stores, which require a vendor shift within the product category to create sufficient space for our line.

On that note, I'd like to highlight that we have continued to execute against our 2020 Plan, which we unveiled 3 quarters ago, to provide more clarity into our long-term strategy and financial objectives. Today, we are reiterating our financial targets under that 2020 Plan.

First, to achieve an organic net sales compounded annual growth rate of 8%. Total operating expenses as a percent of net sales in the 26% to 27% range, resulting in an operating income margin in the 21% to 22% range, doubling our inventory turn rates to 4 and improving our return on invested capital to a range of 17% to 18%.

I'd now like to provide an update on our key operating initiatives. Many of these stem from our 2020 Plan with a focus on rationalizing our cost structure to drive improved profitability without sacrificing our competitive edge. The remainder concentrate on growing our market share and improving our technologies and systems to provide best-in-class service to our customers, an important part of our long-standing trusted reputation and what sets the Simpson Strong-Tie brand apart.

Moving to operational updates. We've continued to work with our management consultant on uncovering areas to enhance our overall efficiency with a goal of realizing potential expense reductions beyond the 2020 Plan to improve our operating income margin and net working capital.

More specifically, in regard to operating expenses, we have identified areas for cost savings in indirect procurement, including national accounts for services.

As it relates to working capital, we're improving payment terms, which we expect will provide a onetime improvement to our cash balance in fiscal 2019. We've also worked with a consultant to review customer pricing in an effort to create a more consistent pricing program across our customer base. Importantly, while we incur additional management consulting expenses through 2018 and into 2019 related to these projects, which are primarily success-based fees, the payback periods for these initiatives are all within 1 year or less. So we view the trade-off very favorably. I'd like to reiterate that while we remain committed to preserving our industry-leading margin profile, we will not sacrifice our high level of customer service or distinctive company culture in the process, which differentiates us from our peers.

Next, our SAP implementation continues to progress. We've recently recast our project timeline following the first implementation wave that went live in the first quarter of 2018. Based on our learnings, we've extended the timeline between rollouts in order to ensure a smooth transition and to make certain that ample on-site support is provided after each go-live. We now believe we will complete the company-wide implementation in 2021. In accordance with this new schedule, we have increased our SAP implementation budget by approximately 15% from our prior expectations, including amounts capitalized from 2016 through 2021.

As of June 30, we have capitalized approximately $14.4 million and expensed $8.5 million since the onset of the project. Our new SAP project cost projections include additional consulting expenses given the extended timeline as well as associated travel expenses.

Turning to Europe. We have been making headway on our growth objectives, which have been supported by improved demand trends. Year-to-date, we're continuing our rollout of the complete line of Gbo fastener products into the Nordic regions and into France. However, the rollout is occurring at a slower pace than originally planned in our other European locations.

In regard to increasing our presence in wood connectors in the Nordic area, we are tracking in line with our expectations.

We also remain committed to cost-reduction measures in Europe to improve our operating income margin. As we discussed on our last call, during the second quarter, we completed the consolidation of our European management team to encompass only 1 Head of Operations versus dividing the responsibility between 2 managers.

Going forward, we believe having a sole leader of our European operations will help create efficiencies and increased accountability across all of our European businesses. As a result of this consolidation, we incurred a severance charge of approximately $1.6 million during the second quarter, which was not factored into our original 2020 Plan expectations.

In addition, we incurred SAP expenses in Europe of approximately $0.5 million during the quarter. Although improved over our 2017 levels, the slower-than-anticipated rollout of our complete line of Gbo fastener products into Western Europe leads us to revise our 2018 goal for our European operating income margin down to around 5%, excluding severance and incremental SAP expenses.

Additionally, in light of recent developments, mainly our price increase for the U.S. wood connector products and higher sales volumes, today we are pleased to update our 2018 benchmark for consolidating operating expense as a percent of sales to be in the mid-28% range, better than our original estimate of the mid-29%.

However, based on increased commissions from higher sales, severance costs incurred in Europe and the additional SAP costs to support our first go-live, we now expect our total 2018 operating expense dollars will be slightly up from 2017 as net results of these items. Importantly, we will remain on track to achieve consolidating operating expense as a percent of net sales in the 26% to 27% range by 2020.

Another key objective pertaining to our 2020 Plan involves improving our working capital management and overall balance sheet discipline through inventory reduction and tighter management of our payables and receivables. Through these efforts, we continue to believe we can double our annual inventory turn rate from 2x in 2016 to 4x by 2020. In an effort to rightsize our inventory, we have developed a 3-phase SKU reduction program. Phase 1 has been completed, which involved eliminating approximately 10,000 nonmoving or duplicate SKUs from our ERP system. We're currently working through Phase 2 of the process, which involves the identification and removal of slow-moving SKUs. We have been working to phase out these SKUs over a transition period as we work to convert our customers over to replacement products and expect this to be fully completed by the end of third quarter.

For Phase 3, we currently estimate we should have room for further inventory reductions amounting to approximately 30% of raw materials and finished goods over the next 3 years. Importantly, I'd like to reiterate that SKU reductions will not impact our ability to deliver products to our customers, which is often within 24 to 48 hours.

Further to support our efforts, we have been working with our external lean consultant to assist us in implementing the 3 phases discussed. During the quarter, we successfully carried out lean rapid improvement events at 3 of our production facilities in the U.S., resulting in efficiencies, enhancements and less inventory required to be held at these locations. We look forward to continue benefiting from the lean consultant and implementing successful practices across all our locations as applicable.

In summary, we are very pleased with our performance in the first half of the year, which was supported by favorable demand trends and strong execution against our strategic objectives. We remain committed to performing against our 2020 Plan goals to ensure long-term sustainable growth, operational excellence and feel confident in our ability to execute based on current market conditions. Importantly, we believe our key objectives will provide additional runway to continue returning capital to shareholders.

I'd now like to turn the call over to Brian, who will discuss our second quarter results.

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 2018 were $308 million, up 17% compared to $263 million in the second quarter of 2017.

Within North -- the North America segment, net sales increased 20% year-over-year to $259.8 million, primarily due to higher sales volume versus the second quarter of 2017 as a result of increased home construction activity in the U.S. and solid demand trends in all areas of our business.

In Europe, net sales increased 1% year-over-year to $45.8 million due to increased sales volume as well as positive impacts from foreign currency translations.

As Karen mentioned, our second quarter net sales in Europe were partially offset by reduced sales volume due to the 2017 sale of Gbo Fastening Systems' Poland and Romania subsidiaries, which contributed $4.3 million in net sales for the second quarter of 2017.

Wood construction products represented over 84% of total net sales in the second quarter of 2018 compared to 85% in the second quarter of 2017. Concrete construction products represented nearly 16% of total net sales in the second quarter of 2018 compared to 15% in the year-ago period.

Our second quarter consolidated gross profit increased 15% to $141.5 million from $123.5 million in the second quarter of 2017, resulting in a consolidated gross profit margin of 45.9%. Compared to the second quarter of 2017, our gross profit margin declined by approximately 110 basis points, primarily due to increased raw material costs. Currently, we do not anticipate the margin pressure experienced as a result of higher steel prices in the first half of the year will impact our full year 2018 gross profit margin guidance of 45% to 46%.

On a per segment basis, our gross profit margin in North America decreased to 47.6% from 49.4% in the prior year quarter due primarily to increased material costs, which were partially offset by better absorption of factory costs.

In Europe, our second quarter gross profit margin improved to 38.2% compared to 37.2% in the year-ago period.

From a product perspective, our second quarter gross profit margin on wood products was 46.7% compared to 48.4% in the prior year quarter and was 37.2% for concrete products compared to 34.9% in the prior year quarter.

Now turning to our second quarter costs and operating expenses.

As part of our ongoing efforts to improve our cost structure, consolidated research and development and engineering expenses for the quarter declined 6% year-over-year to $11.2 million. The decline was primarily due to decreased personnel costs and stock-based compensation expenses.

Consolidated selling expenses for the quarter increased 2% year-over-year to $29.2 million, primarily due to an increase in sales commission expenses related to our increased net sales, partially offset by decreased personnel costs. On a segment basis compared to the prior year quarter, selling expenses in North America increased by $0.7 million and decreased by $0.3 million in Europe.

General and administrative expenses in the second quarter increased 7% year-over-year to $40.4 million, primarily due to increases in professional and consulting fees associated with the SAP project, severance expenses and depreciation and amortization. These costs were partially offset by decreases in IT-related costs, other personnel costs and professional fees.

On a segment level, general and administrative expenses in the North America segment increased by $100,000 compared to the prior year quarter. In Europe, general and administrative increased by $3 million year-over-year.

We're committed to reducing our total operating expense dollars as a percentage of net sales. For the second quarter of 2018, total operating expenses as a percentage of net sales were 26.2%, down 360 basis points from the prior year quarter. We are pleased with this result, which includes an additional $1.6 million in severance and $1.1 million in costs related to the SAP implementation in the second quarter of 2018 compared to the prior year quarter.

Our consolidated income from operations for the second quarter increased 35% year-over-year to $60.7 million compared to $45.1 million in the second quarter of 2017.

In North America, income from operations increased 39% year-over-year to $58.5 million. In Europe, income from operations was $2.9 million compared to $4.1 million in the prior year period, primarily due to the increased operating expenses Karen detailed.

As a result, our operating income margin of 19.7% on a consolidated basis increased by 257 basis points from the second quarter of 2017. Effective tax rate decreased to 27.2% from 37.2% in the second quarter of 2017, primarily due to the U.S. Tax Cuts and Jobs Act of 2017.

Our consolidated net income for the second quarter was $44.1 million or $0.94 per fully diluted share compared to net income of $28.2 million or $0.59 per fully diluted share in the prior year quarter.

Turning to our balance sheet and cash flow. At June 30, 2018, cash and cash equivalents totaled $155 million, an increase of $17.6 million compared to the balance as of March 31, 2018. To date, our inventory levels were down approximately $7 million as of June 30 compared to June 30, 2017, even with significantly higher sales volume.

We remain debt-free, with only a small portion of capital leases amounting to approximately $3.2 million.

As a result of our strong sales and focus on working capital management, we generated an estimated $38.2 million in cash flow from operations during the second quarter of 2018, an increase of over 150% from $15.2 million in the 2017 second quarter.

Capital expenditures were approximately $8.1 million for the quarter and were primarily related to investments in machinery, equipment and software, including $1.4 million of capitalized costs related to the SAP initiative. We paid out $9.7 million in quarterly cash dividends during the quarter.

We remain committed to returning a minimum of 50% of our cash flow from operations to our valued stockholders in the form of share repurchases and dividends on an annual basis. Over the past 3 years, we have returned approximately 80% of our cash flow from operations to stockholders.

On July 26, our Board of Directors declared a quarterly cash dividend of $0.22 per share. The dividend will be payable on October 25, 2018, to the company shareholders of record as of October 4, 2018.

As of June 30, 2018, we had approximately $126.4 million available for share repurchase through December 31, 2018, under our previously announced $275 million share repurchase authorization.

We will remain opportunistic in our approach as it relates to share repurchase activity.

Before we turn it over to questions, I would like to discuss our outlook. As Karen mentioned, we are updating certain components of our fiscal 2018 guidance tied to our 2020 Plan. In regard to the additional components of our outlook, for the full year of 2018, we are reiterating our outlook for the following metrics: we expect our consolidated gross profit margin to be in the range of 45% to 46%; the effective tax rate to be in the range of 26% to 27%; depreciation and amortization expense to be in the range of $39 million to $40 million, of which $34 million to $35 million is pure depreciation; and capital expenditures to be in the range of $30 million to $32 million, including $9 million to $10 million that will be dedicated to maintenance.

In summary, we are very pleased with our second quarter results, which resulted from a favorable demand environment and supported our ability to drive our earnings higher. We remain focused on executing against our strategic initiatives and 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?

(Operator Instructions) Our first question comes from the line of Daniel Moore with CJS Securities.

So obviously, impressive growth in North America on the connector side of the business. Maybe just kind of break out -- I know it was mostly volume, but volume versus price. And you called out California and Florida, it's quite a widespread of your growth versus overall housing starts. So maybe just a little bit more color on what's driving that outperformance?

Sure. So as I mentioned, Dan, the price increase went into effect really beginning third quarter. So most of this was volume growth driven. And as we've discussed in the past, when we look at housing starts, we look at the geographic location of those starts. And certainly, anything that's on the coastal areas going up the West Coast where we have seismic conditions, we put substantially more content into those houses than we would in a house that might be in the Midwest. So because there was substantial house-building and housing growth in both the Western States, and certainly, the Southeast going up the coast there -- the Gulf Coast up to Florida where we have hurricane areas, we again put a lot more content into those houses. So it's the geographic location where the houses are being built that greatly helped us as we looked at our growth in Q2.

Very helpful. And looking at -- shifting to the price increases, just -- obviously, just went in a few weeks ago, but any pushback at this stage? You feel comfortable in pushing those through and given where steel prices are today, are there additional price increases planned or expected later in the year?

Well, as we talk about -- actually, probably, for quite a while, the tariffs are pretty highly publicized. So anybody that's using steel or aluminum to produce their products have had to push some price increases through, and it's really associated with the tariffs that have all been put in place. The real change that happened between Q1 and Q2 is that the tariffs are also now going to be in Europe, Canada and Mexico. And so even though we don't buy steel from any of those areas that gives credence to really keep those high prices of steel in place. And so we think that will probably stay pretty flat or slightly up as we go forward into Q3.

Very helpful. Lastly, sticking with the demand side, concrete, you alluded to an increase in demand in Europe from some government customers. Maybe just provide us a little bit more color there.

Yes, thanks, Dan. In Europe, our concrete business is really, particularly, job-based. We do a lot of work with roadways. We've got some product that works to help strengthen roadways. And those are the types of government projects that have been let, based on the economic conditions. And so what we're really seeing is our concrete products, whether that be in strengthening bridges and buildings or in roadways, we're seeing more of those jobs being let and you're seeing that increase in the revenue and also help on that gross margin increase that we're seeing in Europe.

Our next question comes from the line of Tim Wojs with Robert W. Baird & Company.

I guess, my first question, maybe to dovetail a little bit on the last ones. Is there a way to think about, just from a content perspective, if you look at your kind of coastal regions relative to maybe a national average, what the content -- just an approximation of what the content might look like on either a dollar basis or a percentage basis?

Well, we don't really give that information. We take a look obviously at the content that's been in a high-wind area or a seismic area. And what I've mentioned in the past is if I take some -- a house that's built in the Midwest or, let's use Iowa, we might have about $50 worth of content in that house. Typically, it would be the hurricane-type attaching the roof rafters to the top plates. But if I take that same house and I put it in Florida or in the California coast, I could have well over $5,000 worth of content. So it's a pretty significant difference and it's really driven by the fact that those natural disasters require a higher design standard, and when we have a higher design standard, more of our products will be put into those properties.

Okay, I guess, on the pricing increase realization, I mean, it's been a while since we've had such a substantial kind of increase in pricing. So what's the right way to think about how much of that 11.5% actually gets realized?

Well, as you know, there's always a little bit of a stagger. We give our customers a 60-day notification and that's really to help them get pricing into their systems, but again, there's always going to be a slight, small stagger from our customers. But we do believe that we'll see that price increase realized as we continue here through third and fourth quarter.

Okay. And then 2 other ones, free cash flow. So free cash flow looks like in the first half is maybe positive $36 million or so. And I think -- I mean, that's more free cash flow than you've generated in some years. And so I think normally you generate a large majority of your cash flow in the second half of the year. So my question is could free cash flow be substantially above earnings in kind of 2018? Is that the right ballpark for us?

Tim, it's Brian. I would say that you're right. The free cash flow historically has been higher in the second half of the year. I don't know that it goes far to say that it would be significantly higher than earnings, but I would anticipate it being higher than it has been in the prior years due to the higher earnings, the fewer lower dollar estimated capital expenditure that we have this year versus prior years. But directionally, I would -- that's where we're thinking.

Okay. And working capital should be flat to down on year-over-year basis?

I don't know that I could answer that question right now at this point.

Okay, but inventory should be down year-over-year?

Inventory should be, but one of the interesting things about inventory is in the steel markets, availability is tougher now than it has been. I guess recently it's been tough but -- historically. So as we are approached by our steel vendors and if there's an opportunity to make some opportunistic purchases there, we may do that. So it's hard to say there on inventory, but as you see at least, Q2 this year versus Q2 of last year, we're down about $7 million even on increased revenues and increased cost of sales.

Yes. No, I thought the inventory performance was really good. See, I was just trying to think about how much we can see that sum. I'll maybe talk to you with that -- about that off-line. And then the last one is just on a year-over-year basis, could you just remind us what the annual severance expenses are in '18? And what you're expecting annual SAP expenses to be in 2018?

Well, the severance, the -- it's about $2 million including some amounts in cost of sales as well as the amount Karen noted in operating expenses. I don't have the SAP total number for you right now, though I would estimate it to be in that $8 million to $9 million total expense, including amortization of amounts that we've capitalized in prior quarters. (inaudible), but that's where our best estimate is today.

(Operator Instructions) Our next question comes from the line of Steve Chercover with D.A. Davidson.

So I'm still, I guess, a little perplexed. I don't think housing starts in the West or in the Southeast where we've got seismic or wind events were up mid-teens. So was there some sort of code enforcement that became more pronounced maybe following the hurricanes, like, all of a sudden did these factors and people start to say you got to put this stuff in?

No. There hasn't really been a code change from the hurricanes that occurred last year, but we definitely, again, you're seeing a more push on both multifamily and single family in these more natural disaster type of areas. And then we've also gained a little bit of market share on our connector line also.

Yes, that was my next question. What do you reckon your share might be in -- coming from where to where?

Well, we've always said our market share was somewhere around the 70% to 75%. We certainly can track the houses and the content we put in the houses, and so we think we gained a little bit of market share just on some customers that we have picked up.

Okay. And then were there any significant victories beyond? I mean, it sounds like Home Depot is actually going a little slower than anticipated on the anchor systems.

Well, a little bit slower on the anchors, and that's really a function that -- typically, when we put a product into Home Depot, we're displacing another vendor. And in this case, we're not really displacing a vendor. And so that's why it's taking a little bit longer in that, there has to be a little bit of a reshuffle of the shelf space to be able to get us in. So we still feel confident in the commitment. It's just going to take a little longer than we anticipated. But I think, overall, that Home Depot is doing a great job for us. And certainly, as you see, repair remodel and housing starts again, those are all positives as we sell some of our products to the Home Depot locations.

And then in the current quarter, it sounds like the volume trends remain solid. I don't want to say mid-teens, but double digit, and then we get phase in of the 11.5% price hike?

Yes. So we are -- like you said, the pricing increases is in effect. We are seeing pretty solid revenue numbers as we've started here in the third quarter. Little early to know how the full quarter is going to go, but certainly, have seen some nice numbers as we're running through July.

And if sanity were to prevail and I hope -- we hope it does on the trade front and maybe some of the tariffs on steel would have to dissipate, there is no -- you don't have to give back the price hikes on steel. It is not like there is a price escalator and/or deflator, is there?

Yes, the way steel pricing works, of course, one of the things that we think is, because the tariffs are -- there was a sort of a grace period where the tariffs were not impacting steel coming from Canada, Mexico and Europe. And when that period -- when that grace period is gone, which actually happened just about 6 weeks ago, we think that, that means that you'll see your steel pricing will be pretty firmly in place because there is tariffs on all steel coming in from anywhere now. And as far as our steel pricing, again, it takes us about 60 days to implement a steel price, so customers have plenty of time to put it into their systems. And certainly, as there was some dramatic decrease in the cost of steel, we would have to make some adjustments on the downside. But our best estimates at this point is that those steel prices will probably remain very strong through third quarter, and then we'll see kind of how things are progressing from there.

And would 11.5% be sufficient to offset the steel prices that are currently being absorbed?

Yes, when we look at all the steel prices, as we talked about, we have fairly unique steel, and so the data that comes out gives you a couple of data points when you look at some of the steel prices increase, but we do have very specific galvanization that we put on our steel. We have very specific yields in tensile or structural value that we need on our steel. So we have to look at that particular steel that we're buying and we do believe that the 11.5% will help -- will cover those steel price increases that we've really been seeing over the past few months.

Okay. And then last one. With respect to the truss plates, you got 24. You said a couple dozen new programs that are in the process of being implemented. When those are in, how close does that get you towards your 20% target share of the market? I'm sure there's still a lot to go.

Yes, still a lot to go. As we mentioned from the component manufacturers, you really have the opportunity to convert those customers in fourth quarter and first quarter, actually, because that's the -- it's not the busy part of the season. So in second and third quarter, we're really completing those implementations of customers that we have brought on board. We're making sure that we have got support. And as we mentioned in the -- as we mentioned, we just released a new software -- excuse me, a new revision to get more efficiencies in those softwares. So still a ways from meeting that 20% market share, but definitely tracking in a very positive direction on truss revenue.

And so my last question is to finish that train of thought, what do you reckon it takes to get to 20%? Is that a 5-year endeavor?

No. I think we'll be hitting that target sooner. You got to remember that you kind of have this layering effect because you're not getting these customers for a full year. So only this year are we getting the full revenue from customers that we put in place last year, and so you'll have this layering affect as you go throughout the year. And again, we're very happy with what we've seen. Customers have been very responsive. They like the direction we're going. They like the feature set. They like the support we're providing them. So we're seeing some nice trends on converting those customers. So I think that 20% is not out 5 years, I couldn't give you the exact time, but it should be sooner than that 5 years' time frame.

Yes, this is Brian. I wanted to clarify earlier a question that was around the total SAP for 2018. I would -- actually, again, would estimate a little bit higher than my prior comment. I mentioned $8 million to $9 million. It could be $9 million to $10 million for SAP on a total. So I just wanted to clarify that for the call.

Our next question is a follow-up from Daniel Moore with CJS Securities.

Just thought I'd shift gears for a moment to the expense line items, R&D. Do you expect -- should we expect to continue to decline in terms of actual dollars? Or is 2Q a reasonable run rate for the remainder of the year? And one quick follow-up.

We'll anticipate, this is Brian, Dan, for 2018 that for R&D and engineering, specifically, that, that run rate might -- would be about right. I would say, overall, operating expenses will probably be approximately 2% to 3% higher in fiscal year '18 versus '17.

Got it. So including selling expense as well?

Yes. And G&A and the like, including the severances and the amount that we've gone over on SAP.

That's very helpful. Okay. And then lastly, at the risk of trying to pin you down too hard, Karen, just don't want to misinterpret your commentary around volume trends as of -- into Q3 and I know it's still early, but are you indicating in the commentary saying that there wasn't prebuying, are you indicating that we're continuing to grow just positive in line with the market or something similar to the type of growth rates that we saw in Q2? And again, I realize it's just 1 month.

Yes, Dan, we're really looking at -- as we mentioned, when we put that price increase, we gave our customers a time frame and we also put a limitation on what they can prebuy to try and beat the price increase. So as we look at how July is trending, we're really looking to see, do we have a downfall from people prebuying and that's -- we are not seeing that. So that's really the indication that we have so far too early in the quarter to be able to do too much prediction beyond that point.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.