Simpson Manufacturing Co Inc (SSD) 2006 Q1 法說會逐字稿

Welcome to the Simpson Manufacturing Corporation's first-quarter 2006 earnings conference call. I would now like to turn the meeting over to your Chairman, Mr. Barclay Simpson. Please go ahead, sir.

Well, good morning, everybody, and thank you for joining our CFO, Mike Herbert, and myself. We are only going to tell you what we believe; but yes, we can be mistaken. What looks like an example is our gross margin, which I made some very rough projections between 37% and 38%, and it shows up as 39.8%.

Well, it actually, using the same bookkeeping method, would be 37.4%. The 39.8% is because we took R&D and engineering -- our accountants told us we should do this -- took R&D and engineering, it is no longer a deduct. It is down below.

Margins were slightly better due to price increases on our products that we were able to put into effect during the quarter. Prices for steel are heading upward again and are pretty hard to predict, but they should be reflected, these higher prices, in the third quarter.

You have seen the numbers. It was a good quarter, although the profit per share increase of 53% is somewhat higher than it would be if our first quarter last year had been a better one. It was no disaster, but it was not one of our better ones.

Our Anchor Systems division once again had a good quarter, with sales going up 22%; plus going from a loss in the quarter to a profit. Anchor Systems possibly may be our first manufacturing plant in China. But that really is not known yet; it is still in the assessments stage.

Our Anchor Systems operations manager and Mike Herbert are off to Shanghai next month to have another look at it. Their objective is to try and reach a decision sometime in the not too distant future.

As many of you have heard before, Anchor Systems is an important part of the future of Simpson Company. Their products are designed for use with masonry and concrete, not wood, and they opened new markets such as road building as well as high-rise structures. If you go to the Beijing Olympic Games, you may travel over a road and a bridge built with our epoxies right outside of Beijing.

Our press release mentioned that Home Depot and its acquisitions accounted for 15% of our first-quarter sales, although Home Depot stores, their stores, sales of our products were down over 10%. But other parts, other companies that they own were substantially up. Actually, Home Depot's stores sales were less than the sales of Simpson Strong-Ties by their White Cap owned division.

One number that is not mentioned often, perhaps, because it is difficult to show continuous improvement, is the ratio of people to revenues and profits. In the last two years, we have gone from 2,300 to 2,800 employees; and revenues per employee have gone from $265,000 to 323, while operating profit per person has gone from $71,000 to $85,000. Our people are kind of proud of that.

The new steel shear wall is starting to have an effect. All shear wall sales turned around from being down last year to something like 6% to being up in the first quarter 6%. Our branches are optimistic for the rest of the year now that we are code listed.

Sales in Europe were down 5.3% for the quarter. Our new European manager, Laurent Versluysen, is taking action to counter these tough markets, especially in Germany and the UK. Cost savings measures kept operations in the black; in fact, profits at 2.2% of sales are up despite sales being down. We have a new manager in Denmark, and Laurent has taken personal charge of our largest market, Germany.

Simpson Strong-Tie is off to a slow start in April, due to a big dip in sales in California, largely caused by record rainfalls. You can't build when it is raining. In order to better serve our markets, new warehouses will be opened shortly in Minnesota and North Carolina.

Dura-Vent is like a new company. The heavy costs of shaping up Vicksburg are behind us. The first quarter showed sales up 15% and a small profit still. This quarter is starting out strong. The new laser welding system is making a superior pipe for pellet vent stoves and should help to develop other markets.

Quik Drive sales were up 32.3% for the quarter. The branches in Denmark, France, and the UK now have inventory. This quarter should give a good indication of the potential market there.

Our Canadian division sales were up 15%, largely due to strong sales of Anchor System and Quik Drive products. Also, for the first time, Canada showed a respectable profit.

As anyone who has followed our Company knows, we do not publicly make specific projections of sales and earnings. If we did, there are enough unknowns involved to make this year one of the most difficult in memory to project; and I suspect that some of you may have a question. So it's time for that.

(OPERATOR INSTRUCTIONS) Arnie Ursaner from CJS Securities.

I just want to make sure I am clearly understanding your message on Home Depot. Because obviously your language in the press release is pretty strong. Just if you could please repeat, your indication was your sales with -- just if you would repeat what you're saying about your sales versus Home Depot. And also be more specific about the distributor relationship they have that may be impacting these sales.

Right, well, our sales with the Home Depot's stores were down over 10%. Our people tell me that they think a large part of that is that Home Depot took over the merchandising from us. We had a group of people we called merchandisers, and they worked on training people, on making the display right, on making sure they didn't run out of a product, all kinds of things.

We think that -- well, we just -- the manufacturer knows more about the product, and we know how to merchandise it better, we think. So their sales are down.

And they have changed their distribution mechanism now? They're using another company to provide product; could you expand on that a little bit?

They bought another one of our major outlets, and that is White Cap. White Cap is a separate business from Home Depot. I have no idea what their internal relations are. But White Cap sells largely to big builders, which I do not think Home Depot does much.

Okay. I guess a question for Mike. Obviously you're changing the way you reported the prior-year numbers to back out R&D; but you can't just add it in. Will you be providing us, or can we go offline and get either an 8-K -- will you putting out an 8-K? Or can we do that offline, to kind of build up previous year's numbers to reflect this change?

We are not planning on putting out an 8-K. We will address that in our 10-Q.

Okay. Barc, specifically in California, which was a problematic market last year in Q1, can you freshen up, perhaps, the delta year-over-year in California?

Yes.

Both volume and profit, if you can.

Not profit, I can give you volume.

I figured I would ask.

California was -- we have things broken in, in this country, into five districts. In this year, why, California was up in the first quarter 13%; all the others were up more.

In fact, the biggest one was better than double, south-southeast. Then next came the midwest; and then the west; and then the northeast; and finally, quite a little lower, California.

But it was record rainfalls in Northern California, and if you have not got the foundation in and some walls up, you can't build.

So March, I know March in San Francisco literally had the rainiest month in its history. Did you see a pretty good pickup in California in April so far?

No, because we have had a lot of rain so far.

Okay. Again --

Now, we will get that. That is not business that is gone forever. All the rain has to do is stop and they build again.

Okay. Final question from me is on Vicksburg. I know it was a lot more problematic last year than perhaps the numbers would have easily indicated. Can you give us a little feel for the change at Vicksburg year-over-year?

Yes. Well, when a couple of years ago the turnover -- when the new manager took over Dura-Vent, the turnover in Vicksburg was 140% in the plant. You know, that is ridiculous; because we have one of the lowest turnovers of any company where I have ever gotten any numbers on it.

We pride ourselves on that, so we had some drastic changes to make. The pay scale wasn't what it should be. The benefits were not what they should be, and now they are. So the turnover has gone way way down.

Also, some of the equipment was really -- should have been changed. New equipment should have been in there in some operations; and that is in now. So those changes cost a lot of money.

Now the changes in the pay of the people, that is going to pay off. In the long run, there is one thing we have learned in this business -- don't make your profit by cutting wages, because if you do, it is going to catch up with you. Your turnover is going to go up, and the level of people that you have is going to go down.

So we feel pretty good about it now, in fact, quite good.

Thank you very much.

Barry Vogel from Barry Vogel & Associates.

First of all, can you give us the breakdown in segment operating profit based on two segments, connector products and venting products?

Yes. Let's see. Income from operations on connector products was $40.5 million, and on venting products $74 million -- $74,000, excuse me. I wish it was $74 million.

Now, $74,000 is a low number but it is an improvement. Well, actually, barely an improvement from last year. One would have thought, with the turnaround in venting products in the second half of last year, that you would have had a better profit in the first quarter of '06 in venting products than you had. (multiple speakers)

Well, we will see what happens now. I think that the changes are going to pay off for the rest of the year. But we don't know that until those numbers come in.

Okay. Now you mentioned something about -- when you were talking about steel shear wall, you mentioned something about code compliance. I didn't understand what you were trying to say.

Okay, well, you need to get what we call code approval. I think technically you are supposed to say it is listed, not approved. They are not -- they are saying it fits within their metes and bounds. You have to get that before really the majority of architects and engineers will specify your product because of the building code in their areas. Now, it is approved, and we think that the rest of the year our people are quite optimistic.

Now do you have any idea whatsoever what kind of an impact this is going to have on your -- any idea, conservatively -- what you think the rest of the year will show for the Steel Strong-Wall product?

No. I don't have a projection.

Okay. Can you go back over the five sectors of the country and give us the percentage gains? I know you gave us 13% for California, and if you can list the others I would appreciate it.

Yes. Okay, the largest gain was the south-southeast, 34%. The midwest was next at 29%. The west next at 26%. Then the northeast at 22%; and then California at 13%.

Okay, and as far as the home centers, can you give us the home centers' percentage of total sales, and give us Home Depot's percentage of total sales?

15% of total sales.

Were home centers?

Were owned by Home Depot. No. Oh, home centers, I'm sorry.

Yes, home centers combined as a total.

Home centers, I don't have that number yet.

Okay. Mike, I have a few little questions for you. Can you tell us, give us the tax rate for this year?

37.5 to 37.75.

Can give us your best guess of capital expenditures this year, as depreciation and amortization?

$55 million for capital, and $26 million for depreciation and amortization.

Can you tell us the largest chunks of the capital expenditures?

We bought the building in San Leandro, the warehouse there. We're planning on expanding our stocking facility by approximately 350,000 square feet, completing that in 2007. We are also anticipating adding presses around the world.

So the first one that you talked about, the San Leandro, how much is that going to cost you?

We paid for that already. That was $5 million.

So is that the largest expenditure for the year?

The laser welding equipment came in for Dura-Vent; those two pieces of equipment are $5 million. The actual breaking of the ground and building the facility in Stockton will be 12 to $15 million, I would add estimate.

For the year?

Yes.

So that is the largest single piece?

Yes.

All right, thank you very much.

(OPERATOR INSTRUCTIONS) Cliff Walsh.

Can you guys comment on price increases in the home center channel? What you have been trying to get through and how successful you have been there.

Yes, the price increases now are in.

How much were they?

We don't discuss that. What we're trying to do is, of course, get back what our costs went up. Not adding any more than that.

Okay, in terms of your European sales, what is the environment there? Are you outperforming your peers there? Are you gaining market share, or what's -- when can we start to think about a turnaround in that market?

I think that it is going to take probably the rest of the year for our new manager there to get things shaped up the way he wants.

Those are tough markets. We now are building a brand name, and it has taken a long time, 10 years, to do that. But we are starting to get a real brand name.

Our new manager is determined to improve that, to get the business in Germany going, much better. It hasn't been going well at all. It's been both the market there and the way we have gone after that market. He has taken over the sales there. He is running it now, rather than the Denmark division running it.

So he is doing all kinds of things, and we have a lot of confidence in his ability to get that market shaped up. But it's going to take time.

Okay. My last question comes about China. How much of an investment do you think you will be making there? I know the timing is somewhat uncertain, but -- ?

Cliff, we're not there yet. I'm sorry, but we're not to that point yet.

Okay, great. Thanks, guys.

I should, I did mention -- and it's kind of important I think, as to the ability of the new manager -- despite the fact that sales in Europe were down, profits were up. He has made some real changes there. As I said, we've got a lot of confidence in what is going to happen there.

Okay, great. Thanks Barc, I appreciate it.

Steve Chercover from D.A. Davidson.

Could you give us a sense on the difference in margins between the conventional Strong-Tie products and the epoxies and Anchor Systems?

Yes, it is very large right now simply because we entered markets there where we were not known at all. We were in some markets, but in a lot of markets we were not known, like road building and high-rise structures.

So, it has taken quite a while to get that thing turned. It has turned now, it looks like, and we are making money. But I think it is going to be maybe another two or three years before we make what we consider to be a good profit. I don't think it will ever be up to our structural connectors.

Okay, but can you (multiple speakers) ?

I think it should be up to Dura-Vent's which goes between -- did go and will be back there again, we think -- between half and three-quarters of the profit margins in Strong-Tie connectors.

Then Anchor Systems, like could it do a 20% margin?

You know, projecting margins when you have such a small percentage of the market, and you're establishing a position against big guys, they don't mean much. And I'm not going to do it. I'm sorry.

Okay. Who do you consider to be the big guys? Would it be like Hilti or somewhat along those lines?

Hilti is the big guy; and then there is ITW, and there are a couple of others that have more business than we do. We are only -- last time I had a number, that has been about a year ago, we were about 8% of the market. Whereas you know in the structural connectors, we are maybe two-thirds here.

Sure.

So we have got a long ways to go there, but we've got a lot of good people and we are making a lot of progress.

Understood. It's a huge opportunity. With respect to Home Depot, do you think that their change in the stocking regime is because they are trying to displace you, or they were trying to cut costs? Might they reverse course if they have seen a 10% decline in Strong-Tie sales?

Well, it's pretty hard for me to get inside their heads. But I would think that they certainly will look at that.

I don't want to project any impression that relations are terrible there. They aren't. They aren't. They are, though, trying hard to reduce costs, and they are putting the pressure on suppliers there.

You know, it can only go so far. Because we think we have a very strong brand name; we get the vast majority of the specifications. And they're products which in areas of high winds and seismic problems, why, they can save lives.

So people when they specify, a structural engineer or an architect when he specifies a product like that, he wants to have confidence. He has got to be able to trust the numbers that the manufacturer puts out. We have been building that trust for 40 or 50 years.

Maybe part of the question is, then, are they trying -- do you charge them for the services of stocking? Because presumably if your guys were doing it, it is not an expense to Home Depot in the first place. Maybe I just don't understand that whole relationship. I would think (multiple speakers) ?

Well, no, I think it was a -- I think they approached it from a logical standpoint, except for the fact that I don't think they realized how much our merchandisers were doing to help the sales in the stores.

What they were trying -- they figured out what our merchandisers probably would cost us, and they wanted the cost to go down that much. That kind of made sense. So we went along with it, even though we thought they were making a major mistake.

We will see. Maybe they will turn around, I don't know.

Well, so you've got to give people enough rope to hang themselves, eh? Okay, thanks.

Home Depot is a pretty smart bunch of people. I think we're going to have continuing good relationship, but such things could change.

I hope so. Have you seen the other guys' connectors in there, commingled with yours?

No, no, we have all the stores, except for those that are the new batch of interior design stores. They don't carry such things. No, and I think it would be extremely difficult for and anybody else to supply them.

Sure, you could supply a certain area or something like that, but all those stores? Very tough. We have got plants and warehouses all over, so we can get it there in a hurry, which reduces the inventory time that the customer has.

So for them, the category declined as well, which presumably is suboptimal.

Yes.

Okay, thanks, Barc.

[Tony Campbell] from Dorset Management.

I guess just was curious if you have tracked what has gone on in Florida and Louisiana and Texas with the hurricanes, and if you had seen any, been able to identify any, quantifiable increase in business there.

The second question is, over time, should we expect your tax rate to decline as you start to get more sales from international?

Well, I will answer the first one and leave the second one to Mike. I think our biggest increase, of course, is our south-southeast operation headquartered in Texas, with a substantial warehouse and sales force, engineers, in Florida.

Now that the problems in Florida are behind them and some time has gone by, and it takes time to get the stuff cleaned up and start to build, our sales there have really gone up substantially.

Katrina, it isn't time yet. They have not got it cleaned up yet, they aren't doing a lot of building yet. But if they do as Florida did, and I have seen some real questions on this -- that is rebuilt everything and maybe even build better and more; well, they will build better for sure -- better and more, I don't know.

I see a lot of questions on whether that is going to happen in New Orleans and all those areas that were hard-hit. But I think it will end up helping us. Certainly Florida has given a real boost to our sales in that area.

And the tax rate?

That's Mike.

On the tax rate, we -- I mean, taxes around the world is very complex to project. But the American Jobs Creation Act, as that continues to be phased in will help us, since we have so much of our production in the United States. Our new plant, our expansion in Stockton, because that is in a California enterprise zone, will be a great benefit to us.

As sales increase overseas that will help. So over the next couple of years I hope to see a 1% to 2% decline in the tax rate.

Thank you very much. Good luck.

We will try and make it good luck.

Justin Maurer from Lord Abbett.

Barclay, on the issue of the day, the Home Depot thing, could you talk about the merchandisers and the discussions last year of how that came to be, that they wanted to do it? Like you said, I suspect it has more to do on the cost side.

But more importantly, to what extent are your guys still talking to them relative to the sales, as proof of the fact that you guys could potentially do a better job and get yourselves back in there in that regard?

Well, I think those discussions go on continually. They don't stop. Because we think that we can really help both of us by doing the merchandising ourselves. But whether they are going to flip around or not, I don't know. I don't know.

Any idea, by the way, how big Hughes Supply may have been customer-wise for you guys?

Yes, Hughes is quite small. It is White Cap that is big. White Cap, actually, White Cap's sales are -- our sales to White Cap are larger than our sales to Home Depot.

Okay. All right, sir. Thank you.

Barry Vogel with Barry Vogel & Associates.

Question. I didn't hear any commentary about share repurchases to offset options that were issued based on last year's profits.

Well, there hasn't been any discussion of that at the Board level yet, and of course, the Board is the one that decides. It may come up at a meeting here next month.

How many options were issued for last year's performance?

Approximately 480,000.

Okay. I have another question about the dividend. I haven't seen any announcements on a dividend increase.

We just made one in the fourth quarter last year.

All right, I'm talking about another one.

Well, there has not been any discussion of that. I would kind of doubt it this year.

All right, but given your balance sheet --.

Although I cannot project what the outside directors will want to do.

Okay, thank you very much.

Thank you. We have no further questions.

All right, thank you.

This concludes today's teleconference. Please disconnect at this time.