Simpson Manufacturing Co Inc (SSD) 2003 Q2 法說會逐字稿

Good day and welcome to the Simpson Manufacturing Corporation second quarter earnings conference call. I'd like to turn the meeting over to your chairman, Mr. Barclay Simpson. Please go ahead, sir.

Okay. Thank you, Sarah, and thank you all for joining me and Mike Herbert, our CFO, this morning. And I'm not about to tell you anything that I do not believe, but my comments will be based on current information and circumstances, which can be inaccurate in projecting the future. So if you want to see more about the risks in our business, take a look at our 10-Q.

All in all, the second quarter was a good one with sales increase of 18% and net earnings up a little bit more than that, and earnings per share at 18%. Now, the increases in legal, professional, and insurance costs in SG&A amounted to 134,000 for legal and 545 for health and welfare and business insurance. Higher costs for these items look as if they're here to stay.

Both major businesses had good quarters with SST contributing 88% of sales and 92% of profits. Dura-Vent did well also with around a 9% increase, both in sales and earnings. It now is expected that the loss of Direct Vent business at Dura-Vent, around $6m a year, will not start to occur until the fourth quarter of this year. New products, such as the line of stainless steel pipe liner and connections that swivel 360 degrees will be out this month.

The third quarter looks okay for Dura-Vent, but whether new products and distribution can overcome such a large loss of revenue starting in the fourth quarter -- and profits -- that remains to be seen. Sales to Home Depot increased 12% in the quarter, and they're up 11% for the year. Sales to all home centers were up 24% for the quarter. Sales to contractor distributors -- they sell to large builders of all kinds -- were up 21%, which would seem to show that we got some help from housing starts as well as DIY and renovation.

Now Europe -- despite the German economy, the largest in Europe, being somewhat stagnant, in fact, quite stagnant, our European sales were up substantially. Europe now accounts for 11% of the company's sales. An interesting sidelight is that our Polish operation got their first sales in Russia this month. Last month we -- by the way, they are not shipping until the bill is paid, however.

Last month we had a sales meeting in Nante, France, involving our factories in France, or should I say "Frahns?" The UK and Denmark -- around 60 sales, engineering, and merchandising people of 10 different nationalities, and they all got along just fine. In fact, they were enthusiastic about their prospects. They've joined up. So it isn't the people, it's our leaders who get us into trouble.

We showed a profit in Europe of 584,000 in the second quarter, which was $142,000 better than last year. So it looks as if we still have a pretty good chance to make a profit for the year for the first time. So our long-range investment should be starting to pay off there.

On Tuesday of this week we had the grand opening of our $10m testing and research lab in Stockton, California. Structural engineers from firms around the country, as well as some highly respected academics, attended. The lab is state-of-the-art, as we were able to apply seismic forces equal to those of the Loma Prieta earthquake to a three-story wall while everybody watched from well back.

One well-known authority said that, "Simpson's laboratory and testing will allow the engineering community to know where we stand with current structural design and safety. Simpson will be able to use this technology to design new products that offer a higher level of structural performance." And, by the way, he isn't on our payroll.

And there were all kinds of other positive comments, all of which should lead to more Simpson Strong-Tie unbreakable specifications, which, of course, was the general purpose of that grand opening. After all, all those engineers who came are dealing with people's lives in the case of natural or other disasters. So they want to have trust and confidence in the product. The labs should give a boost to our well-connected house program -- one that we're working on nationwide.

Anchor system sales were up 15.8% in the quarter. The loss was substantial, although 10% less than last year at $743,000. But because it gets us into new markets and does not need wood, the -- products are designed for masonry and concrete -- it's a most important part of our future, and we are willing to invest in it just like we are, and were, in Europe.

Strong wall, sheer wall sales were up 18.8%, which now makes them up 6% for the year. And it looks okay for the rest of the year. I'd like to remind investors that in Simpson Manufacturing, you're investing in a long-range company. We are able to attract and keep the best people because they join us for a career, and a career with a winner. We're going to try and keep it that way, although we do have a tough act to follow, but we think we have the people to do it.

So -- questions?

[no response]

Hello, questions? Sarah, are you there?

At this time, if you do have a question for Mr. Simpson, you may press the star 1 on your touchtone phone, and to withdraw you may press the pound sign. We'll take our first question from the site of Joel Havard of BB&T Capital Markets. Go ahead, sir.

How are you all doing?

Good.

Barc, casual observation -- it looks like you all are displacing one of your competitors at another retail format. Is that a new effort, or am I just making a delayed observation here?

Well, it's a continuing effort and, once in a while, you know, everything comes together, and it happens. But, believe me, we work on it all the time.

How broadly in place has your product gotten now? Are you all -- in half of that new retailer stores or something less, something more?

Say that again, Joel.

Well, as you continue to penetrate this new DIY retailer, how far along on that curve are you? Is it moving quickly? You know, any detail on that?

Well, it's kind of like the weather, it fluctuates. All of a sudden, you'll make a big leap, and then it will go along for a while. We think that it's our brand name that gets us these customers and keeps them.

And we work on that continually -- making our brand name stronger and stronger, and I think if you take a look at our website you will see that we're upgrading that all the time, and making it easier for -- not only for the customer, the direct customer, but for the indirect, the consumer, to buy our products. Like, we have taken that website, and now you can find a seller, a dealer, in your neighborhood or general area, just by using our website.

Mm-hm. Last question on the retail side, and I know that's not anywhere near the biggest part of your business, but --

-- it's important.

Well, sure, I know with Retailer Number 1, we might call him, it's a pretty meaningful piece of business. I wanted to ask, finally, if your performance with Retailer Number 2 on a per-store basis is similar?

No, Number 1 concentrates on our type of products, amongst other things, more so than Number 2.

Okay, all right, thanks, guys. Good luck.

We're coming along.

Good, glad to hear it.

Thank you, I'll take our next question from the site of Barry Vogel from Barry Vogel and Associates. Go ahead, please.

Hello, Barry.

Good morning, gentlemen.

How are you?

I'm good. Okay, I have a few questions. First of all, can you give us the sales increases by region of the country that you usually give us starting with California?

Yes. Okay, in the quarter, California, 12.9% --

And other Western states?

Let me get the whole company -- 13.5%.

Was California?

Yes.

And other Western states?

16.8.

The South, Southeast?

The South, Southeast, 23.6.

Midwest?

8.1.

And Northeast?

17.7.

So basically you were strong across the board in the United States?

Yes.

Okay, you mentioned that Europe was up substantially. What percentage increase was European sales in the quarter?

In the quarter, well, we had big increases -- in the UK it was 33%; France was 29%; and Denmark 18%.

And how much was consolidated up -- how much? In other words, the whole of Europe.

How many dollars?

No, percentage-wise -- the entire Europe including the UK -- what was the percentage increase?

Okay, just a second -- it ended up at 11% of sales, and it was 10.4.

It was up 10.4%?

It was 10.4% of sales in the second quarter last year. This year it's 11% of sales. That's for the whole company.

Okay, so if we look at consolidated sales of $147m, it was 11% of that?

That's correct.

So 16.17? Okay. Can you tell us what's going on with the strong brace and what's happening with Weyerhaeuser(ph) in terms of them being a more formidable competitor since they went out on their own?

The Strong Brace is dead.

Dead?

It's dead.

Why is that?

Well, we made some miscalculations, and the market was not there for it, and on carefully looking at the market after we did not have instant success with the Strong Brace, we find out that we didn't have quite the right product.

And a goodly part of that was something over which we have no control in that the international building code was being adopted by a lot more states and, therefore, the requirements changed as to what builders had to do in areas where this code started to be enforced.

And so now we have a new wall that won't be out for probably six months because we need code approval, but we're all set with it -- that meets the current requirements much better.

So will that be Strong Brace 2?

No. We haven't even got a name for it yet.

All right, but that's going to try to do what Strong Brace didn't do?

Yes, in effect, yes.

Because, in effect, you're taking the strong wall concept, and you're going across the country -- outside of California, am I correct?

Well, that's true, that's true, and also it's -- this one is in a size that we didn't have before.

Okay, now, the expenses of Strong Brace would affect probably your P&L this year to some degree. Could you give us some idea of what it's costing?

Not much, not much. That's all been -- we've been working on it, you know, for a long, long time, and so it's been spread out over a long time. You won't have any blip.

Okay, thank you. I'll let someone else ask some questions. I'll get back in queue.

All right, Barry.

Thank you, and once again if you do have a question for Mr. Simpson, please press the star 1 on your touchtone phone. We'll take our next question from the site of Justin Maurer(ph) of Lord Abbot. Go ahead, please.

Hi, Justin, how are you?

Good, Barc, how are you? A couple of things -- first, on inventory, it looks like you guys did a good job of keeping that under control -- inventory turns turned up. Would you say that you guys are doing a better job this year? Were you guys over-inventoried last year? Maybe expand upon that a little bit?

Yeah, Mike, do you want to comment on that? Here is the guy responsible.

The inventory -- we made a bet last -- well -- going back to 9/11, after 9/11, you know, business slowed down substantially and caused us some problems on inventory. Then when business picked up last summer, we found ourselves a bit behind. This year we made a bet that business was going to be good last fall, and we started running our presses and building inventory, and -- with some luck out there, I guess -- business did pick up, and we did have the inventory to meet our commitments.

Okay, and with that, I guess, talk about maybe gross margin flattened out a little bit. I assume some of that had to do with the fact that you guys had favorable buys on steel last year that you were selling through into the fall and spring, and now that's starting to catch up with you a little bit, is that fair?

Well, steel prices are -- they've fluctuated substantially, but they now are just about exactly what they were at the end of the second quarter last year. And it looks like -- in the market, what do you think, Mike? Do you think the market is a little bit weak?

It looks like, I would say -- we should expect the same price now until the end of the year, is our best estimate.

Okay. Maybe then explain -- you know, Barc, you talked about DNO and other costs on the SG&A line, but what would you then attribute more flattish gross margin to, then, if it's not steel. Is it just product mix?

It could -- well, certainly, product mix always has a lot to do with it. I think there isn't much variation there, though.

Okay. Just looking at the numbers, I mean, over the last several quarters, there have been pretty good jumps in gross margin, and I was just trying to get a sense of the leverage on product margins with sales as strong as they've been.

Right, right -- no, it's a good question, Justin. I guess I don't personally expect that gross margins are going to get any better. I think, if anything, they may ease off a little bit.

Okay, and then one last question on sort of your favorite subject -- use of cash. How about dividends? Have you thought about that?

I suspected I might be asked about that. As I'm sure you know, and most of you know, that I have an okay from the board to spend $30m on buying back our own stock, and I'd say there is a little bit than an even chance that I'm going to start to do that before year's end, only to the extent of the amount of options that we granted, and I'm kind of thinking if we start to do that, then we'll make it a policy that we buy back stock to balance the dilution caused by granting of options in a particular year.

Like last year we granted 605,000 options, and so I would -- I think -- this isn't a commitment, but I'd say it's more likely than not that I'll start to buy 605,000 shares this year.

Okay, and then just dovetailing on that, just looking at your incentive count, what's the rough split of cash bonus versus options, and do you think it will skew anymore towards cash bonus now that you guys are expensing options, do you think?

No, we'll keep the same method of cash profit sharing. We don't call it a bonus, because it's profit sharing, and you've got to make a lot of profits to make a lot of money in any particular branch of this company.

Each one is separate on both their cash profit-sharing paid quarterly and on their options. Now, charging off the options, which we started to do January 1 this year, it cost us a little more than a penny -- what was it? A penny and a half, Mike?

Right, year-to-date our options charge has been approximately $800,000.

Okay, thank you, gentlemen. Good luck in the second half.

Hey, thank you.

Thank you. I'll take the next question from the site of Bob Sedge (ph) of Lord Abbot. Go ahead, please.

Hi.

Good morning. I'd like to address the issue of G&A expenses, which were up a fair bit more than sales. If you can break out how much of the nearly $4m increase was related to the profit sharing, related to the bad-debt expense, which included some reversal of allowance for doubtful accounts to a significant customer as well.

Sure. Do you want to take that, Mike?

On the bad debt, a year ago in the second quarter, we had a reversal, because we collected the money of $850,000. This quarter we had approximately bad-debt charges of $550,000 with one large customer in Germany being $375,000 of that. So when you look at the flip of that, it has an effect of approximately $1.3m in a year-over-year comparison.

Okay, so it made last year's look somewhat lower, and would you say that the amount that you charged off this period is somewhat typical, or was that on the higher side?

You never can predict -- it's tough to predict the future on our customers if someone is going to go in bankruptcy or not. As Barclay mentioned, the economy in Germany is difficult right now, and so I'm hopeful we won't have much in the future, but I really can't tell.

Can you generalize in terms of what you're seeing on a going forward basis? How some of your best customers either are acting or thinking or talking in terms of where their inventories may be and the level of activity that they might be sensitive to?

Well, we're generally, around the country, the mood is pretty good. I'd say not wildly optimistic but solid. Our customers seem to feel that business is going to be okay.

Can you also address where else you might be seeing some expense pressure, whether it's in the insurance area or medical or security costs, things of that sort?

Well, the medical and legal and accounting and so forth -- it just is very tough to predict those. You just can't do it. All of a sudden, you've got some controversy on Sarbanes-Oxley that you didn't account for, and now you've got to spend a lot of money with your lawyers and accountants, and like we have to set up an internal auditor and exactly what that's going to cost and how we're going to do it, we don't know. There are so many -- I'd like to give you an estimate, but any estimate wouldn't be based on nearly enough accurate data.

Mm-hm. Well, can you tell us, though, at what rate costs are rising, year-to-year? This year? And is it that much different, at all, from last?

Roughly 3%.

Okay, and benefit costs rising faster?

Yes, I guess they are, a little.

[crosstalk]

We're seeing our medical costs go up 15% a year.

Is there anything you find that you can do to control that at all?

Well, we go out of our way to make sure our employees have a really great benefit plan.

But if you've got an answer as to how to fix it, let us know.

Okay. In regards to the opening of the new lab, how many or what percentage of the folks that showed up from -- engineers, or however you want to count them -- were potential clients as opposed to existing clients?

Well, they're using the term client loosely. They specify our products and most of them -- well, we had two kinds of structural engineers there. We invited a few, a handful, of academics, who were major names across the country, and then we invited a whole bunch of structural engineers, who were -- that's their business. And they specify our products or they don't, and most do, and the purpose of this whole thing was to reinforce the trust and develop an even stronger affiliation with our numbers that when we do a number, our testing facilities are the absolute state-of-the-art; that we are so accurate and we always have been ever since we were a little company, and we just constantly reinforce that.

But this lab is something they don't see. The only place you see these kinds of facilities that relate at all to our business is in universities. So it puts us in a different level from the competition -- really a different level.

And, lastly, are there any regions -- districts, counties, states -- that have had building code changes that directly affect your business in any way of late?

Yes, in particular, Texas. Texas has adopted the IBC, the International Building Conference Code, and our manager there says that it is in various areas being enforced, and it has helped us.

It's actually measurable that it's helped us. And this is just a continuation of what's happened over the last 40 years -- that building codes get adopted, and then when they actually get enforced, you can't predict.

But, every once in a while, a particular area -- it will be called to the attention of the politicians, for instance, that, wait a minute, we had a hurricane here a while back, and you better get on the code officials to start enforcing these building codes, or we're going to be in trouble. So you can't predict these things, but it has happened, and it will continue to happen, over time. Texas is the latest case.

Okay, and Texas is what percent of your -- I imagine that's included in your South, Southeast region?

Yes, it is.

And what -- how large a piece of that might it be?

Oh, boy, I don't have that exact number. I can tell you that Texas is our third biggest customer state.

Mm-hm, and was it likely --

-- it's California, Florida, and then Texas.

Was it likely up more than the 23% overall for the region that you indicated earlier?

More than?

Yes, or about in line with the 23% gain.

Oh, I see, in Texas itself?

Mm-hm.

Probably, and this is a guess -- probably, it was slightly higher.

Mm-hm. Okay, thank you. Good luck to you.

We'll take the next question from the site of Dan Cilio(ph), Cilio and Company. Go ahead, please.

Hey, good morning, Barc.

Dan.

I just have a couple of questions -- looking at your tax rate, how well do you expect the effects of the various tax credits to continue?

Through the rest of this year. I've been modeling that, and I'm somewhere between 39 and 39.5% for the year.

And then, just getting back to the gross margin -- I thought that the margins last year were so unelevated, due to some favorable raw materials purchasing. Was that the case again this quarter? Or was there something else behind it?

We tried to analyze it, and percentages stayed pretty much the same. That is, steel is a percentage of total cost, labor is a percentage of total cost, tooling, and all that kind of thing, and really couldn't pick out anything in particular.

Okay, that's it. Thanks.

Thank you and, once again, if you do have a question for Mr. Simpson, please press the star 1 on your touchtone phone, and to withdraw, you may press the pound sign. At this time, we'll take our next quarter from the site of Barry Vogel of Barry Vogel Associates. Go ahead, please.

Hey, I thought you'd be back, Barry.

Well, you know, your level of people on your calls nowadays, so you've got to give them deference. The acquisition of MGA Canadian company -- can you give us a brief review as to why you bought it and, Mike, will it affect the last six months of the year in any way, shape, or form in terms of profits?

Well, will MGA affect us?

Yeah.

Well, for the first 40 days they were flat.

No, I'm talking about for the second half of the year. I know sometimes you have goodwill -- actually, there's no longer any goodwill, but should that be a negative impact or no impact on the second half?

Oh, probably very little because we've got to integrate them, and that operation makes money, but integrating an acquisition takes time, and that's been a successful one. We've got some strong people there, and we have to figure out what's going to be really good for them, and so you kind of just have to say it will be a breakeven deal for the rest of the year.

Can you tell us why you bought them?

Yes, oh, absolutely, because it gives us a much stronger presence, particularly in Canada. And it also defuses some entry into the U.S. They really weren't doing much, but they were planning to do quite a little.

Okay. And, Mike, can you tell us what your capital expenditures are going to be for the full year, excluding that acquisition, and what D&A is going to be for the full year?

Our capital is going to be $25m, and depreciation and amortization will be 16m.

Thank you very much. Keep up the great work, guys.

Okay, thanks.

Thank you, and we'll take our next question from the site of Arnold Ursaner of CJS Securities. Go ahead, please.

Good morning, Arnie.

Good morning, Barc. I was wondering if maybe you wouldn't let me in your Q&A session. A couple of questions -- can you give us a sense of the impact of currency in the quarter?

I'll turn that one over to Mike.

We are, as Barclay mentioned, Europe is 11% of our sales, and it's from a -- well, predominantly, our sales are in the U.S. and Canada. So we're not as -- to some public companies, we don't have the exposure from a currency perspective. So we did benefit a little bit and since Europe is -- we do make a little bit of money there but just a little. It didn't have a significant impact on us, as a company.

Okay, but it was a slight positive in the quarter?

Yes, it was.

Okay, and can you update us, Barc, on your full-year view on Anchor Systems? What sort of revenue you think is achievable this year and profitability -- how close are you to profitability in Anchor Systems?

We're a long ways from profitability -- years.

Okay. What sort of revenue are you targeting this year?

Well, I don't want to make an estimate for the year, Arnie, but we are expecting probably about the same kind of increases the rest of the year that we've had, and it's going to be years. We've got to get probably as much as 70 million sales before we'll turn the corner. But, because of those two things I mentioned -- like, it doesn't need wood, it's masonry and concrete and gets us into new markets, it's super-important for the future of the company, and we're absolutely willing to spend the money.

Okay, and focusing on Europe for a minute, obviously, you've been very successful trying to establish and establishing your brand name there. At what point do you reach -- or can you reach -- the same levels of profitability that you reach in the U.S.?

Never. I don't think that market will ever have the level of profitability that it has here.

Okay, but you feel you've hit the turning point in terms of consistent profitability?

Oh, yeah, well, I think it's an even chance that we'll end up profitable this year, despite the German economy. It's an even chance. And then, of course, we would expect to increase all the time to whatever little profit we make, the next year our projections ought to be better.

Okay. I know Barry asked you about your capital expenditures for the balance of this year. If you take a step back, you've invested tremendous sums in building plant facility, buying some land. Where do you think you are in the overall capital spending cycle and, you know, as we think about your uses of capital over the next several years, should capex wind down pretty dramatically?

Well, I guess -- pretty hard to project, because we'll spend capital anytime when either the volume of business of current products demands it, or else we see a chance to get into other markets. So I can't give you any estimate that would mean anything, Arnie. All I can tell you is this is a long-range company. We'll spend the money if it helps our future.

Okay, congratulations, thanks.

Right.

Thank you and, once again, if you do have a question for Mr. Simpson, please press star 1 at this time, and to withdraw, you may press the pound sign. We'll take a few moments to see if there are any other questions.

Mr. Simpson, it appears we have no further questions at this time.

All right, thank you, Sarah. Is that the end of it? That's it?

Yes, if at this time you would like to disconnect, you may, and have a good weekend.

Thank you, Sarah.

You're welcome. You have a good weekend, Mr. Simpson.

You, too.

Thank you. This concludes today's teleconference. You may disconnect at this time.