Simpson Manufacturing Co Inc (SSD) 2004 Q3 法說會逐字稿

Good day and welcome to the Simpson Manufacturing Cooperation third quarter earnings conference call. I would like to turn the meeting over to your chairman Mr. Barclay Simpson. Please go ahead sir.

Thank you Nate and thank you all. Good morning and thank you all for joining our CFO Mike Herbert and myself will only tell you what we believe, but ah surprisingly we have been known to make mistakes. We will try not to make any this morning. As you heard me say before it was a good quarter but the major reasons for our success is our people. We attract and keep the very best compact combined with our decentralization which of course builds strong people and makes us able to promote from within and at the end of this year we will have new managers in charge of the majority of our branches. Laurent Verceise (ph), our French manager is taking over all of Europe. In McKinley (ph), Texas it’s going to be Phill Burton, long time Texas sales manager and Murray Daniels who also a long time California manufacturing manager, will be in charge at Columbus Ohio and Karen Colonious (ph) long time head of engineering is the new manager for the Northern California branch. Now all of the highly successful managers of these branches are retiring and all are being replaced from within Simpson Strong-Tie. Last year we replaced the highly successful manager of Simpson Dura-Vent with Steve Eberhard from Strong-Tie and sales and profits were up 14% and 23% in the third quarter this year.

Some of you may recall that in 2002 Kerry King’s father was promoted to take over our anchor systems operations and sales there are up substantially 21% so far this year and the deficit has been substantially reduced. So we are especially pleased that one of our new key branch managers for the first time is a woman. In addition to that we also have a new branch manager of our Canadian operations and that’s Mike Petrovick (ph) who comes from the MGA acquisition. We will miss all of the retiring managers who have been crucial to the success of our company. Sales and earnings up every year since we went public in 94’ but their replacements also are talented excited and determined to be successful. So what else is going on with various operations? Well before we ah get into that there a question arose about our inventories and accounts receivables and I’m going to ask Mike to answer that one.

From accounts receivable standpoint our DSO is 2 days worse than it was at this quarter last year. Gone from 52 days to 54 days was our increase in sales that’s acceptable to us (inaudible). So contact only after going after our accounts. So no real unusual news there. From an inventory stand point because of the rising price of steel if I look at the inventory, our inventory at the end of December the dollar is up 54% from a pounds, when I look at the north America branches, from a pounds perspective we’re up 29% and we have some really great steel buyers in the company and they have the authority to go out and increase our inventory levels based on their understanding of the supply in the market.

Ok thanks Mike ah so what else is going on with various operations. Well Europe for the first time should end the year in the black ah this is -- this is one operation where its taken much longer than we expected to make it profitable, but we are starting to build a brand name to give customers reasons to buy our products other than just on price. We have a long ways to go but we are making real progress. Our new European manager has constantly shown a profit in the 7 years that he had run our French operation. Ah the Shearwall. Strongwall sales are up 24% for the first 9 months but they slowed down in the third quarter. We need the new Strong-Wall designed to sell in other than in just seismic areas and that’s most of the country. It’s designed and tested but it will not be on the market until we have code approval and that will happen probably early next year. Home center business remains strong it’s up 24% in the third quarter and although it means nothing financially as yet, we are selling a little epoxy in mainland China which has to be a market of the future. How distant the future for us we don’t know yet but certainly at some time its going to be very important.

New accounting regulations are causing a large expense some of which is written off, new employees that is and large increases in legal and accounting fees, but some of it is hidden starting with our CEO and especially including Mike Herbert, some key people have been forced to spend considerable time in what we look on as non-productive work. It has nothing to do with increasing sales and earnings. I mention this because these expenses have been offset by large increases in sales so far this year. That may not occur in the fourth quarter. It’s starting out somewhat flat. Long range though we feel good about the prospects as evidenced by our still largest ever capital budget. Although it looks as if approximately $20m of rather sophisticated production equipment won’t arrive until next year.

Questions?

At this time, if you would like to ask a question, please press the star and one on your touchtone phone. Once again, if you would like to ask a question, please press the star and one on your touchtone phone. I would like to remind you if you’re listening on your speakerphone to pick up your handset before pressing star and one. And you may withdraw your question at anytime by pressing the pound sign. We will take our first question from Aloum Persanom (ph), CJS Securities. Go ahead, please.

Good morning, Ernie. How are you?

Good morning. How are you?

Great. Simple one to begin…you didn’t mention any impact at all from the hurricane. I know Florida’s a very key market for you. Can you briefly comment on what potential impact…what impact it had at all on your results?

Yes. Short range, I don’t think anything to speak of. But long range, if anything like that does have an effect, it won’t…it may have a little effect in Florida but not much. Because the building codes there already are very strong and they are enforced. What you saw on TV, all these collapsed structures, homes for instance, they were manufactured homes. They weren’t homes that were built in the last few years on the site. So, it won’t make much difference to us there but it may in the joining states: Georgia, Alabama, etc. They may get tougher. So, short range, not much effect. Long range, probably some.

Ok. Two more questions, if I may. In the international area, you indicated that the fact you hope to reach profitability this year. Can you give us any feel at all for when you anticipate this reaching normal profit margins?

I don’t think it ever will. I think that market is such. It may change someday. But if it stays the way it is, I do not expect us to have the same margin of profit there that we have in the U.S.

Ok. Final question from me. You -- you completed an acquisition this quarter where you’ve given us no sense of the financial impact of it. Can you perhaps share your views of what you think this can do to your results in ’05?

Surely. I…I think that Quick Drive…It is…It really fits. We’re very happy about that acquisition and probably as far as affecting earnings go, I -- it takes six months or a year normally to integrate an acquisition and you have changes and that kind of thing. So, I don’t expect that to help our earnings for, oh probably, ‘till maybe mid-year next year. But then it definitely should because there are customers they have you aren’t handling our products that can and we have some that we can really use their collated screws, in particular. So, overall, it’s going to be very good. It’ll take a little while.

I’ll pop back in queue and jump back later. Thank you.

Thank you. Our next question comes from Barry Vogle, Barry Vogle & Associates. Go ahead.

Good morning, gentlemen.

How are you, Barry?

Good. How about yourself?

Great.

Good. Alright, first question is…can you give us either the figures for operating profits or the percentage of the operating profits for connector products and fencing products?

Yes. You want it for the year so far or just the third quarter?

Just the third quarter.

Ok. In the third quarter, the income for operations in Dura-Vent was $3.2m. And in connector, it was $35.6m.

Ok. And in looking at the different segments of the company, starting off with Europe. Can you give us an idea of the sales for Europe in the quarter?

Yes. Where is that thing? Take a minute. I have to flip a few pages, Barry.

Take your time.

Here we are. Ok. Third quarter, the sales were $21.4m versus $16.3m.

And profitability, can you give us some sense of how much money they earned in the quarter?

No, not yet. It’s -- the fourth quarter is…has been very important in European operations and I -- we don’t want to publish it right now but it does look as if, as I mentioned, it’s going to be in the black.

Ok. That’s good. Anchoring systems sales in the quarter?

Anchor systems sale -- sales in the quarter -- $14.4m.

Ok. As far as profitability, did you make any money in the…I’m sorry. Did they loose much money in the quarter?

We’re still loosing money in Anchor systems.

And for the year you’re looking for….

We’re doing better.

Are you looking for a lower loss this year in Anchor Systems.

Oh definitely.

Okay and Strong Wall sales in the quarter?

Strong Wall was a 9.4.

Okay, and the venting products, I guess we have that and operating profits in the quarter for venting I think you gave us that, okay.

I did.

Now as far as the home centers, you gave an increase in sales for the quarter of 24%.

Yes

Can you tell us what the nine months increase was for home center sales?

Nine months, let me see here, nine months profit 24.4%.

And your largest customer, can you tell us what the sales were in the quarter and what they were up?

Yes only because we have to, Home Depot. I’ll take one moment again.

Take your time, take your time.

We have to publish this don’t we?

We do.

Yes

Alright the sales were, wait a minute that’s a percentage.

Oh okay, yeah $21m.

And what were they up in the quarter?

They were up 11.4%.

And what about for the nine months, for Home Depot?

Nine months, very similar percentage.

About 11%?

Yes

What was the dollars?

Dollars, $56.7m

Okay, now as far as the steel issue, where are you now in terms of what your price increases have gotten you versus your cost? Do you think you’re on sound ground in the fourth quarter as far as that issue is concerned?

I think we’re okay yes.

Okay and Mike, for the year that we talked about maybe not getting equipment in for your very large capital program. Can you give us your best guess at what capital expenditure is going to be this year?

$45m.

Okay and depreciation and amortization for the year?

$20m.

Okay, now in terms of the shares issues, how many shares did you issue for Quick Dry? But you talked about $5m, but we have no idea how many shares that is.

Approximately 80,000.

Okay and did I get on the press release the fact that on the post split shares, it looks like you’re increasing your dividend; am I correct or incorrect?

No it stays the same.

Okay so you were at an annual rate of 20 cents on the post split basis?

Well yes, let’s see, yes.

Okay

On a split basis, right.

Alright, I’ll go off the line and then maybe I’ll come back. You’re doing a great job considering everything. Thank you.

Thank you Barry Vogle.

Thank you, our next question comes from Keroon Conna (ph), Wellington Management, go ahead please.

Hi Keroon.

Hi, how are you?

Great, how are you?

Good, thank you. Great quarter by the way. Just a couple of quick questions. We see the nice acceleration in the top line growth here for this company. I am just wondering could you give us some color as to really what’s driving it. I know you’ve talked about this in the last quarter but what’s really the big driver here and also as you look into 2005, you are going to be up against some pretty tough comps. What’s going to be driving the growth next year? And then also just on free cash flow, how much cash generation you had in the quarter? Just curious on that front.

Okay, what was the cash flow, Mike?

Net cap provided from operating activities was $10.8m.

Okay, and how much was free cash flow? And Mike, you said it’s $45million of CapEx in ’04.

That’s correct.

Okay.

With that 20 million, approximately 20 million is going to move out to ’05.

Okay.

We had a small drop there in the total because we’re spending less money on a new plant in Columbus than we planned.

So just on the top line growth question mark any growth on that?

Well there is really no difference than what it has been. What drives it is we’re doing I think better all the time on merchandizing and checking our web site, you can see that. Giving people a reason to buy our products and even telling them where they can buy them in their area and also new products, constantly we come out with new products every year and this year is no different. We think we’re getting better in all our skills. So, there’s nothing astounding. You can’t say that it’s this particular thing or that particular thing. We’re advancing geographically. We just got a second order out of Russia. And we’re getting a tiny little trickle in China and we’re working on expanding geographically. We’ve probably gained a little market share in this country but that’s not a major driver because we already have so much of it that we can’t expect to gain much more. It’s just general efficiency.

So if you look into ’05 -- what do you think the company in growth are applying, I mean are we talking in the teens, are we talking 20%, I mean this year feels like it was a very strong year and I just want to get some kind of rough idea.

You know I don’t project that way. I don’t project. All I can tell you is that things are in place. We don’t lose people, we promote from within. That builds a lot of strength and that’s why, a major reason we don’t lose them and as I mentioned at the start of my talk our people is the reason for our success. So we don’t see anything that is a big change either plus or minus in the future but of course we have nothing to do with the economy. We don’t know.

Barc, one last question, that is you’ve raised prices this year twice and I’m wondering are you planning to raise prices again and the price increases that you did put through, are they sticking or are you getting any kind of push back?

No they’re sticking and as far as any more price increases, I really don’t want to discuss that.

Okay, well thanks a lot.

Okay. Thank you.

Thank you, our next question comes from Angel Chin, Sidoti & Co. Go ahead please.

Good Morning Angel.

Good Morning Barc, how are you?

Fine.

Great. My questions have to do.…. I have a few questions so I’ll just shoot. Cost of goods sold, what makes up this number?

Mike, Do you want to comment on that?

Materials, the labor to run the factory and the overhead for the factory.

Okay, labor and overhead. Can you give me like a breakdown in terms of percentages for just a feeling as to what is a bigger component?

No, we don’t publish that Angel

Okay. And regarding the gross margin for the third quarter 41.2% I was just wondering if it’s sustainable?

I personally do not think so.

Okay.

I don’t think it’s sustainable at that level. I was surprised it ended up that high and of course that has a lot to do with the sales number.

I think ….. you had spent a lot in CapEx. How much did you spend in the third quarter?

Oh gosh. I don’t know. Can we …have we got that separated out?

I’ll have to get you that number.

Okay. I was just thinking that perhaps you spent a lot in the first, second and third quarter on CapEx in terms of buying new equipment so that, that brought down your cost of goods sold significantly and I was just wondering if there is any more to that?

Not in particular although that’s a constant goal of course to get that cost down and that’s why we buy this more and more sophisticated equipment and we have about $20m of that, that has -- but we won’t be able to get it in this year but $20m roughly, $20m $21m or so is on very sophisticated equipment of which will be in the first part of next year. And that’s in both divisions, both Strong-Tie and Dura-Vent.

Okay.

One piece of equipment and Dura-Vent gets us into markets that we are not in right now.

Okay, new markets. Also how much -- did you put in a lot of equipment in the third quarter?

How much came in the third quarter roughly Mike?

We’ve added 5 or 6 new press lines and those came into production in this quarter.

Okay. I guess that’s a lot. Also to get a sense for CapEx spending in ’05 and ’06, is it still around $41m?

Well any estimate for ’05 and ’06 isn’t worth much right now.

Okay, all right, and also I was just wondering why sales were strongest in the south and the west coast?

Well it often is a reflection of the enforcement of building codes, it can be a whole variety of reasons. Nothing in particular except that in the state of Texas for instance, I understand that they have been enforcing building codes more and that’s true in some other areas also, so that, is in the past year or so that has been a considerable factor, the enforcement of building codes, the new IRC in particular.

Okay, and my last question, I guess ...just wondered why the engineering of wood products and seismic and high wind products sales were up so much compared to your core products?

Why are they?

Yes

I guess there’s no particular -- well there is one item that the price of wood and regulations on timber cutting and that kind of thing has made engineered wood products much more prevalent and so the connectors that go with them are more prevalent.

Okay, all right.

The answer to your question on capital spending in Q3 was $12.2m

$12.2m in Q3. Great thank you very much.

You are welcome.

Okay.

Thank you once again if you have a question please press the star and one on your touch tone phone. At this time we’ll take the last question from Arnold Ursaner, please go ahead.

Hi I’m surprised Barry didn’t ask you for more of a break down of geography, so given that he didn’t may be you could give us a little better feel for the geographic mix?

Yes one moment. Well let’s see for the quarter the largest increases lets see the south-south east and the west not including California. And then also of course Europe was up very substantially.

What were the lowest rates of gain if you will?

Well fortunately something we’ve been trying to do California was. And California was next to lowest, the lowest was the mid west.

Were all your regions up double digits?

Yes.

Okay, and obviously I’m surprised again no one asked you, you stuck a comment in here about an issue related to corrosion on connectors and some fasteners, can you expand a little bit more on what’s in the press release and give us your view of how that would impact your company.

Yes well our attorneys tell us that we don’t have any and they don’t believe that we have any liability. We’re very careful about that kind of thing and we do exhaustive testing on all these chemically affected pieces of wood. Our $12m test lab has been most useful there. And we know what will happen within certain limits as much as you can predict forces like nature affects these chemicals. So and we caution in our literature and you can get from our engineering staff anybody using our products can get from our engineering staff information on how our tests have run on this particular kind of chemically treated wood. So we’re pretty careful about that kind of thing we don’t see right now there doesn’t appear to be any danger at all.

Does your zinc treated product better solve this problem and what --?

Solve is too strong a word.

Okay.

It helps and the one that seems to in most cases it does solve it is stainless steel and we make our products out of stainless also.

What sort of growth rate are you seeing in the coated products?

Pretty big, pretty big.

Okay one or two questions if I can on your expense lines if you don’t mind. You have a bunch of different items you highlight and I’m hoping you can give us a feel for which of these may be more one time in nature if you will? Specifically you mentioned the $1.3m expenditure on promotional activities, increased promotional activities?

Well that was associated with our sales force as well. I would foresee that beginning in the future.

Okay.

Yes that’s just a normal increase.

Okay your $3m obviously again your employees share in the success of the company but it sound like it was you know incremental if you will $3m jump?

Well you’re going to have that jump any time that the stock holders make out big time so do our own people I mean it’s a direct relation.

Okay you had an incremental $500,000 of bad debt expense was that a specific client issue or was that more just general increases?

We did a really excellent job last year on our bad debt and going after our accounts. And this year we haven’t had been as successful, but no specific client. We just need to put a little more focus on that area.

Okay but I mean these are actual bad debts you’ve incurred or just again in the past some times you’ve been very conservative in accruing for bad debt?

Accruing for bad debt.

So you – okay, so again we could easily find as we have in the past this could come back into earnings?

That’s correct.

Okay and I assume the $900,000 of administrative expense were things like Sarbanes-Oxley, I assume some portion of that will continue going forward?

Sarbanes-Oxley will continue I’ll say and as I mentioned the hidden part of it is the worst, that key people are having to do things that have nothing to do with increasing sales and earnings.

Okay your tax rate guidance for this year for the balance of this year and perhaps any comment you could offer on next year?

In the business as usual environment in Q4 our rate could be 39.75% however; we have added a large number of employees and stock, which is an enterprise zone.

Yes.

And we’re currently going through the process with the state of California and qualifying those people for the credit. If we are successful in gaining those credits by year-end we could have our rate drop to approximately 38% for the quarter. So that’s going to be depending on our success with the state.

And are those one-time credits? Well when we think to next year what should our tax rate view be toward the next year?

I don’t have that number with me. On the answer on the question the one time credit when you hire an employee you get substantial credit in the first year and it goes down over the next four years.

Right.

Approximately $30,000 over the 5-year life of the credit per employee.

Okay so when we build our tax rate for next year again I’m assuming that the benefit that you got from stocks from this year will not all continue in the next year.

It will decrease.

And again you had talked about the $73m in Cap-Ex at the end of Q2 you’re now talking about $45m. I’m assuming it’s the $20m swing for the new equipment that will move into ’05?

That’s correct.

Okay and again other than that I assume you planned quite a bit ahead, are there other major new facilities that are on the planning board at this point for ’05?

Well we already – you know we’ve built 400,000 square feet in Stockton and 300,000 that we’re finishing now in Texas and we’re going to do an addition in Columbus. And I think that probably is pretty well going to take care of it for next year.

Well that’s what I was really getting to. You’ve been overspending on capital for the last 3 years and at some point I assume you have ample capacity for the environment you see.

Yes.

So ’05 and ’06 capital spending barring some change in your business should actually be trending lower?

Well it should be lower in plants, lower in facilities. It might not be lower in equipment. Because you don’t know what kind of new equipment is going to come along that we don’t want to be behind on.

And Mike can you give us your view of depreciation and amortization for next year? Given all the new facilities that are coming on board.

I do not have that number with me.

Okay, I think I’m going to stop right there. Thank you; good quarter.

Mr. Simpson that was the last question at this time.

Okay thank you Nate. And that’s it, I presume.