Simpson Manufacturing Co Inc (SSD) 2006 Q2 法說會逐字稿

Good day and welcome to the Simpson Manufacturing Corporation second quarter 2006 earnings conference call. I would like to turn the meeting over to your Chairman, Mr. Barclay Simpson, please go ahead, sir.

Thank you, Jamie. And good morning, everybody. And thanks for joining Mike Herbert, our CFO, and myself.

As always, we're not going to tell you anything that we don't believe, but surprise, surprise, we're not infallible. We're not too pleased with our results in the second quarter. Yes, sales and earnings were up over the strong quarter that we had last year, but not into double digits. And while we do not know what percentage of our structural connectors goes into new residential building, housing, apparently it has become our biggest market.

As I think most of you know, our distributors sell everybody, so we don't have a number, but we know it's very important. So any slowdown in housing starts will affect us. It has already. New homes tied together with Simpson connectors are a growing percentage of total new construction, and our revenues and our biggest market, California, has seen a substantial reduction in new homes already. It may not show up in the numbers that are published, but it's there. Part of it was due to weather, but certainly not all.

So, what are we doing about it? For many years we've been working on developing new products and markets. Anchor Systems had another good quarter. Its products are for masonry and concrete, as most of you know, and it gets us into new markets such as bridge and road building, as well as high-rise structures. And while Anchor Systems is gaining market share in the U.S., we still have less than 10%. So we've got a lot to go after. Manufacturing in China is under serious consideration. And at the least, we plan to expand our sales efforts there in the near future.

The people of Dura-Vent, led by Steve Eberhard, increased sales and profits in the second quarter by 28 and 160%. Net income before tax was over 10% of sales. The new laser welding systems, one in the Vacaville plant and one in the Vicksburg, Mississippi plant have opened up new markets. So all that money that our new manager there, a couple of years ago, Steve has been spending is now starting to pay off.

And while our markets in Europe have not been too robust, we are making progress. The first quarter's downward trend in sales has been reversed and profits before tax were up 35% to 8.4% of sales. Sales and profits were up substantially in Canada, also. And while sales in the U.S. to contractor and dealer distributors, our largest markets, generally were flat, sales to home centers were up over 21%. We've intensified our search for new acquisitions, especially those that have products that sell to other than markets for new home construction. To help find suitable acquisitions, we now are working with JP Morgan and others both in the U.S. and Europe.

Quik Drive is proving to be a most worthwhile acquisition. As our CEO, Tom Fitzmyers, says, we still have a lot of holes to fill. And while Quik Drive products, they certainly are an important step in that direction. Sales for the quarter for Quik Drive were up 22%, and we're just getting started in Europe. Well, that's a rough analysis of what's going on with us. And now I'm ready for questions. Are you there, Jamie?

[OPERATOR INSTRUCTIONS].

We will now take our first question from Arnold Ursaner from CJS Securities.

Good morning, Arnie.

Hi, Bark, how are you today? Bark, you had declining sales in California in the quarter. I've known you a long time, I don't ever remember a period where you had a quarterly decline in sales in California. Perhaps you could refresh the last time you did?

I do not remember. I don't -- I don't think there's been one.

Okay. So obviously we had the wettest weather in the state of California in the month of April.

That's correct.

And there was always a question whether you would make it up. Can you give us a feel for how trends in California developed in the balance of the quarter? And also comment, perhaps on July of what you're seeing there.

Okay, I don't, the balance of the quarter in California wasn't too good. And starting this new quarter, it's not too good either.

Okay. You gave us the growth rate for Quik Drive at plus 22%. You also indicated Anchor Systems had unusually strong growth. Can you quantify that please?

What was our percentage on Anchor, do you got that handy? 11%.

Okay and my final question and I'll jump back in. You mentioned Strong-Wall product line was down, that's unusual, as well? Any specific factor you think you can identify that may have led to the decline in Strong-Wall productline sales?

Well, I think it's just taken longer after we finally got code acceptance for the specifications to all of a sudden become orders. I'm still expecting, and I'm a little bothered that I thought it would come much sooner. But our people are still optimistic. Now if new construction is way down, those products go into new construction, so you may not be as strong as it looked six months ago. But I expect that new wall to start getting specified and ordered and to turn that thing around.

Okay. I'll jump back in queue, thank you.

All right, Arnie.

We will now take our next question from Barry Vogel, from Barry Vogel and Associates.

Hi, Barry.

Good morning. I have a couple of questions on details so bear with me please.

Surely. That's not new, Barry.

No, I know. I want to be consistent. First of all, can you give us the connector products segment operating profit as well as the venting products segment, the operating profit?

Yes. It was 95.4% was connector and 4.6 was venting.

Okay. And then --

And they were 90 and 10% in sales.

Yeah the sales we have. That was in your press release. Now as far as sales by segment. If you want to give the percentage change of Strong-Wall as a group, anchoring systems as a group, Europe as a group -- versus the second quarter of last year.

Strong-Wall, Anchor, and Europe, okay. Let's see. The shearwall in the quarter was down 12.8%. Europe was up 7.1%. And Anchor Systems was up 14.4%.

These were all quarterly comparisons, correct?

Yes, that's correct.

Okay. Now --

This quarter, the quarter this year compared to the second quarter last year.

Right. Okay. Now the geographic, usually you give us the geographic percentage changes. California, the West Coast excluding California, Midwest, Northeast, and South-Southwest percentage changes.

Yes. California was down 1.9%, man is that rare. I don't remember it. The West was up 12.7, the Midwest up 7.3, and the South, Southeast up 25.6. The Northeast was 12.6 up.

So obviously, the good news is you're not as dependent on California as you used to be.

No, no. That's, we're achieving an objective, but not in the right way. I wanted it, we wanted to achieve it while sales were going up in California, but more elsewhere. Not with sales down.

Okay. Now considering the last press release when Home Depot was a major issue, because of that, can you give us -- if you will be kind enough to give us the percentage, either the percentage -- well the percentage change or the sales dollars for the total home center business in the second quarter versus the second quarter of last year? The total Home Depot business, and that would include and there's a percentage change now, that would include you supplying White Cap, whose acquisitions were acquired by Home Depot last year and I believe you do a little bit of business, perhaps, in that. Because I know you always give us total Home Depot sales, and it used to only be [owned] stores.

Well, Home Depot sales in the U.S. were up 8%. And that, of course, is a big reversal from the first quarter when they were down more than 10%.

Is that including White Cap and --

No, that's the big boxes.

Stores only. Okay, that's good. And the total home centers percentage change.

Was up 21.9%.

Now why the big disparity do you think from the first quarter and the second quarter?

Say that again?

Why the big disparity? It was a very strong quarter with home centers in this quarter.

Yes.

So I don’t think it was that strong in the first quarter.

No. It was not. It was up, though. Home centers were up substantially in the first quarter.

Okay.

Even though Home Depot was down.

Okay. And as far as the inventories are concerned, they were up $40 million from the end of December --

Yes.

To the end of June. If housing continues to slow, would you attempt to get these inventories down? And if so, how much do you think they would be lowered if housing continued to slow?

Well, the inventories are up -- a major reason is that steel is going to go up again. It looks like. And we were able to buy some ahead of time before the price increase. So we laid in quite a bit of extra steel. And that will -- we're there now. And so from now on, we will be depressing the inventory just exactly how much, that's an estimate that right now wouldn't mean anything because I don't have enough facts.

Okay. Now. In terms of your press release, I was extremely impressed with your 20.9% operating margin as a Company. It was the highest operating margin for the second quarter in the last four years. How did you do this in face of the slowdown in sales and higher steel costs?

Mike, you want to answer that?

Well, because we were, we built inventory. We had better overall absorption, managing our expenses, so primarily those two areas that contributed to it.

Okay and of course, you consider -- your strategy is to buy as much steel as you need in anticipation of steel cost increases?

Yes, that's always our strategy. And sometimes you can do that and sometimes you can't.

All right. I got a couple of little housekeeping things for Mike. Can you give us your best estimate for capital expenditures '06 now that you've made some of these, the first half is over, and the D&A for the year?

$63 million in capital, $26 million in DNA.

And how about the tax rate for the full year?

37.75.

Thank you I will drop out and have other people ask and then I will come back.

We will take our next question from Cliff Walsh from Sidoti & Company.

Morning, Cliff.

Morning, how are you?

Great.

Can you talk a little bit about the Home Depot issue, with the merchandising that’s -- is there any update as to whether or not you guys will get back in there? Or is Home Depot still doing their own work in-house?

Well, they're still doing their own marketing and it doesn't look like we're going to get back in there. I think they're doing a little better job than they were, and our relations with Home Depot have improved a lot. Our people feel that we have now a -- an appreciation on both sides of what one can do for the other.

Okay. And in terms of rising steel costs, you've obviously been building inventory in that front. We've talked in the past about you wanting to actually have experienced the rise in steel costs before you go to your customers and ask for price increases. At what point do you think that will happen?

It's going to happen probably within a couple of months. I would hope not, but I -- my feeling is the steel companies are working on making steel scarce so they can raise the price.

Any sense as to what increase you're seeing this summer so far?

No. No. Actually, we don't discuss that.

Okay. And on to the Strong-Wall products. Can you talk about, I mean, obviously sales were down and it's taking a little bit longer than expected. Can you talk about how the product is being received with architects and people you want to specify the product?

Yes, well, all I hear from the branch managers and sales managers is positive, that we are getting specified, it just seems to be taking longer to actually get the sales from those specs than certainly I expected it to. But they're very positive.

So depending on -- this product goes into new housing, the vast majority of these new steel shearwalls. It covers a great deal more area than our original wall did. Goes in a -- covers all of these high-wind areas and we think that this quarter is going to see a real turn around in the sales of shearwalls, but of course, a lot depends on what happens to housing because those products go into housing.

Okay. Thanks very much, I appreciate it.

Thanks, Cliff.

We will now take our next question from Steve Chercover with DA Davidson.

First question, I wanted to know since you're back in acquisition mode, what type of product line you'd like to grow into next?

You know that's a very good question, Steve, and we talk about it all of the time. And it, it's pretty hard to specify specific products because the general direction that we want to go has to do with distribution and the final usage of the product. And as I've said earlier, our constant direction is to try and get away from such a high percentage of our business depending on new housing. We don't want our business to depend on factors over which we have no control or at least we want to reduce that.

So we're constantly looking for products like that would fit in with Anchor Systems because Anchor Systems products go for different markets. And that is increasing and we're pushing there and we're looking hard for other products to go with them. We've also, well, generally, I think if you just figure that we're going to look for things that don't depend on new housing. That's our major objective. Now, if we find a good enough company that a lot of the products go for new housing, we're probably going to grab it if the price is right. But if it's -- if the contest is between that company and one where the products don't go into new housing, we're going to grab the one where they don't.

I certainly appreciate that. But are there other products that are complementary? I assume that Quik-Drive, for instance, is you know, a brilliant addition because it helps people drive the screws to hold the strong ties, are there other kind of symbiotic products like that?

Probably. I can't give you specifics there. There are all kinds of -- if you go into it. Yesterday I went into a Home Depot and looked at all of the products in there, not all, that would take all day long. But distribution is a major direction of ours that we have some recognition in the distribution of a particular product line that we're looking at.

Okay --

and I'm not giving you specific answers that you want. But it's kind of hard to do because we look at all kinds of things and we don't want to close our minds.

Sure. But I mean, are there -- there are elements obviously without being specific that get you excited and you say that would be a nice fit?

Well, yes, and the -- when we talk to our salespeople, which, of course, we always will before we buy anything, anything that they're excited about that they think they can really promote and sell long run, it changes our feeling.

Okay. Second one, I guess is more of a housekeeping, but Barry always asks a question -- or for some kind of granularity that you provide, can you put it in the press release? Because it would be very helpful to us, I think.

Okay.

Okay. I'll get back in the queue now too.

We will now take our next question from Jason Simon from JMP Securities.

Good morning.

Good morning, how are you?

Okay. Just a couple questions. Just the first on the geographic breakout. The so-so piece was particularly strong, up 26%, and as you've been reading as everybody else has Florida's been pretty weak. Considerably weaker than I think a lot of areas in the U.S., I'm just wondering if you can speak to the trends that you're seeing in that area, and what do you think is keeping your sales so strong within that particular region at this time?

Did you say you thought Florida was weak?

Well, new home sales and unit growth have been weak from the public home builders’ perspective, and I’m just wondering if that’s something you’ve been seeing. And if not, what is it that's keeping your business up?

Well, for whatever reasons, Florida has been very strong for us. We have increased sales there. Not decreased. Florida is right next to California, as the second state, second largest sale state for us. And that hasn't changed. In fact, our Texas branch, which Florida is part of the Texas branch has become our biggest branch in the past year. And a lot, a lot of that is due to Florida business.

Okay. Would you expect that the growth in the Midwest would still be tempered, I guess because of wet weather? In that particular region. You were only up, I think 7% this quarter.

Yes, yes, that's absolutely right. Our manager there is really concerned because that wet weather has done what the wet weather did in California.

Okay. And what are you seeing, I guess for the first month of the quarter? Is it still significantly bad?

Well, I think just generally it looks like housing is becoming -- well, it's further off.

Okay. With respect to steel prices, obviously, another steel price increase, not on your side, but on their side just went up last week. And I'm just wondering what you think your -- the potential is for you to keep increasing, obviously your connectors pricing going forward, do you think you might see some pressure going forward?

Well, if our costs for basic materials go up, so does everyone else’s. So our competition, their costs go up. So we've always been able to get back the increase or to get back a substantial part of it. So we'll have to raise steel prices if they go up substantially. We'll have to.

Okay. Okay. In the past, I guess in housing downturns, have you seen any pressure from the home builders to obviously keep your prices at a relatively stable level?

Absolutely. All the time.

Okay.

All the time, but that's no change.

Okay.

And that's just business. And they're -- they can be very tough. But we work with them all the time. Our sales force spends a lot of time with big builders, although we don't sell them directly.

We want to make sure that they know that they can make money by using our connectors. That gives somebody who is going to buy a home confidence, particularly if they're in a high-wind or a seismic area and they have a family. They don't want that structure to collapse on them.

Certainly. Have you seen any restoration efforts underway in the South?

Yes. Yes. The -- New Orleans is starting now to go back together. How much will go back together there, I read different views.

Okay. So what would you attribute a lot of your strength to be for the I guess in the South-Southeast for the quarter?

Well, I --

Would you attribute it to rebuilding efforts, new home starts, what do you think it is?

Well, I think that, we've done an excellent sales and merchandising job there, and we've done things like -- we've just established a new warehouse in North Carolina. And one of our major values to our customers is that we have warehouses and factories all over the country and so if you've got a problem on a job and you've got some carpenters there, and if you don't get these connectors right away, you're going to have to pay the carpenters anyway; that makes us really important because we can get the product there in a hurry.

Okay.

So this new warehouse. We also just put in a new warehouse in Minnesota for the same reason. We want to service the customers in a hurry. And we can do it a lot better than anybody else.

Certainly. I guess with respect to your activity in China, if you do see, I guess sales a little bit more anemic than I guess what you're expecting, do you have the potential to lower SG&A commensurate with, I guess a decrease in sales or is the China initiative going to be a pretty large initiative for you?

Well, Mike Herbert just got back from China where he was there with our head of manufacturing and head of our Anchor Systems division and we're looking on how to get there in a hurry -- because China's the wave of the future -- to manufacture for that market. Not for this market. For that market.

Okay. And --

and we've got a board meeting today at 8:00, our time, Pacific time. And that's one of the topics we're going to discuss.

Okay. And just last thing. What were your operating cash flows for the quarter, and I guess what was your CapEx? I missed that.

For the quarter, approximately $31 million.

Okay. Thanks very much.

Okay, Jason.

We will now take our next question from Arnold Ursaner from CJS Securities.

Hello again, Arnie.

You obviously are buying this facility in Galivant [sic], Tennessee to expand Quik Drive, can you comment on what the capacity was of the previous facility? And I'm assuming you're doing this, obviously continued demand. I mean what sort of incremental growth might this lead to?

Well, Quik Drive is growing rather rapidly. And we're going to be ready for the next, oh, what do you think? 5 years, Mike?

Oh, definitely.

What was the capacity of the facility you were closing?

Well it barely took care of what the sales were last year.

Okay. And I think you did touch on several of the larger home building companies are going to their suppliers and saying that as we are under pressure and lowering our prices, we're going to our suppliers and trying to get them to reduce theirs. My understanding has been that you haven't worked very much directly with home builders. Could you just freshen that up, please?

Oh, no, we have, Arnie, we work with them every day. The big builders.

You're selling directly to them?

No, we don't sell to them, but we work with them to make them realize how valuable our products can be for them and make money for them.

Right. So you're not reacting to them coming at you trying to demand lower prices or anything else?

Well, you're always trying to give them the most value. And that doesn't change. Sure, maybe the pressure gets heavier or something like that and you either have the value that they need at a particular price or you don't. And we've worked on that for a long time. What I just mentioned about our being able to get the stuff on the job right away no matter where it is in this country is extremely important. And also you don't have problems with codes with our products because we're code approved.

Okay. Thank you.

We will now take our next question from Barry Vogel with Barry Vogel & Associates.

I just want to follow-up on the prior question about lower SG&A leverage because you did mention a line, Bark, in the press release that lower costs were helpful in your quarter. And I know that, you had over the last 5-6 years significant increases in personnel and of course, I think in the last 12 months, your SG&A versus sales started to back off, which is helpful for operating margins.

Yes.

So the question I have is, A, what did you mean, first of all by lower costs in the quarter? And secondly, if housing continues to slow beyond what it slowed so far, can you lower your costs further or can you calm down increases in expenses further?

Well, of course, you -- that's a pretty tough question to answer, Barry.

I know that, that's why I asked it.

Of course, you're going to work on that. And one thing that is a big positive in this company and at times a negative is that we do not want to lay people off. When you join this company, we're a growth company, we grow every year and we create more jobs and you join the company for a long range job. And so we really are very slow to lay people off. But if things get bad enough, then you have to. You have no choice.

However, our numbers -- our numbers constantly get better on production, that is sales numbers compared to number of people. The dollars of sales per person in the company has gone up every single year since we went public. And of course, we work on that and you just get more efficient, that's all.

Okay. Because I had never seen you put that comment in before in the press release.

Well, we're constantly working on that. And more and more, one of our advantages over competition is because we're oh, probably 5 times as big as the nearest competitor, we can automate a product before anybody else can in the industry because -- it's a very expensive process, a million, two million bucks to automate a product and you've got to have enough sales to make it pay. But because our sales are so much larger, we can afford to do it much sooner, and that makes our cost, of course, lower.

I know it's early, we're not even near 2007 and you've been spending a lot of money in adding equipment and machinery so that you wouldn't -- so that you would have enough capacity. Is it -- excluding your acquisition, and maybe I can ask Mike this question, do you think your capital expenditures would be lower, particularly in a slowing housing environment next year versus this year?

Yes, I do. We won't do our formal capital plan until the end of October, I would expect it to be less next year.

Thank you, you guys did a great job in this quarter in my opinion.

Thank you, Barry.

We will now take our next question from Justin Maurer with Lord Abbett.

Hello, Justin.

Morning, gentlemen. Bark, you mentioned Florida, I don't know if you can frame up for us maybe the relative size, I know you don't want to go into great detail, but you mentioned number two behind California. Is it half as much as California, two-thirds? And the reason I ask is, even to the extent that Florida slows, just trying to get a sense of how much penetration opportunity you feel is still there that you guys could still be gaining share in a slowing market.

Justin, I don't have that number, we just have Florida separated, but I'm going to make a guess that it's probably about half.

About half the size of California?

And that's a guess. And it isn't based on enough fact right now. It is number two, that I know.

But the starts, I suspect, the starts in Florida are not half of what they are in California so implying that there's opportunity there since you guys are newer to that market.

True.

Secondly on steel, you talked about inventory earlier, I apologize if I missed it relative to looking forward a little bit. Seems like steel, from what I could tell starting to flatten out a little bit maybe. Trying to get a sense of your posture on the buying strategy, assuming that your sales stay at the current levels they are running now.

Well, we assumed that steel prices were going to go up because all the information we got seemed to say that. So we’ve laid it in, tens of millions of dollars worth of steel that we have. And we think that will enable us to hold off for a bid for putting in a price increase after the price of steel goes up. But it doesn't look like it's going to flatten out. I would certainly hope so, but it, our people tell me that they think it's going to go up.

Yep, but safe to say then, you feel like you guys bought ahead, and to the extent obviously inventory has been running higher in sales like it did last year start to come in line with sales as we get toward the back half of the year?

Yes.

Okay, thank you, sir.

[OPERATOR INSTRUCTIONS]. We will now take our next question from Timothy Jones with Wasserman and Associates.

Hi, Tim.

Hi, how are you?

Okay.

First of all, isn't your business more tied to housing completions than starts?

Well, let's see, no, it's tied to starts.

Well, I mean, the starts takes them a couple of months, you're really putting up the frame, it's probably right in the middle between completion and starts. Anyway, interesting question just was asked. Your California, Texas, and Florida, basically have the same housing starts and they account for about 35 maybe sometimes 40% of the starts in the United States. Yet you're saying that -- is your third -- is your third largest market Texas?

Let's see, yes.

Okay. So you've got Texas and Florida half of what California is. Could you, the question is, why -- are you really going to start to try to get the market share that you have in California in those two states? Obviously you have half the market share.

Well, I think we have. We have probably close to the same kind of market share, but now it's becoming more prevalent, codes are being enforced in Florida and Texas, also. What's made the use of our products so heavy in California is codes. Tough building codes enforced. And the rest of the country wasn't that way. Now there are areas that are getting there, like Florida.

Certainly, obviously you know I live in Florida it's happening in Florida, there's no question.

Yes.

Can you, do you have any feeling why these crazy disparities between the government numbers on housing starts and orders – you know, down 5, 4% -- and the builders showing huge drops, you know 30-40% drops. What is the disparity in the numbers? I mean I think you're seeing it yourself that you're more, you know, cautious and do you have any idea why these government numbers are so crazy?

Tim, I think you would have a better idea than I would.

Okay. And lastly, what, how much is steel of either your sales or your cost of goods now?

We don't discuss that.

You don't? Okay. Thank you.

Okay.

We will take our next question from Steven O'Brien from Wellington Management.

Good morning, Steven.

Couple questions here. First you talked about the progression for the quarter for California. Has the rest of the market also been softening as the quarter developed? Or is it a little more stable?

Well, it's more stable. California has been the worst. Now our Midwest people are concerned about the Midwest. And part of the reason is the same. Too much water.

Okay. And secondly any -- could you give us a feel for how much of your sales growth this year over last year was just due to higher prices?

No.

Okay. And the third question is, you've got a, about an 80% increase in R&D expenditures, and you mentioned something about bonuses, but is that increase just due to bonuses? Or is it because of there's more new products you're working on or there's a bigger push to start developing new products? Why the pretty big increase?

Good question, Mike you want to take that?

We are making substantial increases in both personnel and in our lab to develop new products.

Okay. So this is an effort now to really, it's not that it looks like you’re coming toward the end of a new product development, but more of a initiation of a new product development. Another new product development effort. Bringing it up to a new level?

Well, when times like this come around where it's obvious that our major market is lessening, then we got to put more effort behind developing new products, which have been our lifeline. So we're doing it and we're using different methods. We don't want to sit around and let things over which we have no control take over. So new products is a major part of the growth of this company and we're putting more -- even more effort into it now.

Okay. Thank you.

All right.

Mr. Simpson, it appears we have no more questions at this time.

Okay, well, thank you all for listening in. Thank you, Jamie.