Simpson Manufacturing Co Inc (SSD) 2005 Q2 法說會逐字稿

Good day and welcome to the Simpson Manufacturing Corporation's Second Quarter 2005 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. Whatever we tell you will be based on current information. And let me assure you that regardless of my initials, I will not knowingly give you any.

Okay, the quarter was reasonably good, sales up 23.4 %and net income, 32.2. You may recall that in our first quarter net income was below that of last year, but the second quarter put us ahead for the six months, 13.7 %and sales up 19.5%for the six months. A highlight was our Anchor Systems Operations. Sales for the six months, up 31%, 32% for the second quarter. And instead of a deficit of 355,000 for the six months, we have a profit of over 900,000. So now, it does look as if our long range investment in Anchor Systems is going to for the first time show a profit this year--not sure, but it looks like it.

To repeat what I've said in the past, we think that Anchor Systems is an important part of the future of the Company for two main reasons. Its products are designed for use with masonry and concrete, not wood like most of our structural connectors, and it gets us into new channels of distribution like road building and high rise structures. There's a third reason, also. DIY business is an important channel for Anchor Systems' products and new home construction is not.

Road and bridge construction are important markets. Just recently, we sold 2750 tubes of AT30 Epoxy for highway bridge expansion in outer Beijing, China. Unlike our structural connector business, we only have an 8 or 9% of the Anchor Systems market in the US and none in Europe where it's double the size. They build with masonry and concrete, not wood there.

Despite weak economies, especially in Germany, we had a reasonably good quarter in Europe. Sales now are up 14% for the six months and net income, over 100%. The rest of the year, though, is a concern unless economic conditions pick up. But we don't waste time talking about things over which we have no control. Our new European manager is determined to charge ahead regardless of conditions.

Our Quik Drive acquisition is integrating nicely, but it probably will not be until next year that it really starts to pay off. But it continues to promise to be one of our better acquisitions.

Our Canadian operations under their new manager made progress in both sales and earnings and I think market share, but I don’t have late numbers on that. Our new steel sheer wall is now on the market, but it probably will be several more months before we have the code approval necessary in major markets, so we do not expect significant sales until next year.

Home Center sales were up 25% in the quarter and 20% for the six months. I know that some of you are concerned about the price of steel, as we are, and its current effect on our margins. Prices have softened, but we suspect that they will not drop any more. While our, awfully hard to predict, while our costs for steel in the second quarter reflect previous higher prices, our sales increase of over 23% was greater than the increases in other costs. So, while our gross margin did not equal last year's it did rebound to over 39% in the second quarter. That percentage might be a reasonable guess for the third quarter.

Tough quarter for Simpson Dura-Vent. Sales were down 6% and net income down 54%. The rest of this year should be better, but we do not expect Dura-Vent's usual contribution to sales and profits until next year. By then, the new equipment and new pay and benefit scales in Vicksburg, plus the $5 million laser welding systems in Vacaville, it should start to pay off.

Our current capital budget for 2005 is 60 million. It includes 12 million for our new office building, here right near Dublin in Pleasanton, 12 million for plant expansion in Columbus, 5 million for two laser welders and the balance for a variety of equipment to support our plans for future growth including production equipment for the new steel sheer wall.

The transfer in Texas from the old to the new 300,000 square foot plant is now complete. That operation, which covers Florida, had the largest quarterly sales increase. The Midwest and the West, aside from California, tied for second. The Northeast was next and last was California at 16%.

Questions?

At this time, if you would like to ask a question, please press star and one on your touchtone phone. You may withdraw your question at any point by pressing the pound key. Once again, if you would like to ask a question, please press star and one on your touchtone phone now.

We will go ahead and take our first question from the site of Barry Vogel with Barry Vogel and Associates. Go ahead, please.

I think you did a terrific job in the reversing of the tough first quarter and hopefully, this will continue. I have a couple of questions. First question - it was very impressive that your selling expenses as a percentage of sales were only 6.9% in the quarter versus 8.4% last year. And so, I was wondering--and, of course, you had some Quik Drive selling expenses. Is this sustainable because of where you are in total expansion of selling expenses versus, you know, sales growth? That's the first question.

That's a good one. And at this moment, I really can't give you a very good answer. I think, I think probably pretty close, maybe somewhere in between the two.

Okay. And as far as this inventory situation, you know, we had no idea, how much, this whole steel thing, was going to affect you this year. And I know that steel prices have been coming down, primarily because of lower scrap costs and probably secondarily, softening due to excess of inventories that the domestic industry had. So, this question's really for Mike. Can you give us some idea of where we are in terms of the effect on the P&L on the whole steel situation and what we have to look forward to going forward?

Well, I can answer that because I just talked to our steel buyer yesterday. And we usually have and we have right now about three months' supply of raw material on hand. And prices, as I mentioned here a few moments ago, prices seem to be pretty steady now. And our estimate is that they aren't going to drop, if much, at all much more. So, does that answer your question?

Not really. I mean, as far as the effects on the P&L, you know, you brought your inventories down--.

The effect on the P&L in the quarter, the cost of steel was up substantially as a percentage of sales. And that will ease off some we think in the third quarter. But it was up substantially, but we made up the difference in other costs.

Right. But, you know, looking forward on a positive basis, if you continue to make up, by having, higher unit production and, let's say, this doesn’t bother you any more, that should help your margins.

Well, it bothers us a little bit, not for long. We're about done with steel that costs more.

Okay, that's good. And as far as Strong Wall, could you give us the sales of Strong Wall in the second quarter?

Oh, I don't think the--oh, what they were?

Yeah, I know. You didn't mention that I don't think.

No, I didn't, but I got it right here. They were up 7%, as I recall. Let me take a look here. Yes, they were up 7%, but for the year, they're down substantially and they will be down until the new steel sheer wall gets code approval and we start to get real sales.

Okay. And as far as Quik Drive, I know that helped your sales because you didn't own it last year in the second quarter.

Yes.

Can we get some idea of what their sales were in the first and second quarters?

Haven't got it separated out yet, no. We will have before long. We haven't got that figured out.

Mike, could you give us your best guess at tax rate for the year?

38%.

All right, thanks. I'll get in line. Thank you very much.

Thank you. We'll go ahead and take our next question from Taryn Khan with Copper Arch Capital. Go ahead, please.

Good, thanks. Barc, so, I'm just curious, you know, with the recent acquisitions you guys have done, how much of Simpson Manufacturing is now tied to new home builds?

Don't know. We know it's a substantial amount, but our distributors sell to everybody, so we don't have any accurate numbers at all. We know it's important.

Okay. And just a follow up question and you touched upon CapEx and it seems like, you know, you said this year, it's going to be close to about $60 million. So, as I look at the last three years, '03, '04 and '05, it seems like we've had a few years of pretty heavy CapEx. As you look into '06 and '07, what are your thoughts? Does the CapEx start to kind of decline from, the levels that we're seeing in '05? Is '05 peak or is '06 peak? what do you think?

Well, pretty hard to estimate. I have found that wherever our estimates were at the start of a year, why, they change. And I think that we haven't changed our philosophy. We're a company of the future. So, we're going to spend whatever we think that it makes sense. And we will not be holding back because we're bound to go ahead. How do we attract and keep good people? By being a winner. How do we stay a winner? Well, you're willing to spend the money to grow the company. So, that's not a very good answer for you, Taryn, but--.

That's fine. Barc, just one other thing and that is just on the revenue growth, you had 23% growth this quarter. I'm curious, on an organic basis, what was that number? And you know, you guys have increased prices to offset the steel impact. So, I guess I'm curious. With steel prices coming off substantially over the last six months, is there any impact in terms of, your products that you're selling? Are you cutting prices or any adjustments to your prices?

Well, if steel prices do drop any more, we probably will have to cut prices because it all depends on the whole industry. If we have to cut prices, so does everybody else. So--but it has to be a -- enough so that it's necessary to do so either way, up or down.

And just on the revenue number, how much of the 23% was organic?

About 13.

Thank you. We'll go ahead and take our next question from Tony Campbell with Knott Partners . Go ahead, please.

Good morning and congratulations. I guess a couple of questions--first question would be why do you think the tax rate's going to be so high? That's about four percentages more than you've actually reported this quarter?

Well, we reported 37.6% and it's -- trying to predict the tax rate is somewhat complex based on our credit that we receive and filing our income taxes in all the states. And so, we do model it and we are in the 37.5 to 38% range.

Okay. And my second question is, if I might, Barc, what percentage of your revenues do you believe that you're not earning the kind of return that you would expect to earn on?

Well, the last number I got was roughly 20% of our sales are in non-automatically made products. And in that group, the profit percentage is quite low.

Okay. Good. Thank you very much and best of luck.

Thank you.

We will go ahead and take our next question from Arnie Ursaner with CJS Securities. Go ahead.

Hey, Arnie.

First, a mechanical question on your share count. It declined in the quarter, but you also didn't indicate that you bought any shares. I assume it's just treasuring that bit and the fact that your stock had drifted down. Is there any other factor there?

Mike?

No, you are correct. It's because the stock went down and there is left in the treasury (indiscernible) there is less dilutive shares.

Okay. Again, trying to kind of go back on some of the questions, perhaps in a slightly different way, can you give us a sense of the price increases you implemented either in the quarter or at post the end of the quarter?

No.

Were there any?

We really don't want to talk about those.

Okay. Can you give us a sense of the cost of, the average cost of steel in the inventory or used in the quarter and the trends of that going forward?

Well, the -- my discussion with our steel buyer yesterday, she felt that prices will stabilize. They have stabilized. But it's kind of like trying to guess the stock market. You know, your odds of being correct are not too good.

Well, with all due respect, I'm actually focusing on what I think are facts. You had a relatively high cost inventory going into Q2. You've been working that down. So, what I'm trying to get a feel for, if your cost of steel was X in the first quarter, it was lower in Q2, but probably not as much as it will be looking into Q3 as you work off high cost steel.

Our cost of steel as a percentage of sales was fairly stable between the two quarters. We made up the difference there in other costs.

Focusing on your inventories, which declined 25% from year-end, can you give us a sense of the volume decline in steel that you’ve had and perhaps a sense of target levels?

The volume decline in steel?

Yes.

Well, we have roughly three months--right now, we have about three months’ raw material on hand.

And how does that compare with your normal or alternatively, how does it compare with the end of the first quarter?

Probably very similar. Do you think it's the same, Mike?

It's down slightly. It's down since first quarter. But we are comfortable with where our steel levels are now in the three-month range.

Okay. Focusing on Anchor Systems for a little bit, obviously, you've made tremendous progress here. And now that you've had it for a longer period of time, can you give us a sense of, first of all, what are the actual revenues in Anchor Systems?

Yes. Well, last year they were 49 million and this year, as I mentioned, we're up something like 30% .

Okay. What I guess I'm trying to get a handle on is now that you've turned profitable, at what--you've invested a tremendous amount of money in this opportunity. Looking forward over the next four to six quarters, if this continues to grow, would it be reasonable to assume that it's going to approach your more normal markets?

No, no. I do not think in that business in the foreseeable future the margins will be as good as in our core products.

Okay. And international, can you give us a little bit more color for how trends are in the international and your outlook for the balance of the year there?

Right. I think that we are building a brand name there and the first six months was real progress in earnings and sales, too. But I'm concerned. I'm concerned about things over which we have no control. And as I mentioned, we don't spend any time talking about them, but it's a fact that the economies over there, and particularly the German economy, is not in very good shape. And while we are increasing market share and we were able to do that the first half of the year, I don't know how good the market's going to be the rest of the year. So, that's why I'm really concerned about what's going to happen there even though we're way up in profits in the first quarter--the second quarter and for the year.

I have a final question. Normally, you've given us a sense of gross margin in the third quarter in terms of your expectation. I've gone back and looked at Q3 versus Q2 and you rarely have declining revenues in Q3 versus Q2. Is there any unusual factor in place here that would lead us to think your Q3 revenues this year wouldn't be higher than Q2?

Well, there--no. There are no unusual factors that are apparent right now. Now, whether revenues will be higher or lower, I don't know. As you know, I don’t make projections.

No, but I'm also looking at a pattern. Again, with the exception of 9/11, you rarely--I can't find a quarter where Q3 was lower than Q2. So, I'm just thinking out loud about kind of where my model ought to be. You've given us a sense of gross margin. As a follow up to Barry's question, can you also give us, just perhaps expand a little bit more on the selling expenses and again, your view looking forward as to how we should be looking at that line item?

What do you think, Mike, on selling expenses?

The--well, it's something our branch managers are constantly evaluating and trying to get the right mix and make sure we're supporting our customers. So, I think Barclay's (indiscernible) around between the 6 and 8 percent is a fair estimate at the time.

Would it be fair to say that in the second quarter you spent a little bit less than you normally do and that we might see kind of a catch up in Q3 and 4?

I don't think that's true. Do you see an unusual reduction, Mike?

I do not see an unusual reduction in activity and I don't, do not know of any unusual expenses that were deferred.

Thank you. We will go ahead and take our next question from Timothy Jones with Wasserman Associates. Go ahead, please.

Okay, a couple questions--I'm sorry, I missed the first five minutes that you gave your presentation, so forgive me if I ask something that you covered. But first of all, I'm surprised when you said in answer to a question, there was a question regarding organic growth, that you said it was only 13%. That would imply that acquisitions were about 10% of your sales growth. I mean, your screw operations are not that big. What else do you have in there as acquisitions?

Well--.

--You know--.

--Nothing else.

But the Quik operations were like 6.5 million in sales in the first quarter, weren't they?

Something like that, yes.

So, I mean, how do you get 10% of your growth from that operation alone?

Well, I think when the 13% , the question for organic growth, we interpreted that to mean that was the core growth and do not include the increases we had for Quik Drive or for price increases.

Oh, the-- or price increase. That was your unit growth.

Yes.

Would you like to tell what the price increases was?

No.

Well, I can back it out, Barclay.

Okay, go ahead.

I won't go on here, but with the information you've given, I can do it. Okay. Secondly, I thought that your international, when you talked to me, you know, you said it wasn't improving that much. You said the profits are up way now. I think you only made a couple million dollars last year--.

--A million and a half last year.

A million and a half, okay. So, I can go from there. And so, but you were concerned all the time about Germany. Why are the profits--I thought that the profits were going to be relatively flat this year because of a slow down in Germany or was that your expectation of maybe a weaker second half?

Well, we're--the reason the profits are way up is that people there are doing a great job. They're establishing a brand name, which you have to do. We were a commodity when we went into business in Europe. Now, we're getting out of that situation to where somebody will specify us and not let a substitute come in.

Are you doing the same thing, focusing on the architects there, too?

Not to some extent. Not to the extent here because generally, the building codes, they don't have tough ones or enforce them.

Okay.

Britain, the UK recently, well last year, started to have some building codes that help us. It's starting to get a little tougher.

Okay, I think they should. Okay. The Anchor Systems, I mean, you said their profits are increasing and I think there’s a $400,000 number either for the quarter or profits--I thought that was roughly breaking even in the first quarter or was it just making it seem that--?

No, they made a profit for the six months and it looks like for the first time we're going to be profitable for the year in Anchor Systems. Nothing sure, but it looks like it.

Lastly, could you go through with me--I mean, I was--there's some seasonality, I know, in your sales and--but your sales went up, oh, around 15.5 to 23.5%, so about eight percentage points better than the first quarter and your gross margins went up roughly 35.5 to 39. You blew me away on the sales and the margins, even though I thought you'd outdo the numbers that were being carried. But can you just tell me what really, other than the turnaround in the California Strong Wall operations, which hurt you in the first quarter, what were the other big factors that helped either incremental sales being better in the second half--I mean, second quarter versus the first or--and especially the margin improvement, where did it really hit? They’re so fast, they had such a turnaround.

Well, there's nothing in particular, just over the entire business. And I just think we did a better job. And there isn't anything in particular because our steel Strong Wall is not important yet. I don't think it will be until next year.

But I'm talking about the California. The California was down big in the first quarter and up big in the second because of the weather.

Oh, yes. That's right.

That's one thing that helped you, but I was trying to think what other things sort of, you know, really, especially that margin improvement of 400 basis points versus the first quarter.

Yeah.

I mean, you know, there had to be--that's an awful big change in one quarter.

Well, it's getting back to where we have been.

You're not going to answer it, are you? Great. I don't usually say it, but fabulous quarter.

Thank you.

Thank you. And once again, if you would like to ask a question, please press the star and one on your touchtone phone. We'll take our next question from Steve Chercover with D.A. Davidson. Go ahead, please.

Couple quick questions, please. First of all, can you explain--I realize that we can't have a lot of clarity on the direction of steel prices, but you've got such a good brand that is there pressure on you to cut prices if steel falls or can you just kind of use your name brand and actually enjoy better margins?

There is pressure to cut prices, absolutely.

Okay, and the second one - I hope this is not--.

--Now, whether we'll have to or not, who knows? It depends on competition and all kinds of factors. But there's always pressure. And that gives the clients a reason, not a bad one, either. I'd press. Wouldn't you?

Well, of course, we would. So, I guess it just depends. Or your clients are following then the trends in steel pricing and demanding that you pass through the savings?

Well, I wouldn't say demanding, asking.

Understood. Kind of switching gears, there's a tremendous amount of infrastructure, expenditure up in Canada, the oil stands and all that. Are there any products that you currently make or could conceivably supply to that $1 billion opportunity or $100 billion opportunity?

In where?

In Alberta, they're doing an incredible amount of expenditure on oil stands infrastructure, so it's for the energy industry.

Well, probably epoxy is the most likely because it goes into road building and that kind of thing. So, I would expect if that's so, I would expect our epoxy sales to go up more than anything else.

And within the Anchor Systems, are you taking share from any specific competitors or are you basically creating a whole new category of construction materials?

No, we're generally taking share.

Okay. Thank you and congratulations.

Thank you. We'll go ahead and take our next question from Barry Vogel with Barry Vogel and Associates. Go ahead, please.

Well, I did not ask you guys, but usually you give it. What is the connector product share of operating profit and the venting product share of operating profit in the quarter?

Just a second, Barry. Good question. Here we are. Okay. The--in the three months, we had--well, let's take the six months here. In--assets, income from operations. Okay. In connector products for the six months, we had a $62 million profit last year and a 71 million this year. And last year in venting products, it was 3.6 million in '04 and 900,000 this year.

Okay. And the next question, Barc--your largest customer, what was their percentage in the second quarter of sales? And I don't know if you're going to give me connector product sales or total sales. If you could clarify that, that'd be great.

Our largest customer--you mean Home Depot?

Yes.

Is that what you're asking?

Yes.

Oh, okay. Well, Home Depot was pretty strong in the quarter. Have we got a number there? Yeah, we do. Oh, sales in the quarter were up 31% from last year, which is a little bit deceptive because in the first quarter, they let their inventories go down. So, they were replacing inventory because of their program.

And Mike, I have two small questions for you. What's your best guess at D&A for the year?

$25 to $26 million.

Okay. And one other small question--there's something in your P&L called income and equity method investment. Again, it's a small item, but I don't remember knowing what it was. So, if you can explain that, I'd appreciate it.

Well, that's Key Mark, isn't it, Mike?

That's correct. We own 35% of Key Mark.

Oh, so that's the Key Mark that you wrote down to zero?

That's correct.

Yes.

Do you mean they're contributing profits?

Yes.

Okay. And should we continue at the 100,000 rate per quarter approximately?

Oh, probably. That's a guess, of course.

All right. So, that's a little bit of a guess. All right, thanks a million.

Okay, Barry.

Thank you. It appears we have no further questions at this time. I'll go ahead and turn the meeting back to you, sir.

Okay. Well, thank you all for listening in. And you all have my number, so give me a call if you have more questions. Bye.

That concludes today's teleconference. You may now disconnect at any time.