Simpson Manufacturing Co Inc (SSD) 2004 Q1 法說會逐字稿

Good day and welcome to the Simpson Manufacturing Corporation Fourth Quarter Earnings Conference Call.

I'd like to turn the meeting over to your Chairman, Mr. Barclay Simpson. Go ahead sir.

Thank you, but this is the first quarter conference call. Good morning everybody and thank you for morning Mike Herbert, our CFO, and myself.

What we shall tell you is based on current circumstances and information as we know them, and one thing's for sure, they won't stay the same.

Having gotten that out of the way, in our press release, we called the quarter extraordinary and we meant it. It was unusual, out of the ordinary. The increase in earnings per share of 66% is considerably more than we anticipated, as is our sales increase of 37%, not that we aren't very happy about it.

There were several main reasons for the sales increase. One, the sales of ZMAX, the heavily zinc-coated material products made out of that. They resist high corrosion atmospheres and new chemicals being used on a lot of wood used in construction.

Then there was building code enforcement in many parts of the country. It was stronger, in many parts of the country, and of course, that has gone on over the years and it always helps us. Then there was some buying and it's hard to figure out how much in anticipation of a price increase.

And the weather was better than normal over most of the country. And then we added some to revenues by a modest price increase already.

Now some or most of these items are impossible to quantify, but as a group, they were of considerable importance, and some of course, in non-recurring. Also, though our sales and merchandising efforts are getting better all the time, as is our manufacturing. The latter was really challenged by the unexpected increase in sales and we met the challenge.

With the price of steel escalating the way it has, the fact that we have laid in considerable inventory at lower prices, had a lot to do with our margins, as of course, did fixed expenses being spread out over much larger sales.

Simpson Dura-Vent's sales were up 8.3% while Simpson Strong-Tie's were up 42%, but profits were not proportionate as Dura-Vent's were down 34%, while Strong-Tie's were up 70%.

Our new manager of Dura-Vent, whom we transferred from the Strong-Tie Division, when the long-time manage of Dura-Vent retired, our new manager found substantial production and other problems in our Vicksburg, Mississippi Plant, and they're being fixed, but they cost. And that accounted for most of the loss in profit.

Our capital budget for this year has gone up substantially in the past few weeks. It was at 35, well we started at 40 million, then it dropped to 35, now it's 59, 59 million, and that includes 16 million for the new Texas plant, where the foundation now is laid, seven million for the Ohio plant, a new one, two million for a new building in Southern Cal, six million for Dura-Vent, and 28 million for new press lines and other factory equipment in the various of Simpson strong branches.

Our Strong-Wall Shearwall sales were up, this was surprising, 65.9%. Not at all sure how to account for so much, but I think that it has to be somewhat due to increasing trust that engineers have in our test reports. And part of that is because of this $12 million that we spent on this new test lab in Stockton, California. We just had another open house there. We invited several dozen structural engineers from around the country and architects, and they had to be impressed with our facilities there. And it gave them much more confidence in our test reports. When we show a number in our catalog, they can believe it.

And also by job site calls. I think that had something to do with our Shearwall sales increase. We're very good at that. When we have a job that involved Shearwalls, we have somebody out there on the job, certainly at the start to show them how to install the Shearwall and install it quickly and easily. And we think that our Shearwall installs at least as easily as anybody else's.

Most of the increase in those Shearwalls came from Southern Cal and Las Vegas. Las Vegas now is, has building codes that are the same similar to zone four, which is a seismic zone and they're all of a sudden, being enforced.

Anchor systems products were up 22.1%, tough competition, but so are we, and there are lots of opportunities. With only about 8% of the market in the U.S., we have a long ways to go, and we have the people to get there. That's another division where we took somebody and promoted him to take over when the man in charge retired.

Sales in Europe were up between 20-34% depending on the location, and the deficit for the first quarter was substantially reduced. Europe is now 10.7%, our total sales. Canada was up 130% and it's now 2.8% of sales, and although they're still quite small, sales in Japan and South America were up well over 50%.

As of April 30th, BMS, Simpson, our 50-year old Denmark acquisition, which sells half of our volume in Europe, will become Simpson Strong-Tie, a major change by this family-run company.

This is a big step in our program to build a brand name in Europe. Without it, your products remain commodities. We've done it in the U.S., a very strong brand name we've built, but it's taken some years to do it. But now we're making progress in Europe. Still have a long ways to go, but we're starting to get that brand recognized.

So what are our major concerns for the future. Well, one, the price escalation of steel. We're not sure that we can get it all back, and it's rising as much as 50 or 100% over as little as one year ago. Also there seems to be a shortage. And whether that's real or contrived, I'm not sure, but it's there right now, and the demands in China appears to be a major factor. I saw something recently that said that China was using 31% of the steel production throughout the world.

And then a second item, is the economy generally, and of course, I'm far from an expert on that, but there are just some obvious things, the budget deficit, a likely increase in interest rates, the war in Iraq and our lack of international support. We have, of course, our company, zero influence on these crucial factors, and while we are declaring a quarterly dividend again, and buying back, we're planning right now to buy back enough stock to prevent dilution from internal stock grants, no more than that, we at the same time, we do plan to keep a strong balance sheet. Too many factors there that are unknown.

And our capital budget though, shows that we're planning future expansion. We may have concerns particularly about the last half of ought four, but we're charging ahead.

Questions?

[OPERATOR INSTRUCTIONS]

First we'll go to Arnie Ursaner from CJS Securities?

Morning Arnie.

Hi Barc, good morning. Can you focus a little bit, if you would on your inventory numbers? You showed about a $9 million increase versus year-end, and yet you had extraordinary sales. Should we conclude that your steel inventories went up dramatically more than nine million?

The steel inventories did go up dramatically, and more than that. Yes, we're in, we're in good shape for most of the quarter.

OK, were there lipo-profits from steel in the quarter that you can quantify?

Well, no, we're paying more. The inventory we have already costs more, but it didn't cost as much as if it was being committed right now today. So it's, these things, we are, our sales force is out all the time now, trying to figure out if we can get back, particularly in the third and fourth quarter, the increases of the price of steel, if it sticks, and we're not sure.

OK, from a modeling point of view, can you give us a feel for how much of the price increase impacted Q1, if we looked at the average price during the course of the quarter, you may have I guess, put in a couple of price increases. Can you give us a feel for how much of that was reflected in Q1, and how much will be reflected. Will all the price increases be in place before the end of Q2?

That's too broad a statement Arnie, because these things, the conditions change daily almost, I can't predict whether they'll all be in place by the end of the quarter. I don't know that. I would guess probably so, but not, not if we have another big jump in steel price and the word is that we may have that. Now whether that's being put out by the steel companies just to try and pave the way and they really don't mean it, I don't know.

My last question is in going through your quote, non-recurring, or some of the items that impacted Q1, the building code enforcement in many parts of the country, can you expand a little on that, because that does seem to be more recurrent.

Yes, well, it's hard to predict when a particular building code is going to be, start to be enforced in some particular area, because a lot of it is political, like they'll be, maybe a threat of an earthquake, or a threat of a hurricane, or a typhoon or something in some particular area, and then the politicians feel they better, if they want to get reelected, get on the building code people and start to enforce. And these things, you can't predict them, but it seems like in the last three or four or five months, there has been more than usual enforcement of building codes in areas where they weren't being enforced. Now there's still a long ways to go in this country, but what surprised was talking to the branch managers around the country, it seemed fairly general that it was in most places there was some change in enforcement of the building codes.

Barc, thanks again, great quarter.

Thank you Arnie.

Thank you. Next we'll go to Barry Vogel from Barry Vogel & Associates, go ahead please.

Good morning Barry.

Good morning. Hello?

Yes, I'm here, how are you?

OK, first question Barc, the home center sales, can you tell us what percentage of your sales in the quarter were to home center customers?

Yes, just one, sorry Barry, I ought to be quicker on that.

That's OK.

I have it in front of me, just one second. There we are OK, home centers, in the first quarter, they were 13.9%.

And what was the percentage of your total sales to your largest customer in the quarter?

To our largest customer?

Yes.

Oh gosh, I don't have that. You mean the largest home center customer?

Well they probably are the largest customer of the company.

That's public knowledge, so I can tell you that, but I haven't got it in front of me. That would be Home Depot.

Right.

Let's see, no I haven't got that.

OK, now the ZMAX, which is you mentioned as one of the reasons why you did better.

Yes.

Can you give us an idea generally, of how much dollar sales they were in the quarter versus last year?

No I can't, I'm sorry.

OK, is it more profitable than, generally than your other connectors?

No, it's about the same.

The same. OK. Yes, as far as Arnie's question about, you know, prices and inventory profits, you know, I think publicly you told us on the last call that you had a decent amount of inventory at the end of last year so that you wouldn't be impacted by rising steel prices in the first quarter.

That's correct. We did - the inventory is up a little in cost, but we were able to put in some modest price increases.

OK, now you're on FIFO. Am I correct?

Yes.

OK. So, if you did have inventory profits, it would be in your P&L.

Yes, we're on FIFO. Right.

OK. Does Mike have any idea or, you know, you know, if, you know, as far as relative to the usual profitability in this particular seasonal quarter. Do you have any idea how much that might have helped your reported operating profits, Mike?

Well, wait a minute. What's your question again, Barry?

Well, if you're on FIFO, it's first and last out.

Yes.

So, if you had inventories at the end of December and you're pricing it on FIFO. And prices, you know, rose because of steel price increases, you would benefit by having, theoretically, an inventory profit.

Well, that's true and we probably did have some, but that's - trying to figure that one out - neither one of us can.

OK. Now, as far as inventories of steel going into the quarter, how would you characterize them in terms of, you know, relative to what you expect in business for the second quarter?

Well, probably, we're going to be all right, oh, maybe two-thirds of the way through.

So, with the first two-thirds of the quarter, you already have your inventory?

Probably, yes. But that - provided that our projection for ((Staples)) comes out correctly.

OK. Now, obviously, there had to be pre-buying by your customers because they all know that prices are going up.

Yes.

Everybody knows that.

Yes.

And when you're talking about $100 a ton price increases, that's really very, you know, it's an aberration on one hand, but it's reality. Do you have any, any idea - any idea of what, you know, how sales were helped by the pre-buying by your customers in anticipation of price increases?

No, because I asked the branch managers, each one of them, how much they thought their sales have been influenced and I got a variety of answers, but generally significant, but not as much as one might think. I think maybe there's a belief that the price of steel is not going to keep escalating. And whether that's right or not, who knows?

OK. And the last question I have is on the Vicksburg situation, I know you put in a new manager last year at the end of the year because Mr. Townsend retired.

Correct.

What kind of problems did he find there generally and, with the money he's spending to fix them, which resulted in you having a downturn in operating profits for venting products, do you think that that's behind you and you'll go back to more normalcy in the second quarter.

I think, probably, it's pretty much behind us. We'll have some costs still into the second quarter, but it certainly should be over with by the end of the second quarter. We have things like the turnover in that plant was extraordinary and because of that, why, the cost of production was considerably higher than it was in back of Vacaville, the other plant. And it really hadn't been taken care of. And he's jumped right in and he's made some real improvements already. There's some new equipment, all kinds of things in that plant because, once again, that plant manager was retiring.

Right.

You know, when people decide to retire, why, no matter how conscientious they are, why, their mind is partially elsewhere.

OK. So, the plant manager retired as well as the guy who was the head of the whole division. He retired.

That's correct. And what we did, what the new manager did was put the man in charge of production in Vacaville in charge of the whole operation. So, he has spent a lot of time in Vicksburg.

OK. And Mike, I have one last question. Now, with you're increased capital spending, could you give us a better idea of what depreciation and amortization will be this year?

$21 million.

OK. Thanks very much. I don't know how you can top that first quarter, guys, but ...

I don't either.

But, I think you might. You just might.

No, we're not projecting anything like that.

All right. Thanks a lot.

OK.

Thank you and, once again, if you'd like to ask a question, you can do so by simply pressing star and one on your touch-tone telephone now. Well, at this time, it appears we have no further questions.

Well, thank you all for listening - those who are still on. And I can, just one last word, this is a long-range company. That hasn't changed. We've got strong goals for the future and we're going to push hard to make them.

Thank you. This does conclude today's program. You may disconnect at any time.