Simpson Manufacturing Co Inc (SSD) 2005 Q3 法說會逐字稿

Good day and welcome to the Simpson Manufacturing Corporation's third quarter 2005 earnings conference call. I would like to turn the program over to your Chairman, Mr. Barclay Simpson. Please go ahead, sir.

Thank you Leo. Welcome everybody and thank you all for joining Mike Herbert, our CFO, and myself. We are not going to tell you anything, which we do not believe, but this might surprise you, we are not invaluable. Our press release pretty much outlined what happened in the third quarter. Our sales and earnings were up substantially, the latter around 25% when you take out the one-time sales of real estate. Quick Drive sales were 8.7 million and 3.6% of the 24% increase in sales. The majority of the increase was due to improved sales and merchandising of our Simpson Strong-Tie core products, although Dura-Vent contributed 7.4% of the increase. Our new and recently approved steel sheer wall did not play a significant role as yet in total sales although after a poor first six months, sheer wall sales were up 16% in the third quarter. They still are down 7% for the year. We expect the steel sheer wall to start to have an affect this quarter, no estimate as to how much yet.

Business was good throughout the United States. The South, Southeast had the largest increase. Florida was a major contributor. Generally, building costs (ph) stiffen after natural disasters such as Charley or Frances last year. We lose business in the disaster area for several months as we will in Louisiana and environs (ph), but after time, to clean up, time enough to clean up, the mess as in Florida specifications for our structural connectors usually increase. Home Center sales were up 19% for the quarter although Home Depot was only up 1%. Anchor Systems, which we think is an important part of our future because the products are used with masonry and concrete, not wood and do not depend on new construction like housing and industrial structures. Sales were up 17% for the quarter and 24% for the year and it continues to look as if that operation will for the first time be in the black unlike our structural connectors in the United States where we have the majority of the market, Anchor systems products probably have around 8% of that market. So, we have got a long ways to go. Steel prices are proving difficult to predict and what else is -- it's kind of like predicting the stock market.

We have orders placed through the end of 2005 at slightly higher prices. We may have to increase the prices of our products, not sure yet. Other costs have gone up, some substantially items like gasoline, healthcare, freight, fuel, surcharges, plastic cost, education, the list is most extensive. Our estimate for the fourth quarter's gross margin is about the same as it is now between now 38 and 39%. Europe, our other long-range investment that we were willing to subside is profitable again this year despite the biggest market Germany, as well as the UK not being very healthy. We are making progress in building up brand name and that's what's built this Company. Sales for the year are up 11% and profit is up 40% (ph) with the French operation showing the most increases in sales and profits and that operation has done that continually. Western and Eastern Europe, both are tougher markets than the US and our new manager there is a good example of the value we are promoting from within. So, the new managers of our US branches in Stockton, California; McKinney, Texas; and Columbus, Ohio.

Questions?

[OPERATOR INSTRUCTIONS] Arnie Ursaner, CJS Securities.

Good Morning, Is that Arnie or Frank?

Just wanted to ask you a little bit of the increasing variability we are seeing in the gross margins over the past year and just see whether you could talk a little bit about the impact that your steel inventories having on gross margins, particularly in the quarter and what you see in that going forward?

Well, I think it has a continual effect. We don't like to increase prices unless we have to, but generally we have been able to off set most of it by savings elsewhere and by increasing sales of course. So, you will run all your administrative and other costs over more volume and as I said, I think probably it's going to stay somewhere between 38 and 39% gross margin despite whatever steel contributes. It's going to be a -- well, we are not sure, very hard to predict.

And could you talk a little bit about the effects of the hurricanes that -- what effect it had on you in the quarter and maybe a little after the quarter?

Well, as I mentioned, our business in Florida was up substantially and that's because enough time had gone by for them to clean up the mess and start to rebuild and that's going to happen in Louisiana and the Gulf Coast there that were just hit with some heavy wind, it's going to take several months. We will lose business there for several months, but then what usually happens is that building codes get stiffened. The politicians realize they better get on their code people and stiffen the codes or else they might not get re-elected. In fact it sounds that although some other people have come to you.

Barry Vogel, Barry Vogel and Associates.

Good morning Barry. How are you?

Good morning Barc and Mike. I am fine. First of all, in terms of the sales by region, can you give us a percentage change first in the West excluding California and then California and the Northeast, the South, Southeast and the Midwest?

Sure. You want it for the quarter or the year?

Just the quarter.

Okay. In the quarter, the biggest increase was the South, Southeast and that was better than 39%. And then next was the West, not California, excluding California and that was 32%. And then the Northeast at 23 and then last California at 19.

How about the Midwest?

The Midwest was 19.

Okay. I just want to go back over the breakdown of the changes in sales for the different components. You gave a 17% increase in the quarter for anchoring systems and 24% for anchoring systems for the nine months. You gave us 11% for Europe in the nine months, but you didn't give us the increase of Europe in the quarter?

Okay. Europe, let us see --.

About 4%.

How much?

4% for the quarter.

Four?

Yes.

At Strong-Wall, you said it was up 16% in the quarter. What were they up the nine months?

In the nine months, it was down 7%.

And I guess the balance would be in the connector sales. I guess the balance, you haven't figured what is the balance were up in the quarter and the nine months?

Balance of what?

Of the connector sales? In other words, the Strong-Wall and Anchor systems in Europe and the balance is what I call core domestic business?

Well we haven't got out that properly separated out. But, obviously that was a major part of the increase.

Okay. Now as far as organic growth in connector, if we exclude the Quick Drive, what was the increase in the quarter? Would you have that number?

16%.

Okay. And Mike, can you give us your new number for depreciations and amortization for this year as well as capital expenditures?

23 million for depreciation and amortization for capital on that remaining 47 million.

47 million?

Yes.

And Barc, these investments you have been making over the last few years in new equipment, I presume that they are helping

you to get more business and improve your profitability?

Yes. We have to -- how do you match the increase in sales.

And most of that stuff operating right now in the big increases in the last few years?

Yes.

I want to just turn to the venting profitability which is not there yet even though your sales gains are starting to show improvements.

Yes.

Can you tell us when will profitability turn up with the job that the new management team is doing?

I would hope that you can tell me. I think they have had some tough things there as you know in Mississippi and now it is kind of coming together, because all of a sudden production is up there substantially and that is because of new equipment is at work and also the people are properly compensated there. So, they are working harder. It is coming together pretty well, but until we get numbers for this final quarter. I can't give you anything, it really is based on enough fact.

Okay. One more question for Mike, you usually give us a breakdown of the operating income by connector products and venting products, and sometimes it is in other items, could you give us those three numbers for the quarter?

Okay. Income from connector products -- income from operations 45.8 million.

And venting?

Venting, 2.7 million.

And is there another category at this time?

Well, administrative and all other was a couple of hundred thousand.

Was that a negative?

No, positive.

Thanks a lot. Keep up the good work.

Okay. Thank you Barry.

Justin Moorer (ph), Lord Abbott.

Hi, Justin.

Hi, Barc and Mike.

How are you doing?

All right. Inventories relative to the gross margin, any likely impact on that at all on the margin or not?

Yes, we are not on LIFO, but there was no impact.

No impact. Secondly, price increases, Barc, you made the comment that you typically don't like to take those, have you guys taken any in the last nine months?

Last nine months, did we do any?

We raised prices on (indiscernible) area in the US, 3% beginning of this year.

Okay. And what about transportation cost, Mike, is there a margin?

Well, transportation costs were up substantially, very substantially, but then, so were a bunch of the other things, you know that I mentioned, Justin.

Yes. Any -- is that all flow through gross margin, or is there any of that in SG&A?

Well, let's see. Well, they can be in gross margin.

The majority is in gross margin.

Okay. And then, Barc, you mentioned Home Center is up strong, but Depot only up one, some of that has to do with, I think, last year this time you guys were loading in some Anchor System product, so, just a tough comparison in that regard?

Well, I think that Home Depot is hard to predict, because they will all of a sudden have an inventory, new methods and they will say we are only going to have X inventory and boom the sales chains, but then, they pick up later on. I don't know we are hearing about -- what caused that Mike?

I do not --

So, it is more of a timing thing, then what is going on here. And then, just lastly with your comments on steel, what are you guys -- obviously there is some criticism out there about the buying patterns, you know, late last year into this year, and you have done a nice job of kind of working that back down, what is your sense as you guys look out toward the end of this year and the next year, give us a little glimpse on what the strategy may be in terms of buying or are you just going to buy to the market or do you think you need to bring some in again?

Well, generally, it is going to be what we always follow unless we have some special information and that is, we are not going to out of steel. If the mills are either creating a shortage or there actually is a shortage because of higher demand, we can't risk anything there. We are not going to lose a customer because we don't have the basic raw material. So, we are always going to have more inventory than somebody might look at it and say, ho, that is too high. But it will generally be that way and we will buy ahead, buying ahead now.

All right guys. Thanks.

Cliff Walsh, Sidoti & Company.

Yeah. How are you Cliff?

Good. Good morning. I was a little bit surprised by the strength in the Dura-Vent segment after the first half of the year, can you comment on what was driving that turnaround there?

Yes. I was a little surprised at the extent of it. I didn't really expect it until the fourth quarter, but I just think that -- we had these labor problems in Vicksburg, Mississippi, that plant and they were substantial. The turnover we found was a 140% of the workers in the plant. Well, our new manager there and that was one of the very first things he got on. That wasn't Simpson, that is not the way we do things with our people. So, we have some substantial changes like we changed weight scales,

raised them and we don't have that turnover anymore and it took a while, we also were behind an equipment, and it took a while, we got the new equipment in, and now it's operating, and it's starting to work out.

Have you -- are you in the same -- you have the position in terms of price increases with Dura-Vent as you do? Strong-Tie, so you are considering them given the rising commodity prices?

Actually no. We have built a very strong brand name because structural engineers and architects trust us. When we put a number in our catalog of the particular product, we will resist this force from this direction, so many pounds of force. They know it's true, we have been doing this for over 40 years. And they haven't seen us ever, and they do anything, you said given the facts. So, we've built a very strong brand name. And Dura-Vent, it's more difficult in that industry to do that because generally you have some safety items involved there, but not a lot. And of course, our brand name in areas where you have high winds and seismic factors, the brand name is extremely strong, and Dura-Vent a little tougher to do that.

So, you know the pricing power there, so you might get squeezed a little bit more on Dura-vent?

Yes, I think so, and I also do not expect that Dura-Vent's margins will ever be the same as Strong-Tie's.

And you also mentioned that you were able to take cost out of the business in the areas around the Company to kind of offset the rising in commodity costs. How much more opportunity is there to do that?

Every day, every day with technology the way it is and the way it is developing, the way that we are able to handle the production and just communication, and keeping track of things gets -- well, it gets better all the time. And I don't see that changing, do you Cliff?

I sure don't, I mean, no one would know about it than you guys, but I was just wondering if you picked all the low hanging fruit at this point.

We are reaching up a little end of the tree.

Bob Whitall (ph), MD Sans Investement Service (ph).

Couple of simple questions. Do you have the dollar figures for the two segment connectors and venting for the third quarter?

Yes. Net sales connector products 209, and venting products 24.

And my second question is, can you quantify the contribution to third quarter sales growth from Quick Drive sales and foreign currency fluctuations?

Foreign currency doesn't affected, stays there.

Okay. All right.

Quik Drive sales 8.7 million.

[OPERATOR INSTRUCTIONS] Steve Chercover, DA Davidson.

My question was on (indiscernible), could you maybe get a little bit more into the growth prospects? You have given us the growth rates thus far in the year. How confident are you that this is going to continue to really move into a material big business for you guys?

Well, I think it's going to take time, and -- but we are coming on strong there, and I think in the foreseeable future -- I am expecting double-digit growth, and just how far up in the double-digits, not sure, but we are -- it's a very important part of our future, because it doesn't depend on the same things that most of our strong type products depend on. And like -- I guess -- I didn't mention it in the sales call, some of you know that for instance we are into Mainland China with our epoxies. And we -- 4,500 large tubes for a bridge and a road outside of Beijing this year. And it gets markets like, we also sold a whole bunch of our toxies (ph) for retrofitting the bridges here in this area. The Bay Bridge, San Francisco Bay Bridge and the Richmond Center Fall Bridges, still it gets us into entirely different markets that don't use wood and most of our other products need wood. We don't get a sale of most of our connectors and not there is a piece of wood involved. Now, there are other things involved with it, masonry, concrete, and whatever, but there has got to be wood. So, this is really exciting. It's why we have spent all this money for several years. Lost money there and finally this year, it looks like it is going to be in the block. But, we are going to continue to put resources behind that and see if we can just keep, if we can make that 8% of the total market grow rapidly.

Is it the same kind of strategy where you work with the contractors and engineers and get them specify your Anchor Systems?

Exactly, and you also merchandise the stocks often. I mean, you respond and you check out their needs and you check job sites and our sales and engineers if they have a problem, they know all they have to do is call and they will get an answer from, if it is needed from an engineer right away. This is the art of building the brand name, as well as safety.

Obviously, housing is the piece of the pie of it where most of the exposure is, do you have an opinion on where we are in the cycle? I mean, if you listen to the press, it is already, somebody is probably feeling that it is going to fall that --

We just had our annual international sales meeting. We bring them in from Europe all over and there are a couple of topics that weren't discussed nor are they ever discussed. One is the general economy and another is types of construction, housing starts, for instance. We don't spend any time at all, we don't even discuss them, we can't control them. So, whatever happens there, we have to be ready, we have to keep going on more new products on better merchandising, geographical expansion, acquisitions. All those things still that whatever happens, we make a tremendous effort to overcome it and we don't give anybody an excuse for not increasing their sales and profits.

One last question if I could then, how is the acquisition pipeline or is there anything attractive out there?

We are looking at things all the time. We don't have, at the moment, anything that is at all close to a conclusion, but we are looking and we will continue to look. We have got a very talented guy that -- that's what he does, he looks for acquisitions. Our major problem is our success because our return on investment and our return on sales is, I think, a little unusual for building material companies. So, we got to be careful about whom you buy because usually they are not for sale because they make a lot of profit. And you guys are going to get tried of it if it lasts very long or our earning get hit hard.

Bob Fetch, Lord Abbett

In regard to steel cost, where are they relative to a year ago?

They are up a little.

Okay, and your prices though are up by more than a little, correct?

Yes. Our prices aren't up percentage wise as much as steel is up because steel isn't the entire cost.

How about a measure regarding productivity per worker, dollar sales per worker?

That's a very good question and I haven't gotten it since we acquired Quick Drive, but it's always been our goal and we have achieved it right along that the sales per employee keep increasing. Now, with an acquisition like Quick Drive, where it's not tremendously significant, but it is significant, you get a lot of people and then you've got to integrate them. And at first, it doesn't show up that is the increase in productivity, but by the end of this year, it should. And we will be really disappointed if we don't show an increase in sales per employee.

So, you are suggesting ex the Quick Drive acquisition, you are continuing to make further progress this year?

Yes, we are. Quick Drive is a very good acquisition, it's working on extremely well.

In regards to some of your Anchoring Systems, are you seeing increasing content say for frame or trust or the building material that are being used as a result of building codes as opposed to test products being used in places that wasn't used at all before?

It is very hard to predict what's going to happen with building codes, but one thing that has happened over all these 50 years that we've been in this business is that every time there is a natural disaster of some kind, while some building codes somewhere gets different or they already have -- there are a lot of places, they already have a building code, but they don't enforce it. And it forces people to look at this and say, 'hey, layman (ph) we better start to enforce it'.

In regards to Asia, I read a few things recently where with earthquakes and other natural disasters that people are beginning to figure out that. Would constructed homes -- are likely to be a better long-term alternative than what's been used up until now? And I would argue for ensuring that you have a more significant presence there. Are you seeing that actually develop in a progressive manner at this time?

Not yet. We expect it to though. Well, you have -- there is a lot of construction and this is how it's going to develop in the short run, I'm not sure in the long run, I think the realities of cost and results will determine what they do.

And you must have gotten a refund for the Jobs Creation Act. Are you likely to repeat more of them?

Mike, what do you think?

Well, the tax rate for the year, we are predicting 37%. The Jobs Creation Act will deter (ph) the benefit the Company in the years to come because we have so many -- so much of our production is US based.

So, but that's an ongoing program and is that a function of the number of the employees you are hiring?

It's an ongoing program, it's a function of our output of product that is made in the United States.

So, it's output and not employment driven?

Correct. We do get credit because of the employees we have in the stock and the California Enterprise zone.

Any sense on the magnitude of those refunds going forward at all?

The overall tax payment is going to be 37% for this year and for next year it will be around 37 to 37.5%.

Okay. So that, obviously, includes any impact from any of those refunds?

Yes.

Justin Mauer, Lord Abbott.

Hitting you from both sides here Barc. Capex, I think if I remember right, at the end of the year, you guys were talking more 60 to 65 million and I think you said 47 discounted a plan?

I know and that's a kind of standard procedure. It just seems to happen that way.

Are there some things that are slipping into next year or you just found some more less?

Mike, you want to --?

Do you think that's slipping into the next year? We are in a process of expanding our Columbus, Ohio plant. We are adding 143,000 square feet there. That will be done -- that will finish construction and in the December timeframe, we expect that to happen a bit earlier and so the prices that will go in that space have moved to next year. The retrofit of our new Pleasanton, California home office, some of those dollars are filtering into next year and just some of the additional capital equipment was a lot later than we planned on it.

As you guys looks out to '06, is it too early to get a sense of any, at least, project wise any bigger projects you plan on doing or is it going to be a lesser year you think, or?

It really is too early to make any estimates. Generally, our branches are optimistic, but we are a bunch of optimistic people. So, you can -- there isn't enough information yet and there are too many variables there. We don't see any problems that are unusual.

[OPERATOR INSTRUCTIONS]. Barry Vogel, Barry Vogel and Associates.

Mike, couple of questions for you. On the tax rate, that $700,000 state tax refund that you mentioned in your press release, are you saying that that's included, I suppose being an ex item, it is just included in the lower rate?

That will be included in Q4 and that will be reflected in the 37% tax rate for the year.

What will the tax rate be for Q4?

37%.

And what were the actual shares outstanding in the quarter?

28.658 million.

And one last question. I think you might have it there. The percentage increase in Home Depot sales this year for the nine months and the percentage increase for all your Home Centers for the nine months?

Was that 1% for the nine months?

No, that was the quarter.

For the year, it's 14% on Home Depot.

And how about for all of the Home Centers, including Home Depot?

21%.

And it appears Mr. Simpson, we have no further questions.

Okay. Well, thank you all for being on the line. Bye.

This concludes our conference call for today. You may now disconnect your lines and everyone have a great day.