Simpson Manufacturing Co Inc (SSD) 2003 Q4 法說會逐字稿

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

Good morning. Thanks to all of you for joining, our CFO, Mike Herbert and myself, and no I'm not going to tell you anything that I do not believe, but circumstances can and often do change. There are a few highlights from last year. We had an increase in sales of roughly 24 percent in our Anchor Systems group. The fourth quarter was up 33 percent. And the year's deficit for the first time was less than $1 million. As opposed to over 3 million in '02. We're starting to establish a brand name with these products that are used with masonry and concrete rather than wood as are most of our other products. There are new markets for us; we are long ways from where we want to be with these products in these markets, but we are making measurable progress.

Our Canadian acquisition last year, MGA has integrated nicely. As a matter-of-fact, I just saw the two leaders here in our office this morning. We are now the leading structural connector manufacturer in Canada, as well as the U.S. and Europe. Our sales in Canada were up 80 percent last year; it appears that the MGA acquisition was a two plus two equals five, and that is not always the case. It's possible that maybe we have learned something along the route.

Our sales in Europe were up something like 20 percent in constant dollars but we still had a loss. Did not end up in the black. Once again, as a goal this year, in the way that we are building a brand name in Europe, just as we have done in the U.S. should make that possible. Although, that is no sure thing, and in what is a not so robust market right now. The plus, is that we have been strengthening the base and that is the brand name and the people for future profits.

Some of you know ever since we went public in 1994, we have worked hard to build more volume outside of California with its tough enforced building codes. We had some mild success there last year as our fastest-growing markets in the U.S. in the fourth quarter and the year were the South, Southeast and the Northeast. We had increasingly strong competition for our strong wall shearwall, but the sales still were up 16 percent in the fourth quarter and 9 percent for the year. We have a second wall designed and up for code approval, but we do not expect it to help until the latter half of this year.

Home Center business was strong in the fourth quarter, up 27 percent for the year, around 20 percent. We had a onetime charge of $431,000 of which we are not proud. Quality control is super important to us, and somehow wasn't much but just one little product, some inferior work slipped out. We're tracking it down and taking the parts back. The reason I am mentioning this is because you should all know how important quality control is to this company. We built all this trust over all of these years with architects, engineers and builders. So, we really watch it. The other charge against earnings per share last year was around 6 cents for stock options.

The price of steel, our major raw material remains a problem. It doesn't look like it's going to change in the near future. We are expecting major increases in prices this year, probably around 20 percent. It might even be more. The question is, can we raise prices to cover the entire amount. Possibly not. So productivity will have to continue to improve as it has. You no doubt will note that our year-end inventory levels were up substantially. That is because we have good relations with the mills, the steel mills, and we are able to stock up ahead of some of the increases. We have a really good steel buyer.

Last year we opened our new $12 million testing lab in Stockton, California. We invited leading structural engineers from around the country to the opening where we simulated the Loma (indiscernible) earthquake that is 6.9 on the Richter scale on a three-story wall. This state-of-the-art lab enables us to test whole systems while designing products to resist all kinds of forces. It reinforces the reasons why engineers and architects specify our products. We use the most advanced and precise techniques to design and test our products, many of which are specified in areas subject to high winds and seismic forces where home or building of any kind. If it is well connected with our products, it can resist these forces and in some cases, save lives.

We have a new man in charge at Simpson Dura-Vent, Steve Everhart. The one who has done a fine building job, Don Townsend, has retired several months ago. We promoted from within as we almost always do. Mike Herbert here with me is a rare exception. We had to go outside. But Steve Everhart is off to a flying start. In the fourth quarter Simpson Dura-Vent contributed 19 percent of operating profits on 17 percent of our sales, that is most unusual, and it was partially caused by the reversal of some excess reserves. For the year, Dura-Vent was up 14 percent in sales, and rather was 14 percent of our total sales, and 11 percent of operating profits. That is the usual relationship.

But, the important thing is that they have made up for the loss of their biggest customer. We had our first sales in Russia last year and the salesman in charge of our Polish warehouse is just published this month a brand-new connector catalog in Russian. It will take time, but he is determined to build the markets in Eastern Europe and further.

Well, who really knows about the future, but we feel that we have the essential ingredient to continue to succeed. That is the right people. We have and keep the best. Questions?

(OPERATOR INSTRUCTIONS) (indiscernible) CJS Securities.

Good morning, this is John Arley (ph) for Arnie Ursener (ph). The first question is regarding steel pricing and what your vendors are telling you. You mentioned you might expect as much as 20 percent increase throughout the year. Are your vendors telling you they might stagger those price increases or what do you think the timing of those will be?

Whatever they are telling us, it is apparent you can't count on it. So, one day it is one thing, the next day it is another. The timing, some are right away, some they say are going to be next month. It is really in a state of total flux right now. Our strength, of course, is that we always pay our bills. We have long-range relationships with these mills, and we are going to be at least as well-off as any competitor, maybe better.

Right. Next on your Anchor Systems, you appear to be reaching profitability at much lower revenue levels than you had previously anticipated. What is driving this?

I wish I had a quick definitive answer. It is just generally, we are doing a better job in the shorter space of time than we thought we could. And it is all people. We have had the best people -- you know we transferred from Strong-Tie to Anchor Systems. We did not go outside. We transferred some of our very best people and it has paid off quicker than I thought it would.

Are epoxies having anything to do with the shift?

Yes, a lot. A lot. We are doing very well with the epoxies, getting new customers, pushing out the competition in some cases. They are going well.

One last question. Dura-Vent showed a very impressive quarter end. You mentioned it was related to the appointment of a new division head. What specifically is Steve doing in that division to drive increased revenues as well as profitability?

You know, I think for one thing generally, when somebody new comes into an operation, the people there make an extra effort to appear to be really necessary in doing a good job. Because just think about it, if you're working there, why you better. That new boss better think you are very important. So, it might be that might be a factor there that people are just doing a little better job than they were. He also, anytime you have a new view, if it's a smart view and in Steve's case it really is, it is a very perceptive view, you see things. That the prior manager did not. People are just different. So, this changed the way it started out, it just looks great. Even though Don Townsend who had it before did a great job for a lot of years. Tough business, his two major competitors have been sold once or twice. That wasn't because they were making a lot of money.

Thank you very much and I will get back into cue.

Barry Vogel from BVN Associates.

First for Barclay, I noticed something in the press release that I didn't expect, and that was that you declared a dividend of 10 cents a quarter. Was I reading that right?

Yes you were reading it right, although the commitment is to 10 cents once. The general idea is that we probably will do it quarterly.

Okay, so you said the board currently intends to pay the dividends quarterly, so does this imply if it's a 10 cent quarterly rate that you might pay 40 cents next year? 40 cents a share this year in dividends?

You could imply that, well, it would be 30 this year.

It will be 30?

Yes, because the last --

Why would it be 30? Explain that to me.

Let's see. Tell me when you would put four in?

I'm not sure, but if you're saying to pay 30 --.

The years ended by the time you get the next one in in all probability.

So what changed your mind?

You mean on dividends? Well, it was all you people ragging at me. The tax law, also. It just seemed to make sense. That we cannot find as yet, we're still looking hard that large acquisition that we had all that cash for. So, we're doing a couple of things with it that most investors wanted us to do. One of which was a dividend, of course, it's just a token. It is less than a one percent return on your money.

Okay. Second question has to do with your new authorization to buy back $50 million worth of stock. Last year, you did buy back as you stated, 500,000 shares from the PSD fund for 47.05 a share. The intent that you publicly stated was to prevent dilution of options that were granted the year before. Is this new $50 million authorization on top of what you had left before for a total authorization of a higher figure and its the same intent? Once you give options to your employees for profits earned in 2003 that you intend to do the same thing?

That is the general intent. This is not a commitment.

Okay, so do you know how many options have been issued for last year's performance?

Not yet.

When would you know that?

Here in another month. It's roughly as I recall 477,000. 577.

For the year that just ended?

Yes.

Okay.

As you can see, it was a big year, so most of the branches made their goals.

That's good, at least you don't give them options just because they are there.

No, we do not. You've got to make your profit goal.

Now as far as raw materials squeeze, I had in my notes that it cost you through the September period about 6 cents a share in squeeze from steel. Can you give us an idea if there was further squeeze in the fourth quarter and if so how much? In terms of the effect on your operating profits per share.

As a percentage of cost was roughly the same, wasn't it Mike?

2 percent higher.

What I'm saying is if it was 6 cents for the first nine months, was it a couple of cents more in the fourth quarter as far as squeeze from steel?

Yes, roughly that.

That meant it cost you 8 cents a share last year approximately?

Roughly, yes.

Did you put any price increases into effect as this was going on? In the fourth quarter?

Fourth quarter, no not in the fourth quarter.

So if you're starting out in the first quarter, and you just had further price increases and you are expecting further price increases, can we assume you are continuing to be squeezed on that one item?

We are being squeezed, however, we will put in some price increases. But these things you've got to try the market. So, they are no givens to start with.

Okay.

But, we will be testing to see what we can do.

Okay.

The way we handled it before, as you can see from the general numbers last year, we have increased productivity elsewhere.

Okay. As far as the home center business, I broke down very quickly because you were talking a little bit too fast, at the home center sales for the year and I am just trying to make sure that I got this right, were up 27 percent. Is that correct?

That was in the quarter.

In the quarter. What was the year?

The year was 20.

I had that reversed. The largest customer which you have broken down, what were they up for the year?

The largest customer, we have to reveal or we wouldn't. That is Home Depot.

What percentage was their increase for the year versus the year before?

Let's see. It was around 15.

Right, because we have the year before number. Barclay, you're doing a great job. Congratulations on your flexibility to allow paying a dividend and buying back shares on the options to prevent further dilution.

Well thank you Barry, but there are roughly 2200 people who are doing a great job.

Yes, I know that, I know that but I am congratulating you on something else.

Okay. Thank you.

One other question for Mike. Mike, what were the capital expenditures last year last year and what is your expectation for this coming year? What are you expecting depreciation and amortization to be this year?

$22 million for capital, approximately, in '03, and '04, $43 million. For depreciation and amortization in '04 approximately $17.7 million.

Right. What is the major cause of the big increase because it's almost a doubling? In CAPEX?

We are building a new factory in Texas.

Okay. Thank you very much.

By the way, in that budget, there now is about $2.7 million for new equipment in Simpson Dura-Vent, plus there may be that other 5 million for a laser welding system which would open up some new markets for us. Dura-Vent is like a new company.

Bernie Harris calling from E.J. Harris.

Good morning. Being new, I probably have some questions all the other people already know, but in manufacturing typically material is only like 15 percent of the total cost. Is yours because of the item is much higher, or what is it basically?

We don't discuss that.

Okay. Just a question more to do with the economy with all this capital expenditures, are you also hiring more people or are productivity keeping the hiring down?

One thing that we are really proud of is that over the years, the revenues per person have gone up. We continually try to keep that thing going. Once in a while, when you make an acquisition, for a momentarily, you don't make that, but generally that is always our goal to keep the sales per employee going up.

But are you also hiring more people with this growth or is it pretty much all internally?

No, we are hiring people.

Thank you and congratulations on your record.

Thank you.

Tyrone Conner calling with Wellington Management.

Barc, most of my questions have been answered. Just wanted to get some color on topline growth in 2004. It sounds like you saw a bit of an acceleration in the last quarter. I am just wondering what the drivers are and as you are looking to '04, what is your thinking on topline?

Well, as you know, we don't make projections. Externally that is. We certainly do it internally. Just generally, I get reports from all of the branches before this call. Just before. Generally, people are optimistic. I think it looks like it should be a good year; now things change.

And should we assume margins are a little lower here because of all the rising raw material prices?

That is you are right, that is a constant problem. Particularly right now. This is the most volatile steel market that I remember in 50 years. It is unpredictable. But, our strength is that we are in the connector business especially, our major business, roughly 85 percent. We are by far the largest, we buy the most steel, and we have the most strength with the mills. Whatever we get hit with, our competitors are going to get hit with at least as much.

Okay. Thank you.

You are welcome.

Justin Mauer with Lord Abbott.

I have to apologize for forgetting that you've been through the plant out here.

Yes sir, not the new one though, looking forward to that.

Right.

Just very typically hitting you with this segment stuff, I figured I would give it a shot in terms of -- I just want to see -- you had mentioned that Europe still lost a little bit of money. And I had you according to what I think you said last year you lost a couple hundred thousand bucks. Does that mean that you didn't improve upon that or was it closer to breakeven?

No, we did not improve on it.

Looking at the sales of that business, about 45 million last year, does that sound right in '02 and what would it have been in '03?

What was that again?

The Europe sales, about 45 million in '02? What were they in '03?

Fifty-eight.

Okay.

Really up substantially.

Our problem there is that it is a -- we have not been able as yet, we are making progress, but we haven't got the brand-name there that we have here. That is our long-range goal continually to push to get a stronger brand name but in the meantime, the price competition is fierce.

Were there any additional marketing related costs that you put in there to try to grow the brand? That should hopefully start to slide back over time?

Well, yes, we are not reluctant any more than we are with Anchor Systems. If it is a part of the future of the company that we think is really important, we are willing to spend the money. We will spend it in the short run to build a base for the long run. Because you know you build a company by building a brand name. We have to do that.

Speaking of Anchor, where did it end up the year in sales?

Anchor, let's see -- what was it -- around 39.9 million.

Up from 30 in '02, right?

Yes. Up from 32.

And I think you talked before about a program at Home Depot that you have in rolling out the epoxy. How much of that you anticipate kind of falls into this year as you guys roll that out, or are you fully rolled out at this point?

No, we have more market to get.

Lastly on the steel thing that we're all wondering about, how much -- you mentioned inventories up because you were able to buy some. How much you think that insulates you, you talk about 20 percent as your best guess on a price increase? Were you able to insulate yourself by three or four months in terms of buying ahead a little bit in inventory?

Yes, probably this quarter will probably be okay, but it's going to start to hit us next quarter. We will, of course, be checking the market very carefully.

Great. Good luck, and I agree with Barry's assessment of the dividend.

Think you, Justin.

(OPERATOR INSTRUCTIONS) Dan Seeley (ph)from Sidoti.

Barc, I'm just wondering if you could give us the sales numbers for the strong wall?

Yes. Just one second, I have to shuffle some papers here. For the quarter, the strong wall was up 16.5 percent. For the year was up 9. That was better than we expected. The competition was tough, and we haven't got the new wall out yet.

Can you give us dollar figures for that?

Yes. Shearwall was 33 million for the year. For the quarter it was 7.5.

What market is the new wall intending to address?

What markets? It is still mainly West Coast. California. And some Washington, and some elsewhere, but not a lot, and that is why we're working on this new wall. Because we want to get the rest of the country also.

Lastly, what is your outlook on your tax rate for 2004?

What do you think, Mike?

39 and 1/4.

Thanks.

Okay.

(OPERATOR INSTRUCTIONS) It appears we have, excuse me, we have one more question from the sight of Barry Vogel.

Mike, on the stock option expense, I believe you said it cost you 6 cents a share this past year. What is likely to be the number for the new year?

In '04 it will be 12 cents a share.

So it is going to be doubled?

Yes.

Why is it going up so dramatically?

Because of the expensing of the options that are being granted this quarter for '03.

These are non-cash charges?

That is correct.

Thank you very much.

At this time we have no further questions.

Okay. Thank you all if you are left on the line.

This does conclude today's program. You may disconnect at anytime.

Okay. Thank you.