Simpson Manufacturing Co Inc (SSD) 2004 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.

Thank you. Good morning everybody and thanks for joining Mike Herbert, our CFO, and myself. We are only going to tell you what we believe, but our conclusions – some of them – they are all based on current information. They could be wrong – one or two. Amazing, eh?

As you know, it was a reasonably good quarter with net sales up 26 percent and net income up 32 percent. We like the fact that the biggest gains were in the South-Southeast and the Western states other than California. Did the hurricanes in Florida help us in the quarter? Probably not much. But in the months and years to come there should be more specifications for our products elsewhere. Those pictures on TV of flattened manufactured and mobile housing usually cause more attention to making structures safer. Most of Florida already has tough building codes that are enforced. But, apparently they only apply to site-built homes. But building codes elsewhere, with the exception of California and a few others, tend to be more lax. Destructive winds and seismic events over the last 50 years have been a major factor in the stiffening of building codes. But there still is a long ways to go. Our sales people spend something like 25 percent of their time calling on architects and engineers to show them how specifying our products could increase the safety of a structure. And our engineers spend time with code people.

Elsewhere. Canada – with the integration of MGA going well and with our new area manager who came from MGA, sales were up 23.6 percent in the quarter. We went from a loss to a profit. Sales for the year were up 43 percent to 18.5 million. We made $880,000 after letting our inherited manager go with a mandated separation payment that was rather substantial.

Simpson Strong-Tie sales to home centers were disappointing in the fourth quarter. In the fourth quarter in '03, home center sales were up 29 percent, a lot of it due to heavy buying of epoxies and cemax. (ph) On the plus side, sales to what we call DIY lumber dealers were up over 50 percent, which makes them about half of our home center sales. Simpson Dura-Vent sales to home centers were up over 50 percent in the quarter and went from 9 percent to 12 percent of their total sales. For the year, home centers were up 20 percent.

Europe – and for the first time, finally – ended up in the black. A good net profit to start with – a net profit of $1.5 million on sales of 78 million. We've made considerable progress in establishing a brand name, i.e., giving customers reasons to buy our products rather than the competitor's. It's a tough market, but it looks as if we've made the jump, in a significant part of it, from commodity to brand-name product. Our European new manager is aggressive in going after new markets such as Eastern Europe as well as Spain, Portugal, and Italy. Sales in Europe were up 35 percent for the year and are now 10.9 percent of our total sales.

Our Anchor Systems division, that is epoxies, acrylics, drill bits, mechanical anchors, and powder-actuated fasteners – that division made progress too. Sales were up to 48 million and the loss was reduced to 190,000. Our Quik Drive acquisition's collated screws fit well with Anchor Systems products as well as structural connectors.

Most of you have heard me mention that we have a new shearwall out this month. Our branches all over the country are enthusiastic about it. But real sales results probably won't show up until about midyear. For one thing, it will take several more months for code approval to be granted. That's a long process, which in the long-run is a plus. Our current shearwall – we call it the strong wall – was up about 5 percent for the quarter – not much. But it was 20 percent for the year to around $40 million.

Our inventories are high. I know a bunch of you have questions about that. A lot of it is steel. It appears as if we will be able to reduce the level this quarter. Prices appear to have somewhat stabilized. But if it looks as if they may go up again or there may be a shortage, we'll pile it in once more. Not having the raw materials to produce the product would be a disaster. And we lead in service.

For the year since the Strong-Tie sales were up 30 percent to 615 million or 88 percent of the total Company's sales, while Simpson Dura-Vent's were up 12 percent to 83.5 million, or 12 percent of the total Company revenues. SSD's earnings were 92 percent of the total and SDV's the remaining 8 percent, a somewhat surprising result considering the substantial expenses to get the plant in Vicksburg efficient again.

As I think most everyone knows by now, we never make numerical sales or profit projections. However, when any of you is projecting our first quarter earnings, please take into account that last year's first quarter was up an extraordinary 62.8 percent. That's 62.8 percent, a lot of which was due to steel piled into inventory before prices went up. That sort of profit will not occur this quarter.

Questions. No questions?

Hello.

Hello.

What do you press to get questions?

I don't know. Come on, miss. Let's get this thing going.

Is this an open conference?

I thought so. Well, speak up somebody.

I'll ask you a question. As far as the new shearwall – first of all, what are you calling it? Do you have a name?

We haven't named it yet, no. No we don't. We certainly aren't going to call it the strong brace.

Okay. Now I know you don't know what sales are going to be. But based on the work you've done with your customers, can you give us some idea of minimum sales expectation for '05 net product?

No, I can't. I don't have enough information yet.

Okay. As far as the (multiple speakers)

I can tell you, though, the branches are enthusiastic about it.

Okay. As far as different regions of the country, you mentioned on your press release and in your opening statement, some of the gains by region. Can you tell us the number one gain in terms of sales gains based on the regions and then number two, three, four, and five with California being one of them. The other western states being one of them. South and East. Midwest. And Northeast.

Sure. Okay, I'll give you for the total Company. Is that what you want?

Oh no. Each of the regions for the quarter and for the year, if you have it. (multiple speakers)

Alright. But for the entire Company, not just Strong-Tie? Is that what you want?

Just Strong-Tie. Strong-Tie only.

Okay. The biggest increase was – for the quarter – was in the West. That's except California. That's Western States, except California. Then we had the South-Southeast – very close. Then we had – let's see – the Northeast. And the Midwest and finally California.

Okay. And as far as capital expenditures for last year, Mike can you give us what the final number was. Can you give us an idea of what you're expecting for this year as well as depreciation and amortization for this year – the new year.

46 million in 2004; 53 million in 2005. Depreciation and amortization in 2005 of 23 million.

So obviously we didn't get done what we planned to.

Okay. I'll let someone else ask a question. Then I'll go back.

I don't know if the line is open.

Yes, it sure is, Arny.

Good. Mike, first if you could, can you give us a view of tax rate guidance for next year?

39.5 percent.

Okay. Could we focus a little bit on the inventories, if you would. I'd like to try to get a handle for ross-field (ph) volume for inventory. How much of the inventory increase is volume?

42 percent.

Okay. Again, we're up against a—last year you had built inventories quite significantly at year end. You also built them in Q3 in a material way. Can you give us feel for your view of how much inventory you're trying to keep on a go-forward basis?

It's always been the direction of the Company to be number one in service. So inventory turn – people look at it. Ours is lousy. And it's going to stay that way. We just estimate what we think the sales are going to be. We're always on the conservative side. By conservative I mean, we'll have enough inventory to take care of the upper level that we think sales might be. It's really that simple.

Just remind us. You have some arrangement with your various suppliers that if there is a decline you do have some form of price protection.

Yes, that's right.

Okay. Question on Anchor Systems----

Again, Arny, that can of course, change overnight. But we have a strong position simply because we've kept our word for 40-plus years.

Quick question if I can on Anchor Systems. The 48 million you discussed, does that include a contribution from Quik Drive? Are you putting that in Anchor Systems right now?

That's not in—we haven't got Quik Drive in Anchor Systems?

No.

Okay, so it's completely separate.

No, not in Anchor Systems.

Got it. Separate. Can you give us your view of—well. Quik Drive – you haven't really discussed the potential impact it could have in '05. Now that you've had it in part of your business for a few months, can you give us a feel for growth rate and expectations for Quik Drive?

We're thinking that – and we felt when we bought it and it still looks like that – that their sales were 25 million. We think that in two or three years we can double that.

One more mechanical question, you mentioned you were disappointed with home center sales, but then indicated they were up 20 percent for the year. I'm assuming you're disappointment is in Q4?

The quarter, right.

Could you quantify the increase in Q4 – for home centers?

Yes. It was – have you got that number, Mike? It was 6.8 percent.

My last question, if I can. Can you—obviously you are managing through dramatically (inaudible - background noise) steel prices. You have put in some pricing increases to try to offset it.

Yes.

If one were to look at your gross margin going into '05, what is your view of your gross margin in the upcoming year?

Well, we kind of think that we can maintain. It's not going to—we're not going to increase it, we don't think. But we think we can probably maintain it.

(ph) Hi. Is my line open? Hello.

This thing isn't working very well.

I think we're all on the line. I think it's an open conference.

Okay.

This is Kevin Wank at Polynese (ph) Capital Management. Can you hear me?

I can, Kevin. Thank you.

I understand your reluctance to give your own financial guidance. Could you give us some color as to your general views as to how you're looking at the housing market? That might be helpful.

We don't spend any time – for instance, at a sales meeting we don't spend time talking about the housing market except in what products we furnish for it. We don't try to make estimates of it because we can't control that. What we talk about is what new products we're going to work with, how we're going to merchandise better, how we're going to sell better – all those kinds of things. But if you ask me for a projection on what we think will happen to the housing market, you won't get it.

Well, I'm not asking – yes, indirectly I'm asking for a projection. What I am really getting to on this is, I know with your higher margin products and your desire to have high levels of service, you want to have high inventories. But if you don't have a view on what's going on in the housing market and the housing market runs into a brick wall, how are going to manage through that with the high level of inventory? That is really where I am getting at in terms of trying to understand what your balance is going to be.

What happens is that constantly each of the branch managers is making projections as to what his sales are going to be of various kinds of products. Some of them, he makes them all—products he makes himself in that branch, then that doesn't come out to the rest except with a dollar number. But if it's something that is transferred between branches or we're trying to make an estimate as to what we can do with it and it all goes into housing, then there will be some kind of estimate. Overall, no. No. Just—it always comes into – when the branch managers come in to make their projections for the year starting in October and then November and December and finally we arrive at a conclusion, which is a number, in profit and sales that they think they can make and it's within the Company's goals, then you have some projection—they've made projections. But as far as saying housing starts are going to go up, down, or in-between – sure. It's in the back of everybody's mind. But what we talk about is what we're going to do about conditions no matter what happens.

Okay. Also, I know one of the reasons for the inventories are high service levels. But as we all know, steel has been in a shortage in various places in the last year. What sort of shortages are you seeing at this point?

As far as our suppliers?

Yes.

We're not bothered. We have, though, but that's – we're in a very strong position. Because actually the basis of these steel companies – they are different names and they are conglomerates and all that same stuff. But the same companies are the basis – some of them – like US Steel, our a major source. We have very strong positions with them. So if things get tight, if steel gets tight we have preference.

Okay. Alright, thanks for your help.

Hey, it's Jason Simon. Let me try to approach the last question a different way. I'm looking at the unit growth for Q4 for the public home builders up 15 percent. I'm looking at their backlog up 30 percent. I'm guessing it must make you feel pretty comfortable for your prospects for the first six months of the year at least. Do you care to comment on that?

Well, I think we've got things in place. So, yes I'm expecting us to do Okay.

Okay. Just on Quik Drive----

(multiple speakers) However, as I said, this first quarter, because of the huge increase last year – over 62 percent in profits. That is hard to follow. It came because we had figured out—our steel buyer figured out that steel was going to go up substantially and we just laid it in. So in that case, you could put a price increase before your costs went up. We're not going to be able to do that this quarter.

Sure. I guess just on the price increase, in your press release at least, it said that you instituted a price release in January. It sounds to me like you think you probably could—you could stabilize the margin at this point. I guess your comment to the last gentleman that you said that you could at least maintain the gross margin. You're in a seasonally weak quarter right now – December quarter. You did, I think, 38.2 percent. I suspect when you say you could sustain the same margin, you mean the same margin relative to last year in the March quarter. Is that how we should read this?

Yes.

Okay. I guess lastly on Quik Drive, when I look at what your percentage growth was for your two segments, I could back into maybe $4 million a quarter for Quik Drive. Is that in the ballpark? From October 15 to the end of the year?

How much did Quik Drive contribute in sales? Was it about 4 million?

About 4 million.

For the first time.

Okay, so if you are suggesting that you could double this within the next two to three years taking the base case and doubling it in three years----

(multiple speakers). Yes we think we can.

So you are looking at maybe $8 million a quarter contribution next quarter – base case?

Maybe.

Okay, great. That's it. Thanks. Good quarter.

But it's still a little soon to make projections that, except maybe long-range, because we're still integrating them. That takes time.

What's the margin on this business relative to your overall margin?

It's lower. We think that maybe we can raise it some. Quik Drive makes money. That wasn't a problem in buying them.

Understandable. Great. Thanks very much.

It's Tharoon Conna (ph) from Wellington. How are you? I want to go back on two issues. One is the whole inventory issue because your inventory has been skyrocketing over the last six, seven quarters. As you look out towards the end of '05, where do you get inventory levels down to? Secondly, you have been in CapEx expansion mode. If you look at '05 versus '04, how much do you think your production capacity will be up with all the new factories and things that are going in place?

A lot.

(multiple speakers) I assume that is because of demand?

I beg your pardon.

I assume that is because of demand, then?

I missed that.

I said you said your production capacity is going to be up a lot. I assume that is because you are seeing strong demand. Otherwise you wouldn't be doing it.

Yes, but when you buy some property and build a new plant, of course, you build it for the future. We think we're going to continue to be successful, so we build these facilities for several years ahead. We have excess capacity now. We don't have a lot of excess capacity in equipment. But we have the facilities to put the equipment in when it's needed.

Okay.

This is a little unusual, the last couple of years, a little unusual because we bought over 60 acres in California—northern Cal. We bought over 60 acres in Texas. We're expanding in Columbus. It was a little unusual. You know, you hit those peaks and valleys in your expansion. We're still at a peak. We're just closing over 300,000 square feet in Texas – a new plant there – just moving in. We had 400,000 square feet in northern Cal here in the last year or so. So we have put in a lot that is betting on the future.

And just on the inventory issue. I know you touched upon this briefly. According to my numbers, you had 168 or 169 days of inventory, if you look at the trailing four quarters. That is at record levels. Any thoughts on where you'd like to be at the end of '05. Is working capital going to be a source of cash flow? Or is it going to be another use this year?

By the end of the year, we expect to have our inventories, well I have to say, it depends on what's going to happen in the steel market and our views at that time. At this point in time, we think that having them at approximately four-month level would be a good level to have them at.

And on the working capital in general?

We should be able to supply our needs out of our existing cash and the cash we earn.

Okay. So just looking into '05, what do you think is going to be the ballpark top-line growth? You far exceeded expectations in '04. That was coming on the back of a pretty strong 2003. What should one assume (background noise)? Is it in the teens? Is low double-digits? What do you think?

I don't make that kind of projection. You know that. I can tell you that our branch managers, most of whom are new in the job, are enthusiastic. I think the year looks like it's going to be a good year. Beyond that, we don't make any projections.

Okay, great. Thanks a lot.

Hi. It's Tim Adler (ph) from JP Morgan. I am a little newer to the story. I was intrigued enough by what I heard when you were at the office to want to listen in on the call. I want to ask two questions. The first is, with respect to your inventories, in cost and metal terms if you were basically to account for steel costs at year-ago prices, what would the inventory comparison look like?

It would be considerably different. What do you think, Mike?

We've seen—we laid in a lot of inventory at the end of last year at cheaper prices. But even now I see raw material prices have gone up over 50 percent.

I'm sorry. Say that again. I didn't—I couldn't hear you.

Raw material prices have gone up over 50 percent (multiple speakers) gone up significantly.

Okay. So in volume terms, your inventories may look consistent. I could take—I could reduce that carrying value by 50 percent and get a picture of how they looked in terms of comparable volumes?

I think that's right. I think that's right. I think that's also a very good question. How many pounds (ph - multiple speakers) of it do you have?

My second thing, I want to clarify and make sure I heard correctly. You were saying, keep in mind last year in the—I guess the March quarter, was it?

Yes.

That net income was up 62.8 percent?

That's correct.

You said we won't see that.

A substantial amount of that was due to us buying steel ahead.

Okay. The question is, I want to clarify. Are you saying that you won't see that kind of growth? Or you won't see that kind of net income?

Net income.

Okay. So you are looking at a negative comparison probably because you don't have the forward buy going on?

We are going to sure push it. But that's a very tough goal to match.

Sure, okay. Okay. Alright, those were the things I needed some clarification on. Okay.

How are you sir? I want to talk about the gross margin again. The expectation is for flat. The nice increase that you saw first quarter last year, as you said because of the steel buy. So I suspect that will be a negative compare followed by positives as we start to cycle some of the steel increases last year? Is that fair?

Yes.

Okay. Could you give us the breakdown – I don't know if you still look at it this way – by segment? You gave us Europe, Anchor Systems, Dura-Vent. What was the Strong-Tie for the quarter and the year?

Let's see. The quarter – how do you want it? You want sales and then profit?

In dollars, yes.

Okay. Sales for the quarter – connector products were 142 million. Venting products were 25.5. And in profit, connector products were 23.8. That is not profit. That is income from operations, not net profit – but 23.8 connector products. And venting products were 3.9.

But the Strong-Tie, the 142 – that includes Europe obviously, Anchor. It all reports up through there. Do you just have the Strong-Tie business as it's on itself in the US?

No. This is – the 142 does include Europe.

Right. Do you have the number ex?

Oh, in the US?

Yes.

Let's see. Yes, we can take away what Europe was in the quarter, which was 2.3, 3.3, 3.8—that's the increase. Just a second. I've got to add these things up.

That's okay. I can follow-up with you later.

So 13.4 million was the quarter total in Europe.

Okay, alright. Then just relative to the inventory question. I'll beat that dead horse again. Turns have gone—as you said, turns aren't the greatest right now because of what you have been doing. But they have gone from maybe mid-threes down to low twos. Mike, I think you said you are hoping for four months implying three turns by the end of next year. So you hope to see a steady improvement. Because it was really the last two quarters that we've seen the huge jump in inventory. So again, I would think as you cycle that stuff in the back half of this year, that starts to look better. Correct?

That's correct. Inventory has gotten a little bit more complex because of when we put those cemax products in, because of the pressure-treated wood issue for the high-strength steel products we have in there now.

Okay. Then lastly, on the home center comment. I caught what you said. It was up 20 for the year. But what was it for the quarter?

6.8.

It was up 6.8. Okay. And your competitor—public competitor is squawking about picking up share at home centers. I don't how much of that is in overlapping business with you versus his other businesses. But, any share loss in that? Or is it just timing?

I don't year any share loss, no.

Okay, great.

No. I think that is just noise.

Yes. Thanks. Good luck this year, sir.

Anybody else?

Yes, I have a question. There was a comment about authorization for another $50 million of common stock? I am assuming that this will follow-up what you did last year where you don't want dilution and therefore any options that you issued or will issue for the great performance last year by your employees will be bought in the open market. Is that a correct assumption?

No. You cannot assume that.

So why are you doing a $50 million authorization?

Just in case we decide to do it. The decision is not made.

Alright. But as far as options given to your employees, when do you find that out? (multiple speakers)

It will depend on how much cash we have. And----

That's stock options.

I understand. But we're not going to spend all that money to balance if we've got a big acquisition that we're making or something like that. It's always a question. What are you going to do with your cash? We decided – and we've done it for two years and we may do it again. I am just not committing now.

Okay, but do you know how many shares you've issued—I mean how many options you've issued?

Not at the moment, no.

Okay. I have a question for Mike. How many shares were outstanding at the end of the year?

A lot of paper here. Sorry for the delay.

I have another question while he looks for that. I know you mentioned on the last conference call, with the expansion that you've done recently, that you would have the ability if the business were there, to increase production by X percent in '05 versus '04. Can you clear that up, roughly what that is?

You mean what we could do?

Yes, if the business were there based on what you'll have in equipment that is operating throughout '05.

You've got some variables there that are hard to figure. I think—I can only generalize that we think that we have prepared for any increase.

Does that mean a 25 percent increase you can handle?

Yes. I think so.

Okay. Thanks.

As far as the share number for 2004 for the full year, basic was 48 million 051 and diluted was 48 million 918.

Did you get that?

One more time, please.

48 million.

Okay, thank you.

Anything else?

(ph) This Brian Macaulay at Akree (ph) Capital. It looks like your sales were up about 27 percent in '04. If you didn't have any price increases, how much do you think your sales would have been up?

Good question. Let's see. What would you guess at that, Mike?

I don't have the exact numbers. I would guess they would be up approximately 15 to 18 percent.

Thank you.

It's Justin again. On that score, what do you expect as you layer in a January price increase? What is your target, assuming steel doesn't go crazy? Do you hope to get another 2 percent or another 5 percent directionally? What are you thinking?

I don't publish that. Also, we don't publish the price increases that we've made. Of course, what Mike had to do there was work out the arithmetic roughly. My guess is we would have made maybe 20 percent.

But are you fully caught up from a margin standpoint? Do you feel that anything—any price increase here is in addition to what you have in inventory in steel? Or is there still some catch-up to be had?

No. We think we're okay.

Okay, great. Thanks.

We do have a strong position with the mills. If our costs go up, so do the competition's.

It's Tharoon again. I want to clarify one thing. I know one of the gentlemen asked a question about Q1 earnings. I realize you don't give specific guidance. You said that Q1 '04 was a very strong quarter. I look at the consensus numbers and I think people are looking for – I don't know – 12 or 13 percent EPS growth over last year. Are we talking about essentially down earnings in Q1 year-on-year?

Not necessarily at all. I just want everybody to be aware of what the target is that we have to beat if the earnings go up. It's going to be very difficult.

Understood. Okay, thank you.

That doesn't mean that we don't think we're going to have a good year. It's just that first quarter.

(ph) Al Norton at John Hancock. Just a question on the general and administrative expenses. I know you've talking about Sarbanes-Oxley. We've gotten to this point about 13 percent of revenues. Are there some opportunities to work that down over the course of '05 a little bit?

What do you think, Mike?

I think there is. Our Sarbane-Oxley fees are, just what we're paying for the outside work, over $1 million. Hopefully we get some efficiencies as we move forward in that and streamline some of those processes we had to put in place this year. SG&A also went up because of the Quik Drive and MGA acquisitions on a comparison basis. As we have integrated and continue to integrate those, we should have some efficiencies.

With those two acquisitions in the last year and a half or so, you always have surprises. And they always cost you more than you think they will. But these two have gone quite well, everything considered. But you do have those costs.

Sure. Do you have a long-term target? Is that a line item you can knock 50 basis points out of over the next year or two as a percentage of revenue?

That is something that is pretty hard to put a target on. There are too many unknowns there. Of course, we are going to push all the time to lower it. But how much we can lower it – awful hard to say.

Okay, thanks.

Thanks for practically nothing, huh.

I'm used to it.

Anything else? Hello. I guess that's it. Thank you all – those who are left. You all have my phone number. Give me a call if you've got a question.