Simpson Manufacturing Co Inc (SSD) 2005 Q4 法說會逐字稿

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

Good morning, everybody. Thanks for joining Mike Herbert, our CFO, and myself. We will only tell you what we believe but conditions are not poured concrete; they can change. We at Simpson Manufacturing are never satisfied. We always could do better. But with sales up 21.6% and net income up 22.8, it really wasn't a bad quarter.

One item that I know concerns you and us is our gross margin, which went from 38.2% to 35.9. It ended at 37.4 for the year. I owe everyone an apology for predicting a gross margin of between 38 and 39. Well, we have price increases coming shortly, which should balance most of the increase in the price of materials, especially steel. But more often than not, there's a time lag between cost and price increases. This time, it was fairly substantial, and making improvements in the percentage costs of various other items provided only a partial balance.

Our major long-term investments in Europe and Anchored Systems both were in the black -- Europe for the second year, despite our largest market there, Germany, not coming out of a major slump.

We're starting to successfully build a brand name just as we have in the US. And that has enabled us to overcome tough market conditions and to increase our market share. But, regardless of market conditions -- we can't control them -- our new manager for all of Europe has several changes in mind, including taking over sales in the German market himself. He also has hired a new manager for Denmark -- our current one is retiring -- and that's our largest European branch. The new manager will join us in May. Another objective of our European manager is to efficiently -- and that's his word -- launch sales of Quik Drive products in Europe.

Anchor Systems did surprisingly well, increasing sales 23.4% for the year and showing a tiny profit for the first time. And that's a year ahead of expectations. It's not significant yet, but we are selling some epoxy in Mainland China. Our representative there, [Henry Wu], visited our Stockton, California operation and test lab last week and spent some time with several of us afterwards. He seemed to be impressed and optimistic about building the market in China, but it was a bit hard to tell. His English, while immeasurably better than our Mandarin, took quite an effort on his part, enough so that his expression was pretty much inscrutable. We will see what progress we make this year. China definitely is a major objective in our future.

Home center sales were strong both in the fourth quarter, up 22% and the year, 21%. Shear walls sales were down 1% in the fourth quarter and 6% for the year. The new steel shear wall obviously is having little effect as yet, but we expect the first quarter to show progress.

Our last acquisition, Quik Drive, is now fully integrated with sales up 38% in the fourth quarter and reaching 34.3 million for the year. We expect this year to be a good one for Quik Drive. Sales in Canada are strong, and we will be entering the European market with a continuous sales effort and presence for the first time. The latter is an example of the excellent fit of the Quik Drive acquisition.

The expenses for new equipment and pay and benefits in Simpson Dura-Vent's Vicksburg plant are starting to pay off. One measure of that is that in [Aug 3], there was 140% turnover in the plant. And last year, it was less than 5%. Although profits for Dura-Vent were down for the year, the fourth quarters were up 22% and represented 14.5% of total operating income for SSD.

Dura-Vent's first of two new laser weld lines is due in February. It should open up new markets but probably will have little effect until next year. SDV plans to expand R&D efforts considerably this year. Several new product ideas need further research and testing.

Okay, so far, I have been largely discussing past performance. But of course, the question is, can we follow the act? The key element is in place -- our people -- we attract and keep the best. Their efforts have increased our sales and earnings every year since we went public in 1994. Can we overcome a solid drop in construction and/or the economy? I don't know, but our strong financial condition and our people make us better qualified than most. Questions?

(OPERATOR INSTRUCTIONS). Arnie Ursaner, CJS Securities.

I know you apologized for your margin, and obviously your shareholders appreciate that. But could you comment a little bit more on some of the factors that are impacting it and any specifics steps other than price increases you might be taking to restore margins back to much more normal levels for you?

Mike, do you want to take that?

The deterioration in margin was caused 100% by material. And so the price increases will help a long way in getting us back to where we should be.

Could you again give us a little more specific information about -- are you selling inventory at a loss -- steel inventory at lower prices than you paid for them? Can you again walk us through a little of the mechanics of how it is impacting your margin?

Well, it's really pretty simple. You've got a time lag in there, and our price increases are going in the 1st of February and the 1st of March. So it will still affect the price of steel being higher than we had in our current price levels. We just -- it lowers the margin; that's all.

So the margin issue at least may continue into the first quarter until this works its way through?

Yes, it will certainly partially continue because the quarter will be partially gone.

Okay. You focused quite a bit on Europe in your earlier comments, and I guess one logical question would be that -- Anchor Systems, which is more epoxy and more targeted to concrete would probably be a better strategic fit for Europe as well. Are you in Europe with it now? If not, why wouldn't you be?

That's a good question. We are not. And the reason is that it's a pretty tough market to get into. We are so strong about building a brand name for our structural connectors in particular there that the management is putting its effort on that. We have got it profitable now, and they are doing all kinds of cost things and sales and merchandising. They just don't want to take it on yet. You're absolutely right. The market is twice as big in Western Europe as it is in all of the US. Roughly the US market is 500 million, and Europe is 1 billion. So eventually, we will be there but not this year.

Final question I'm sure you will get asked, but could you break down your geographic mix in terms of rates of growth?

Yes. I presume you want it for the year.

That would be great.

Okay. Well, the fastest-growing areas in order were the South/Southeast; the West except for California; then the Northeast and finally California, which actually as we grew quite a bit that is one of our objectives to have California be less and less of the brand total but not because there's less business there. We still want it to grow; it grew 12%.

In Europe, it was a mix. The UK was tough; it was down oh about 3%. But France, as usual, was way up. Denmark was up despite Germany. So now let's see 4, 6, 9 -- it's roughly 10% of our business is Europe.

You mentioned California was the slowest growing, and it was up 12. What was the South and Southeast?

The South/Southeast was 33.

Great number.

Barry Vogel, Barry Vogel and Associates.

I want to go back to those first, so I get my tables straightened out on the sales growth by region. Can you give us -- first of all in the fourth quarter, can you give us the percentage increases for the same five categories as well as give us the percentage increase in each of the five categories for the year?

Yes. Well, I gave you it for the year.

Well, you only gave us 12% to California for the year, 33% for the South/Southeast for the year.

Oh, you want them all?

Absolutely. I want to get my money's worth.

I knew you were precise, Barry. Okay, for the year, the Midwest was 20%, the West except for California was 26, South/Southeast 33 and the Northeast 21.

How about for the quarters -- for the fourth quarter rather?

Fourth quarter, it was the South/Southeast 32, the Midwest 27 and the West and California tied at 22 and the Northeast at 17.

Now, as far as the home centers, you gave us the total increase in sales for home centers for the fourth quarter and the year. Could you give us the total increase for the largest customer in the fourth quarter and the year?

Yes, that's Home Depot. The reason I will give you that is because we have to. It was over 10% of our business. Just a second; we'll have that. Home Depot was up 7% for the fourth quarter and 12.5% for the year.

Mike, can you give us your expected capital expenditures for '06 as well as depreciation and amortization?

The capital expenses for '06, we are predicting at the moment $59 million, depreciation and amortization $26 million.

How about your estimated tax rate?

Between 37 and 37.5%.

Barc, can you give us your organic growth rate in connectors in the fourth quarter as well as the year?

Well, let's see. Just one moment. It's about the same thing, about 18.5% both periods.

If we go back to the strong wall sales for the quarter, the Anchoring Systems for the quarter and Europe for the quarter, could you give us those numbers?

Yes. Well, strong wall was in the fourth quarter -- was down 1% and down 6% for the year.

Okay and Anchoring Systems?

Anchor Systems was up 23.4% for the year, and the fourth quarter -- have you got that fourth quarter, Mike? Oh, wait a minute; I have it here. I have it here. Fourth quarter, Anchor Systems was up 20%.

And Europe?

Europe?

Yes.

Europe was up 1% for the quarter and 8% for the year.

Now, as far as the breakdown of operating profits in the quarter, give us venting products and connector products.

Yes. In the fourth quarter, connector products -- you want the profit?

Profits, the operating income.

Yes, okay. Connector products was 27.7 million.

And venting products?

Was 4.7.

So obviously, the gross margin deterioration impacted connector products? Okay. Now, as far as this $59 million in CapEx, I know you have been adding a lot of machines over the last couple years. You picked up your capital expenditures. And I'm a little surprised that $59 million is a fairly big number, given your very strong increases in capital expenditures. Can you lay out for us what the major elements are there?

Well, let's see. You want to outline that, Mike?

As we announced, we are buying one of our warehouses we currently lease in San Leandro; that's $5 million in the first quarter. Additionally, we are doing the stock construction on a new plant. We'll probably have that completed half through the quarter -- I mean half through the year.

Where is that going to be?

That is still being determined. And that is going to be up -- we'll set approximately 15 million there. And the balance will be on machinery.

So obviously, you are very positive about needing more capacity?

Oh, yes, we always are.

Given the fact that you have really added a lot of capacity. Mike, would you have an operating rate in the fourth quarter?

I'm not sure I understand your question.

Utilization of capacity for your domestic connector plants?

No, we really don't have a decent number on that.

Thank you. Great job.

[Bob Latell], MD Sass Investor.

Just a very quick question. You gave us just now the operating income breakdown between Strong-Tie and Dura-Vent for the fourth quarter. I wondered if we could get the dollar number for sales.

Oh, yes. 203 -- well, 203.9.

And Dura-Vent?

Oh, that's the grand total.

Oh, yes, that's right; that's your total. I'm looking for the two segments.

Connector products were 170 million, and venting products were 33.9.

Tony Campbell, Knott Partners.

It seems to me that we have yet to see potentially an impact on your business because of the hurricanes, given my understanding of what is going on in Alabama and Louisiana. So I guess my question is, when do you think that that should have an impact? Second -- well, I would love to hear your answer there, and then I can just follow up.

Well, we are already having some -- our business in Florida. It takes several months to get a place cleaned up, and then they start to rebuild and they start to use our products again. As far as Katrina, not yet, but that will come. And I think that the indicator there is that South/Southeast -- and that covers all that area -- South/Southeast was by far our biggest increase in sales last year and last quarter.

So I guess if I sit back and listen to what you are saying, why would I not think that your business shouldn't accelerate? It seems like Europe is getting better and --

I read all kinds of things about dire projections on housing, some of them. And that's an important part of our business. Now, commercial construction, if the economy takes a dip, why that's going to go down too. Do-it-yourself will grow up, but I think -- well, the future is about like trying to predict the price of a stock.

But it just seems to me that you seem to be functioning on all cylinders, and (multiple speakers) --

Well, we are, in that -- and I think the indicator of that is what we are spending on expansion.

Exactly. Final question, China.

That doesn't mean we are going to be dead right.

Well, we're not -- over time maybe.

We're going to work on it; I can tell you that.

What about China?

Well, China, I guess you don't have to have a very high IQ to figure out that China is going to become increasingly important. It's in all the media now. And we have thought that for a long time. It's a tough market to get into to manufacture there. But that is one of our goals. We want to manufacture in Mainland China. We have done a study of that, and it's going to take a little while. But we will end up there.

Cliff Walsh, Sidoti & Company.

Can you comment on maybe the home center channel in terms of some of the -- there have been some inventory reductions by some toolmakers. You said -- it's like Black & Decker and Stanley Works have been hurt by that in home center recently. Did you see any of that in the quarter in the home center channel?

Well, no. We were up very substantially in the home center channel. Our biggest customer though was a low gain. And part of that cause is that they are doing their own merchandising now. We had in-store merchant -- we had people who that's what they did. They called on retailers -- and number one of course being Home Depot -- and helped to train their people and make sure that the displays -- if somebody was walking by, why, they would look and say -- hey, maybe I need to buy some of those.

If we are not doing it, we have enough ego here and we have been successful enough with it to think that it costs. We think that's a major reason why they are not up in relation to the whole thing.

So what can be done about that?

Not very much. It's their decision, not ours. However, you can believe that we work on it.

In terms of the price increases that are set to go through in February and March, are those timeframes different for different channels, or how is that playing out?

Yes, it's -- price increases sound simple; you just put them in. But we are really conscious of how our customers react. So, you have different timing, different places. You don't just bang say to everybody -- we like to talk to them.

In terms of the extent of how large they are, is it similar throughout all of the channels? Maybe you can quantify for us if possible?

No, in expenses -- how do you mean -- which expense?

I said to the extent -- are they same across the board in the different channels?

Oh, well, no. The profit margin at Dura-Vent of course is less than it is at Strong-Tie. And the margin Anchor Systems, it's extremely low, and it will be low for a while as we build our percentage of that business. For instance, we have of course by far the largest part of the structural connector market both in the US and now in Europe. And we have an excellent margin. Now, in order to build that margin with Anchor Systems in particular, we are not going to get that high a margin I don't think eventually. But right now, it's practically flat. We just barely tipped into the black a year ahead of time, and we have to get a larger share of the market. Right now, we have about 8% of that market.

So if fuel costs continued to rise, it would make sense that you would maybe get squeezed a little bit more at Dura-Vent than just general products outside of Strong-Tie?

Yes, so although Dura-Vent has the expenses that our new manager there incurred in the last couple years -- are really starting to pay off. The percentage there has gone up. I think we have a stronger position in those markets than we've ever had. It's harder to build a brand name in that business than it has been in the connector business.

Steven Chercover, DA Davidson.

Good morning, Steve.

I'm very well. How are you?

Great!

Sounds like it.

Well, we had a good quarter.

You did indeed. Two questions, please. First of all, with respect to Dura-Vent, I just want to get your opinion because I agree with you that there was likely a great deal of substitution from natural gas to the alternative fuels. Can you give us a sense of where you think people are in that? Is it the early innings of such substitution, or do you think the folks that were price sensitive are likely to have made the switch for this winter?

You know I really don't have a good answer to that yet. Our manager there says that there has been a lot of switch. And a crazy guess -- and that's all it is on my part -- would be that it's pretty much done.

Which would imply I guess a little bit of risks on the growth for next year, since the natural gas sales were actually down.

Yes, it could.

And the second one I guess is actually more of a request than a question. I certainly benefited from all the disclosure of growth rates by segment and everything. I'm wondering whether you could just incorporate that into your quarterly press releases, since you end up giving it to us anyhow.

I have been a little reluctant in the past on that, and I've been a little more open on this conference call on it than is usual. And I guess before making that wider dissemination have to really decide and got to talk more with our people, our salespeople. One thing we do not wish to do is give information that the enemy can use to attack this market. They thought it was half of what it is or something like that. So maybe, maybe not.

Okay, well, mull it over. I find it useful. And maybe at very least, you could put segmented sales and operating earnings in the press release, since we get it in the 10-K or 10-Q anyhow.

Well, I won't make any commitment except that we will discuss it.

(OPERATOR INSTRUCTIONS). Timothy Jones, Wasserman & Associates.

First of all, I can assure you that the enemy is listening to this conference call via the Web.

I think you are right.

You could bet your life on it. I got on a little late, so I'm hoping I don't -- just a couple questions. Your inventories were down despite a very healthy sales rise. I know that you stopped a lot of the raw material for steel a year ago. Do you think you are set for any potential rise in steel this year? Do you like where your inventories are? Are they a little bit too low or what?

That's a good question, and I wish there was a really good answer. Trying to outguess that thing is tough, and our guesses were a little bit off in this last quarter.

But they are right on in the first quarter.

Yes. What's going to happen to it, why, not sure. What do you think, Mike? What do you hear?

We did increase our inventories in the fourth quarter slightly by about 10%. We have seen some capacity constraints on the West Coast. So overall, I think we're comparable with where we are. But we monitor it every day.

Are you comfortable where your work in-process is?

Yes, we are.

The second question is -- about a year a little bit ago, you really revamped your Vicksburg, Mississippi plant. I don't think it was hit that badly by the hurricane. Can you give me an update with the new managers how the raising the pay for the workers and the new equipment -- how that is working out for Dura-Vent?

It's working out extremely well, and it's shown by the profit margin in the fourth quarter. It's working out very well. We were 22% above last year. And I guess you weren't on the call at the time I mentioned that. There, in Aug 3, the people turnover in that plant was 140%. Last year, it was less than 5%. So we have put in a lot of benefits and costs, but they are paying off. And the equipment also was -- some of it -- outdated. We spent a lot of money on that. Now, it's starting to pay off.

You're putting that equipment in the California plant too, aren't you?

Yes, whenever we need it. But there, it had been kind of neglected. California plant, that wasn't true. So it's just normal replacement. And of course, we are adding this laser line that is going to get us into, we think, some new markets.

How do the margins of the California plant stack up with the margins of the Mississippi plant now?

We don't separate them; we can't. (multiple speakers) -- the Mississippi plant.

At the time, there were tremendously different. Are they relatively close now?

Still I would guess -- I don't have late information, but I would guess that California is still more efficient than Vicksburg, Mississippi. But I would also guess they are an awful lot closer than they were even 6 months ago.

That was a good move.

[Brian McArley], [Agree Capital].

You mentioned that you are looking at opening some manufacturing in China. Is that for profits that will be distributed in China, or would that be for exports to the US and elsewhere?

No, that's for product to be distributed in China and Asia. (multiple speakers) On structural connectors in particular, why, the labor factor is so low it doesn't pay to make them elsewhere. But the Chinese and Indian markets are just going to expand so rapidly; they already are big. And we are not getting our share by a long ways.

Another question for you. On these price increases, is your general philosophy to try to maintain your gross margin percentage, or are you shooting to maintain your gross profit dollars per unit?

Well, generally, we want to maintain our margins and it's difficult. You do have that lag, as I mentioned earlier. You have a time lag usually, and it's usually negative. Once in a great while, it's positive. But usually, that time lag is negative. The only time it's positive of course is we have really good advance information about a price increase going to come in the cost of materials, and we just load up ahead of time. And that doesn't happen often. It's almost -- the vast majority of the time, it's the other way around. You get the increase, and then you start to negotiate on raising your own prices to match it.

You had a slight decline in sales in the UK for the year. There has been a lot of discussion of the slowdown in the housing market in the UK. Was that the primary impact on your business?

That was (multiple speakers) impact.

I'm sorry.

That would have been a heavy impact, yes.

And are there any lessons learned there that can help you position yourself better in the US if we see a slowdown?

In the UK, you mean?

That's right.

Yes. Well, I guess we have been learning right along. And our new manager there, our new European manager -- the former one had already instigated some methods that took a little while to achieve both merchandising and manufacturing methods. And the new manager is accelerating those programs so that the business went down, but we made money in the UK, despite the fact that business was down. You seldom do that -- increase the profit when your volume is down. So they are making real progress there.

Did I hear you say that you thought you were the market share leader in Europe in connectors now?

Yes, that's correct.

Have you any sense for what type of market share you might have?

It's awful, awful tough to guess. Each country is different. Each country has in some cases major differences in the products we sell there. So I really can't give you a good answer. I guess we are though -- oh, I don't know maybe in structural connectors, we might have oh 35, 40%. And that's a crazy guess because every market is different.

We're doing a little business in Russia now. Our new manager, one of his goals is to increase business in Eastern Europe. We have an operation, and we have a warehouse and salespeople in Poland. And they are our path to Eastern Europe. So it is a little hard to give you a good answer. In fact, I didn't give you a good answer. I'm sorry.

Barry Vogel, Barry Vogel and Associates.

Mike, can you give us the actual shares outstanding at the end of the year?

Yes, we can.

The diluted shares at the end of the year were 48,876,000.

I want actual.

I don't have that number with me.

So diluted for the year was 870 -- 48,876?

Yes.

All right. Now, Barc, I have a question for you. Now that you have been so gracious giving us some dividends over the last 2 years, I'm looking at $131 million at the end of the year in cash and marketable securities and virtually no debt. I'm looking at a dividend payment of $0.05 a quarter. Given the current 15% tax rate on dividends and given your enormous power in terms of profitability, et cetera, and the likelihood that that is going to continue, when is your next Board meeting to discuss dividends? Because I would think that you should be raising your dividend.

Well, we are going to discuss it. As a matter of fact, we have a Board meeting today. It's not on the agenda right now. But the next meeting in the new year, if we don't discuss it today, we will discuss the dividend. I will give you a guess right now and it isn't based on fact yet. But I think the Board probably would approve something that gets it from $0.05 to $0.10 a quarter.

That would be nice.

It's now at $0.08 of course. It's at $0.08 and to raise it up to 10.

I didn't know that. It is $0.08?

Not yet. It's at 8 now.

When did that happen?

Last fall.

I didn't realize that.

$0.32 a year.

The share number is 48,321,922.

(OPERATOR INSTRUCTIONS). It appears we have no further questions.

Okay, thank you. That's it.

Thank you for your participation in today's teleconference, and please disconnect at this time.