Simpson Manufacturing Co Inc (SSD) 2004 Q2 法說會逐字稿

Good day and welcome to the Simpson Manufacturing Corporation second-quarter Earnings Conference Call. I would like to turn the meeting over to your Chairman, Mr. Barclay Simpson.

Please go ahead, sir. Thank you, Tony, and thank you all for tuning us in, Mike Herbert, our CFO, and myself.

And, first, of course, I have to give you the usual disclaimer. I'm not going to tell you anything that I don't believe, but it's based on current information and it can change. Amazing, hey?

Our quarter was reasonably good. 24% up in revenues and 25% in earnings per share. It will be a surprise if we can do those kinds of numbers in the last half of the year, although we'll work on it. But our major line of product, structural connectors, has 60% or so of the market, so an increase in market share is tough to do.

Now, we keep working on raising the size of the market and that comes from new products and acquisitions, better selling and merchandising and building code enforcement.

And we do have a new Shearwall coming out next year which probably won't have a real effect until maybe mid-year. And the Quick Dry (ph) acquisition, which was in our report, it looks likely. It's not a sure thing but it looks highly likely. And it's a screw-fastening systems and collated screws, and they have the leading market in North America and a strong name, just like Simpson Strong-Tie, as well as something like 40 patents; although we don't know yet the value of the patents. We have not really researched them.

The owner is a most innovative sales-oriented manager, and he's going to stay, and as part of the price become a small shareholder of Simpson Manufacturing Corporation.

Now, its products added dimension to our offering, which should help the sale of our other products and widen our distribution. The price is high, but our projections show that we can make it pay. In fact, we are kind of excited about this one.

We are showing a 30% increase in sales for the first six months. And while we projected internally a healthy increase, it was [INAUDIBLE] merely this magnitude, and some of it was due to price increases because of the increase in steel cost but most was product volume.

While we don't expect the second half of this year to match the first half, we do expect a healthy gain. And it's obvious that we need more facilities and equipment, especially equipment. As we already had planned in our building substantially more manufacturing space. So our capital budget is gone from 54 million, which was a record, to 73 million with most of the increase for such as new automatic press lines.

Among the real estate projects, our new Texas plant of over 300,000 square feet; a new plant in Columbus, Ohio; in addition to the new warehouse in Florida; and what's already operating, 400,000 square feet of new manufacturing plants in northern California. So, I think it's fairly obvious that we are betting on a successful future.

In addition to the new president of Dura-Vent, who came from Strong-Tie and is doing a great job -- for example, in the second quarter, his sales were up 15% and profits, despite heavy costs to shape up Vicksburg, still were 5% over the prior year. Well, three of our four largest Simpson Strong-Tie branch managers are retiring at the end of this year, and they will be replaced by people from within the company. While all three have been most important -- and they have -- in the profitable growth of the company, their jobs are opportunities for deserving people and we do not expect any letdown. Our decentralization built strong people and promoting from within keeps the best aboard.

Our steel inventories remain high as prices have shown no signs of softening, although availability is somewhat better. Several of our major plants are working three shifts, seven days a week in order to reduce unusually high backlogs. We have obsession with keeping our customers supplied. Their [sharehold's] full and they make money because of us, and so do we. That's why the seven-day week and the large new equipment budgets.

Taking a look at our sales for the first six months geographically. They were in double digits everywhere, including Europe, which was between -- up between 32% in the UK and 50% in France. France and Denmark both showed a profit. We are still having trouble making money in the UK, but we are making some changes there which we think will help.

Our Polish operation has sold the first of several Merlyn (ph) DIY stores in Moscow. It will open in August and more stores are scheduled later.

We have a catalog, of course, now, small catalog in Russian. It now looks as if, for the first time, we may be in the black in Europe. It appears that we are beginning to have some success in the building of a brand name, which remains our goal there, just as it has been for almost 50 years here in the U.S.

Sales in Canada were up 67% for the six months. Our MGA acquisition is working out just fine. Anchor Systems sales were up 22% for the second quarter and the same for the six months. The loss for six months with Anchor Systems was reduced from 790,000 to 355. No, we do not expect Anchor Systems to be in the black this year, but we are making progress.

Our Strong-Wall Shearwall sales were up 10% for the quarter and 35% for the six months after an unusually strong first quarter. Steel costs were up only slightly as we still had some lower costs in inventory. We now are working off higher priced inventory, which our price increase this month will at least partially offset. Our gross margin was up slightly because of other cost reductions.

Now, I just have to say something about Sarbannes Oxley. It is costing us large sums of money in additional payroll as well as accounting and legal fees. Both of those professions are really adept in getting laws passed that, while they may be needed -- and I don't say they aren't -- they are unnecessarily complicated and obfuscating. However, on balance, something needed to be done and we are doing it. But I don't want to close on that unhappy note.

Generally, we feel good about our plans for the future and the quality and enthusiasm of of our people who, of course, will carry them out. Questions?

At this time, if you would like to ask a question, can you do so by simply pressing star and 1 on your touch-tone telephone. If you wish to withdraw your question at any time, simply press the pound key. Once again, to ask a question, press star and 1 on your touch-tone phone now.

Our first question comes from Barry Vogel with Barry Vogel & Associates.

Go ahead, please.

Hello, Barry.

Good morning, gentlemen. How are you today?

Great.

Good. I have a couple of questions. First of all, on the Home Center business, can you give us, for the first half of the year, what your largest customer was as a percentage of your total corporate sales and what -- and versus the first half of last year; and also the home center sales combined, what was that? What was the percentage of sales in the first half versus the first half of last year? Percentages?

Right. Just one moment . Okay. Home Center sales for the entire company for -- let's see. Have you got the quarter there?

Home Center sales for the quarter were up 9.6%. For the six months, they are up 23.9%.

How about your largest Home Center customer?

Well, of course, that's Home Depot. That's the only one that we'll talk about because we have to.

Right. What were they up?

[INAUDIBLE] 10%. Let's see. Haven't got that, Barry, but we'll see if we can get it.

Okay. Now, as far as the steel issue, considering that you had a 23% -- I'm sorry, 24% increase in overall sales for the company, that's consolidated?

Yes.

Margin slipped from 19 points -- your operating margin slipped from last year's 19.7 to 19.6. Would you say that steel was the culprit in the second quarter versus the fact that the first quarter your margins were up handily despite -- with the fact that you had more inventory going into the year, more steel inventory?

Well, we are now out of the cheap steel. We ran out of it during the quarter. And, of course, as you know, in the first quarter, we were dealing with steel we'd bought at low prices. We still were. Now, we are out of it, so that whole thing has changed.

Okay. You talked about price increase in the second quarter. When were they actually put into effect in the second quarter?

Well, let's see. We've put some in in April. And that's when they -- in the second quarter, that's actually when they went into effect.

Okay. And the price increases that you announced in the press release for July, when will they be effective?

Mid-July. And they vary some.

Okay.

They vary some.

Now, considering the recent actions by the steel producers to continue raising prices, would you say that your July price increases, for the moment, would satisfactorily, you know, allow you to hold margins?

Maybe not. Might be down a little bit.

All right. So margins for the third quarter, because of steel, could be down from last year?

They could be.

Okay. Now, in looking at your balance sheets...

You know, these aren't absolutes.

I know that. I know that. As far as steel inventories and dollars on your balance sheet, you showed the end of June 131 million total dollar inventory versus 97 million last year.

Yes.

Can you give us some idea of what your dollar inventories of steel were last year at the end of June versus this year?

Oh, holy smoke. Steel, do you think, Mike?

Barry, I'm going to answer that question in a little bit different way. From a pound standpoint, from a year ago, our pounds are up 31%, if I look at North America.

Okay.

If I look at increase from the end of the year, it went up 14% from a pound standpoint for North America. You can do the math of what the increase was versus the pounds.

All right. So you were talking about up 31% in North America on pounds versus last year, and up 14% since 12-31-03.

Correct.

Okay. That's fine. Now, Mike, I have a question for you. I noticed that you had a net interest expense in the quarter of $165,000, at least that's what it shows on my press release.

Considering you had 79 million in cash, and you had very little debt on the balance sheet, how did you have interest expense?

That was bond premium amortization on our long-term investments.

You mean had you a negative impact on your long-term investments?

No. We had a $300,000 catch-up in that that we had to record.

Okay. Other than that, you would have had interest income?

That's correct.

Thank you. That's it for me for the moment. I'll let someone else ask a question.

Yeah, thank you, Barry.

Tony, are you there?

Our next question will come from Justin Mauer from Lord Abbott.

Good morning, Justin.

Good morning, Barclay. A couple of questions just to follow up on Barry's margin question.

First, I guess, as it relates to pricing on the steel. It sounds like what you are saying, the majority of the sales increase in the first half was unit as opposed to price. I mean, was it --

That's correct.

-- you know, maybe 5 or 10% of that price, or even less than that?

I think that's probably not too far off. 5 or 10%, somewhere in there.

Okay. Now, relative to the gross margin being down, you know, call it close to 60 basis points in the second quarter; and you said you're just now are eating into more expensive steel.

Well, we already were doing that towards of the quarter.

Okay. And I'm looking at third quarter gross margin last year was down almost 300 base -- actually it was about 300 basis points versus the third quarter of '02. So I'm going back a couple of years, so. You're thinking that it's even going to be tough to eclipse what you did last year, which was down from the prior year; is that fair?

Yeah, I think, yes. I think that's fair.

Okay. And just -- can you give me totals? I will ask Barry's question since he didn't in terms of sales breakdown. Europe in total was up how much? You gave us the country breakdown but what was the blended?

Let's see. In the quarter -- wait a minute. Here we are. Here we are. Okay. Well, I can give you the individual countries. For instance, the UK was up 29%. This is for the quarter.

Yep.

France was up 56%. And Denmark was up 30%. So our sales there were really strong.

So you have the total then of those three combined?

Well, let's see. They ended up as -- the three combined were 22 million.

22 million. Okay. And I didn't catch -- you said that the Shearwall business, I got the six-month number, but what was it up for the quarter?

Oh, for the quarter in -- where?

Shearwall.

Oh, Shearwall, okay. Oops. Where is that?

Oh, yeah, the Shearwall was up 10% for the quarter. Now, it was up 65% percent in the first quarter, which was a real aberration. But the six months -- so we end up six months about 35%.

Okay. In the Dura-Vent, the turn there, are you hopeful that, starting with the third quarter, you start to see a profit growth commensurate with revenue growth or is there still some work to go there in the second half, do you think?

I think we're going to see profit grow commensurate with the revenues.

Okay.

I think that our new manager there is just doing a fantastic job.

And then lastly, on the acquisition. Does that -- how does that fit in from a product standpoint? Is that more complementary to anchor systems or is that more channel opportunity with Strong-Tie?

Strong-Tie.

Strong-Tie?

Yes.

And that's a retail brand, too? They sell at the home centers, don't they?

Yes.

And how big?

They are much bigger in other sources right now than home centers, but they are getting in there.

How big are they?

25 million sales.

And what kind of margins?

Not sure yet. We are going over those books and any number I gave you right now would be before really researching them.

Great.

But it looks okay and we really like the people.

Yep. And where are they based?

Tennessee.

Tennessee.

Yeah, right.

Just with a a single facility there?

Well, that's their -- they manufacture there. I don't think -- do they manufacture anywhere else?

No.

No, that's it. They buy quite a little of what they sell overseas.

Yep.

And I think that's a plus for us to get to know suppliers elsewhere that -- as we are expanding geographically.

Okay.

For instance, they have a little contact in mainland China; and it's very clear, I think, that we got to get to China. It will take us a while but we need to work on it.

Okay. Good luck.

Thank you, Justin.

Thank you. Once again, to ask a question, please press star and 1 on your touch-tone telephone now. In the meantime, we'll move to Arnold Ursaner from CGS Securities. Please go ahead.

Morning, Arnie.

Barc, how are you today?

Good. Great.

Couple of questions. You indicated your capital expenditures for this year will be more like 75 million versus previously thoughts of 54 or so?

73 versus 54.

How much of that has already been spent?

Oh, gosh, how much do you think has been spent, Mike?

$20 million.

How much.

20 million.

Of the 75 has been spent? So you really are going to be cranking it up pretty hard in the back half of the year?

We hope so. It's very hard to predict because things get delayed. This and that happens, but we are pushing because we hate to have backlogs.

Following up right on that point on backlogs, you indicated that you obviously are manufacturing 24-7, and you have indicated you are doing everything you can to reduce backlogs. So I'm assuming your inventory does not have a lot of finished goods in it. I assume most of that would be viewed as raw material?

Well, that's true. That's true.

Okay.

It has some, perhaps -- and I don't have exact numbers on this -- but it has perhaps a little extra finished goods because we've had quite a switch to more resistant coatings for some of our products. ZMAX, for instance, is selling much, much higher, which means that the sales of the regular coated products go down. So our inventories for higher sales, they'd be there longer.

I'm trying to get a feel for the likelihood for inventory profits in the back half of the year. I would assume any manufacturing good that you have in inventory should have some inventory profit given that the raw materials are higher and prices have gone up. And then in addition, I assume the steel inventories, if prices are rising there, should have some inventory profit as well. Are you building that into your margin guidance going forwards?

What do you think, Mike?

I don't expect significant inventory profits at all. Finished goods up, you know, [INAUDIBLE] and you don't revalue those. So I -- we are not anticipating anything there.

Okay. And again, going to the acquisition you are making, you gave us some of the details there. What would it require for that to be accretive to earnings? What sort of margin would they need or growth rate would they need?

Well, they apparently have a good margin now, and it should be accretive shortly.

Okay. And I went on their website. It appears as --

Pardon me. You know, we have not researched the books yet.

Okay. If you go to their website, It appears a lot of their product appear to be a kind of a razor-blade kind of product. In other words, it's hardware that's sold and then they sell a clip that works on existing hardware that's out there. What percent of their revenue would be kind of what I've called razor blade-type revenue?

I'm sorry, Arnie. As of yet, I have no idea.

Okay. You mentioned -- I would assume that overtime expense has been quite high if you are running 24-7. What impact did that have on the margin in the last quarter?

Well, I think it probably had some. How much, I'm not sure. What do you think, Mike?

I don't have those exact numbers, but overall from a [INAUDIBLE] and tooling standpoint, because of the efficiency they'r running the plants at, not much. Those offset the addition cost of overtime, that we had better absorption.

My final question, Barc, in the first quarter you used the word "extraordinary" in your press release and in this one, you are not. Are you trying to more signal that some of these results are more sustainable.

Well, we're going to try and make them sustainable. And, of course, they aren't like the first quarter. First quarter was 37% in sales, but in profits, over 60% up. And we are not going to do that. You know, that was extraordinary.

Now, we're going to push for everything we can get. That's why we are spending all this money for the future.

Okay. Great quarter.

Thank you.

At this time -- excuse me. Next, we'll move to Barry Vogel from Barry Vogel & Associates. Go ahead, please.

Hello, Barry?

Hi, Barc. Mike, can you tell us what percentage of your operating profit was in the connective product segment line?

Yeah, the -- let's see. In the quarter,94% was connector.

And 6% was...

[INAUDIBLE] to be exact, 93.8.

And the result was venting product?

Yes, except for a little bit.

Okay. As far as your stock buyback program, congratulations on accomplishing most of what you were trying to do.

Yes.

That 57,000 shares that you commented on in the third quarter, is that the end of it for this year?

That's the end.

So I guess...

Well, Barry, as you know, we granted 575,000 shares, internal options, and that's all we're buying, exactly that amount.

Right. And,Mike, can you tell me how much options, if any, were exercised in the first half for how much proceeds? Can you tell us the shares outstanding at the end of the first half?

I don't have that number with me.

Okay. Thank you very much. Congratulations on a fantastic performance.

Thank you.

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

All right. Well, thank you all who are still on. Bye.

Thank you. This does conclude today's program, and you may disconnect at any time. Have a great day.