Simpson Manufacturing Co Inc (SSD) 2003 Q3 法說會逐字稿

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

All right. Thank you, Gabriel [ph], and good morning, everybody, and thanks for joining Mike Herbert, our CFO, and myself.

I have to please the lawyers, so I'm going to say that I'm not going to tell you anything that I do not believe this morning, but my comments are based on current information, which can be inaccurate in projecting the future. Amazing, eh? You can take a look at our 10-Q or 10-K for some of the risks in our business. OK.

Well, you've seen from our press release that it was a reasonably good quarter. There were some aberrations, however, that are worth noting.

Earnings per share were decreased by roughly 6 cents compared to last year by the higher cost of steel, which will probably stay at about this level for the next few months, although next year the steel mills probably will try for an increase. That really was an aberration because we had a large amount of very low cost steel in inventory last year and we don't have it this year.

Medical and other benefits were up around 30% over last year and predictions are for another 20% next year.

Our necessary use of attorneys and accountants has increased significantly and that, unfortunately, will remain so. They've done a great job of forcing us to use their services. We do feel, though, that laws such as Sarbanes-Oxley and the New York Stock Exchange regulations were needed and we're either in compliance or will be in the near future. But just because something is legal does not necessarily mean that it is ethical and we'll continue to stress ethics and integrity within the company.

Simpson Strong-Tie contributed 88% of sales in the third quarter and 90% of profits whereas Dura-Vent was 12% and 9%. Another 1% came from other sources.

Sales to home centers increased 15.6% while sales to contractor distributors were up 25%. Home Depot was up 10% and 12% for the year.

Anchor Systems had a particularly good quarter with sales up 31%. So far this year, Anchor Systems sales have totaled $3.1m, an increase of 21% and the deficit has gone from $3.8m to $650,000 so far this year. That is a surprise to us. We didn't expect it to go down that quickly. A major plus is that we're getting our epoxies into home centers.

The Strong-Wall Shearwall systems were up 9% and are now up 7% for the year. We're working on a new model that's badly needed to combat the competition, which is really tough, but it will not be on the market until sometime next year.

Our efforts to build a brand name in Europe are starting to get results. Although it still is questionable as to whether we'll be in the black this year. Sales were up for the quarter by roughly 23%, but Europe remains a tough market. The severance package for non-performing people is a costly one, but we have replaced a couple of key people this year.

If any of you are tied of hearing how tough it is to make a profit in Europe, you're not alone. I'll guarantee you, we're working on it.

The latest capital budget this year is roughly $21m, of which $4m remains to be spent. Next year, 2004, will see a big jump to around $41m. Over half is real estate and involves new plants and warehouses in McKinney, Texas, and Bloomingdale, Illinois, replacing the plant now in Addison.

Also involved is $5m for a laser system of welding pipe. This system opens up new markets for Dura-Vent in Europe and Japan, as well as the U.S. Also in the budget are several automatic press lines for Simpson Strong-Tie, as well as various other equipment.

We continue to improve our website. I invite you to take a look at it, the definition of ``improvement'' being that it makes it more desirable and easier to buy our products.

The company plans to buy back the amount of shares, 500,000, for which our people were granted options this year. We'll attempt to do it in a manner so as not to cause a spike in the stock.

And that's all I have to say, but I'm ready for questions.

And at this time, if there are any questions, you can press the star and one on your Touch-Tone phone. To withdraw your question you can press the pound key. Once again, if there are any questions, press the star and one on your Touch-Tone phone now.

And we'll take our first question from Arnold Ursaner of CJS Securities. Go ahead, please.

Good morning, Arnie.

Barc, how are you?

Great. How are you?

I'm pretty good. Two questions I'd like to start with. One would be, can you quantify the impact of the tax benefit that you got in the quarter?

Mike, you want to do that?

The tax benefit was approximately 2-1/2 cents earnings per share and that was primarily because of the enterprise zone where the new Stockton plant is located.

And can you give us a sense of what your full year tax rate guidance would be and your view towards next year for tax rate?

For full year I'm expecting close to around 38.5% and for next year I would expect something similar.

OK. And obviously, you mentioned the steel impact that it had on your quarter. I assume it's also-- you're trying to put through put increases. I guess I have two questions related to that. One is, did you try to put in a price increase and if so, did you see some pre-buying from customers in anticipation of that price increase?

You always do see some, yes, and we did put in some price increases, but not enough to offset the increase in the steel.

OK. My final question is you obviously are moving towards profitability on Anchor Systems. What do you believe is your actual break-even level of revenue in Anchor Systems and when you do reach profitability and you reach what I would call a normal state, what sort of margin do you expect to earn in that unit?

Well, I think that I did have sales of $70m as a target for showing a decent profit. It may be that we'll get there with a smaller number because the reduction this year was really unexpected and I think that the people in Anchor Systems have done a great job and it may well be that $50m or $60m will get us to the point where we're in the black.

OK. Thank you very much.

OK, Arnie.

Our next question comes from the site of Barry Vogel of Barry Vogel and Associates. Go ahead, please.

Good morning, Barry, how are you?

Good. Good morning, gentlemen. A couple of quick question questions for Mike. The D&A this year, what does it look like and what is your best guess for next year?

For this year D&A is going to be approximately $16.8m and we are currently in our budget process for next year, but my best estimate at this time is we will have a similar number for next year.

OK. Now as far as the MGA effect on your quarter, Barc, did that add to operating profits? That's the first question. The second question, was it dilutive or accretive?

No, it took away from profits.

Can you tell us what the operating loss was?

It was approximately break even.

The operating thing was break even?

We did convert them over to our computer systems, you know, put our phone systems up there, get the people converted to our payroll and bring product lines together. So we did spend-- from a resource standpoint, it did consume quite a bit of resources.

OK. And going back to Arnie's question about the steel cost increase, 6 cents is a big number and I know you mentioned, Barc, that you had low-cost inventory in the past. Because of your dominant position, I would think that Arnie's comment that probably will try to get back that with price increases probably is valid. So can you tell us if you are going to try to get back that money with price increases?

Well, we will. We always do, but I can't tell you whether we'll succeed or not, because you never know until you go out and talk to the customer.

Have you tried to get-- have you raised any prices?

Oh, we have, yes.

When did you put them into effect?

Well, they varied some. It was first quarter, some in the second.

OK and would you-- Mike, on that same issue, would you say that the negative effect would be far less in the fourth quarter than the third quarter?

Yes.

OK.

Yes, definitely.

All right. Now as far as-- let's see here, I don't have the numbers because you just gave us percentages on what the operating profits were by segment. Mike, do you have that so I don't have to figure it out before asking a question?

Just one moment. Here we are. OK. The split is what you want, between the two divisions?

Yes, fencing products and connector products.

Yeah, OK. The sales, first connector products, were $133.5m.

Right.

And venting products were $18.3m.

And operating profit?

And operating profit was $26.3m and $2.7m.

OK. And on the venting products you mentioned for the last year about the loss of a customer. Could you tell us, roughly, what sales you think you lost from that customer in the third quarter?

Well, it's kind of hard to say, but probably about a half million dollars.

And what do you think you'll lose in the fourth quarter?

Oh, probably-- let's see. Maybe more than that.

Maybe a million?

Yes.

OK. And as far as your balance sheet is concerned, Mike, what is your goal for inventories at the-- I mean, it's a very fine balance sheet in the third quarter. It looks like you've done a continuation of a great job with inventory management, et cetera. What is your goal for inventories at the end of December and what's your goal for receivables?

Well, you have to know -- I think you do, Barry -- that we don't have goals there except what drives inventories and receivables is the customer and we are not going to miss a sale because we want to turn the inventory faster. So the inventory turn depends on what we need to get that stuff out on the job site right away. Contractors do not want to wait.

OK. One more question. Geographically you usually give us numbers so I'm asking that question that we've always asked, in the quarter, sales by region, what was the percentage change for California, the other western states, South/Southeast, Midwest and Northeast?

OK. California was-- Well, let me give you the ones in order. The Northeast was the biggest increase. The South/Southeast was second. Well, of course, Europe was number one, actually. Then came the West and then California and last was the Midwest.

Do you have the percentage change by region?

I don't like to publish those generally, Barry.

You usually give it to us on the call.

Yeah, well, I'm not going to.

OK. Thank you. I'll go off the line for other people.

But, Barry, one thing that I do want to put across is that we did achieve something that we constantly try to achieve and that is to make California less important in the grand total.

Well, you did a good job of it.

Yeah, we did a good job and it still went up.

Right. Thank you.

OK.

Our next question comes from the site of Dan Filley [ph] of Sidoti and Company. Go ahead, please.

Good morning, Dan [ph].

Hey, good morning, Barc. Just a couple quick questions. What was the amount of the bad debt expense that was reversed during the quarter?

Approximately $800,000.

OK. And can you elaborate on the potential market sizes that you're pursuing, you know, with the initiative at Dura-Vent?

At the moment, no. And the reason is that our long-time head of that division is retiring and somebody brand new to that job, not new to the company, is going in there and any numbers or anything else right now wouldn't mean anything because we've got a new person in charge and he'll figure out what he thinks can be done.

Can you tell us what the timing might be of, you know, of the sales initiatives?

Oh, probably-- I think he's got to have about six months to get used to things. You don't put a manager in and right away-- You know, if he's a good manager, he's going to check things out very thoroughly before he makes any moves or sets goals.

OK. And would you anticipate that the new laser welding equipment would be installed by that time?

Yes.

And then just one last question.

It may take a year. It may take a year to get that equipment in there.

OK.

It's a pretty complicated line, but it's important for the future.

Just one last question. How do you see the phase-out of CCA as a wood preservative at the end of the year, you know, affecting-- you know, affecting your business in terms of the sales mix in connectors or, you know, potential liability issues?

What do you think, Mike?

Well, we have a large initiative underway addressing that problem. We are coming out-- we have a product line that exists today with a ZMAX coating on the steel, which is much more resistant to the chemicals and so we are working with our distribution channels on providing those products to address that problem.

OK. Can you tell us what the cost differential is, you know, between the two particular product categories?

It's about 15%, isn't it, Mike?

That's correct.

Yes, 15%.

OK. Thank you.

And actually, it gives us-- the whole thing is an advantage for us because we have much better testing facilities than any competitor does and we've been conscious of this for a long, long time and we have had ZMAX products, stainless steel, all that kind of thing, also for a long time. Now, it's a pain in the time we have to spend on it, but in the long haul, it's a plus for us.

Our next question comes from the site of Justin Mauer [ph] of Lord Abbott. Go ahead, please.

Hi, Justin [ph].

Hi, Barc. A question on the gross margin. I joined the call late, so I apologize is you answered it already. I did hear that you talked about steel costs costing you 6 cents, but the year-over-year change in gross margin, how much-- you know, was it 100%, 50%, related to steel or was some other overhead, you know, insurance and those type of things included in that, too?

You just said it, Justin [ph]. It is several things. It is medical and other benefits, all kinds of things. It's our cost of lawyers and attorneys. It's steel. It was a combination of a whole bunch of things and, unfortunately, the increased cost of medical and other benefits is going to continue. It's not only going to stay where it is, it's going to increase every year. Those are the projections of the experts in the field.

OK. And relative to the steel buy, did that affect you the whole quarter or did it show up kind of mid-quarter? And the reason I ask is as you go to the fourth quarter is there going to be more of an impact or did you feel kind of the full effect this current quarter?

Most of the effect was this quarter. That is, the really low-cost inventory last year was in this third quarter.

Got it. Did you say, by the way, what your Europe sales and/or Anchor sales were in the quarter?

No, I didn't, but we're-- I'm happy to give out that information.

All right.

Europe, let's see, was-- just one second here. It went from $13.2m to $16.3m.

How much of that was currency? Do you know?

None of it.

No, I'm sorry, that's not correct. The currency did change substantially.

Oh, wait a minute. Wait a minute, yes.

I was going to say, you're the only guy that hasn't been affected by currency this quarter, then.

No, we were.

I don't have those exact numbers with me, but we did benefit from a change in currency.

All right. No problem. Then on Anchor?

Well, Anchor was up 31% and did I mention -- yes, I did -- what happened to the deficit there? That-- and this has been going on all year, but this last quarter especially was good in reducing the deficit from $3.8m so far to about $650,000.

In the third quarter?

Yes.

And you had sales in the second quarter, Anchor Systems, $10m. Was it up from the second quarter, sequentially, or was it roughly the same?

Well, we compare quarters with the same quarter the prior year. Now this one, let's see. We went-- Have you got that number, Mike?

Yeah, the third quarter the Anchor Systems sales were approximately $11.7m.

OK. Still going up. OK. That's all I had. Thanks, guys.

Our next question will come from the site of Torin Kana [ph] of Wellington Management.

Good morning.

Hi, Barc. How are you?

I'm fine. How are you?

Good. Barc, can you give us some color on free cash flow in the quarter and also, just the components of it? And as you look into 2004, it sounds like, you know, some of these expenses are going to stay with you. So any kind of preliminary targets in terms of gross margins as you go into '04?

The target is always, of course, to try and improve it, but realistically, the gross margin, we think, is going to be less next year than it was this year.

OK.

And let's see, we'll get that cash flow in a minute. You got it, Mike?

The-- for the nine months ending September 30th, cash provided by operating activities was $44m.

OK. So any plans on instituting a dividend?

No, none, because, you know, we're a growth company and we need that money, we think, for our future and you don't buy this stock for dividends. You buy it because of all the progress we have made and we're going to make and we need that money. We keep looking for that big acquisition. We haven't succeeded yet, but we keep looking.

Fair enough. Thank you.

I tell people that we wouldn't mind a really good recession because then somebody would become available.

OK. Excellent. Thank you.

OK. I'll see you on the 29th.

Yes.

OK. We have a follow-up question from Arnold Ursaner. Go ahead, please.

Barc, can you give us a feel for the trend of revenues during the quarter? In other words, was it relatively even throughout each of the months in the quarter or did it accelerate in September? And also, could you comment on current trends?

Well, it accelerated in September. It was not a level quarter, in fact, just the opposite. And the acceleration has continued.

So are you seeing continued-- You know, again, I know you won't break it down by region, but are you seeing generally double-digit growth in the month of October so far?

Yes.

Across the regions or--

Yes.

OK.

The next question is also a follow-up question from Barry Vogel. Go ahead, please.

I'm a little confused on your breakdown of sales. So, Mike, if you can tell me, just for the quarter now, I have the European sales at $16.3m versus $13.2m last year. I have $11.7m this quarter for anchoring systems. Can you give me the anchoring system sales last year in the third quarter? And can you give us the actual Strong-Wall sales in this quarter versus last year?

Hey, Barry, you got to keep better records.

I'm trying.

The Anchor Systems sales last-- third quarter Q2-- I'm sorry, third quarter, '02 was $8.9m.

OK. And this year?

It was $11.7m.

No, are you talking about Strong-Wall now or anchoring systems?

Systems.

Which one?

Anchor Systems.

Anchoring systems last year was $8.9? OK. And Strong-Wall? That was last year. And Strong-Wall, last year and this year?

Just one moment here. Strong-Wall last year was-- in the quarter, you mean?

Just the quarter.

Yeah. In the quarter it was last year, $8.2m.

And this year?

This year it's $9m.

All right. Now on the operating profits, I'm a little confused. That's why I want to clarify this. The $3.8m losses for anchoring systems, was that in the first nine months of last year or was that in last year's third quarter?

Nine months.

OK. And this year for nine months you had a $650,000 loss?

That's right.

All right. Thank you very much. Sorry about that.

No, you mean you sorry about lesser loss?

No, sorry about asking you these questions because, you know, you guys go very fast.

OK, Barry.

Thank you.

All right.

OK. Our next question is also a follow-up question from Justin Mauer [ph]. Go ahead, please.

Yes, Justin [ph].

I'm going to follow Barry's lead here.

OK.

On your Anchor loss, year to date $650, I had you guys losing $1.3m through two quarters. Does that mean that you made money in the third quarter or are my previous numbers wrong?

Well, that's the way the first numbers appear that we actually were in the black for the first time. I don't know what is the cause of that. I suspect, though, that it won't continue in the near future.

So there may have been some accounting adjustments or something that just--

There may have been something in there.

OK.

It was a surprise.

Did you quantify, by the way, the option hit, the stock option hit to earnings, how much that was?

Yes, we did. It's-- let's see, it's on that-- on the press release, I believe. Just one moment. Yeah, the pretax stock compensation expense was $542,000.

OK. And that's all in G&A?

Yes.

This is a dumb question, but if you are expensing stock options and you also see a diluted share count creep year-over-year, 24.8 million up to 25.1, you're getting hit-- you're getting penalized twice, right?

The stock dilution, at least this year and possibly in the future, we're going to offset by buying that many shares, whatever we grant.

No, I understand. But-- this may be a Mike question, just accounting related, is that, you know, in previous years where companies didn't expense options the-- as the stock price moved up, as yours did year-over-year, the increase in shares outstanding, diluted shares outstanding was accounting for the fact that you had options out there. But now that you're expensing options, I'm surprised to see the additional double whammy, if you will, of shares outstanding, you know, diluted shares, still going up, as well. So you're getting, you know, lower net income by expensing but then you're also getting diluted by more shares outstanding.

Well, that's true. That's just-- you're absolutely right, that's the fact.

Yeah, OK. All right. Thank you, sir.

OK.

Once again, if there are any questions, please press the star and one on your Touch-Tone phone and to withdraw your question press the pound key. At this time, Mr. Simpson, we have no further questions.

OK. Thank you all.