Simpson Manufacturing Co Inc (SSD) 2006 Q4 法說會逐字稿

Good day and welcome to the Simpson Manufacturing Company fourth quarter 2006 earnings conference call. I would like to turn the meeting over to your Chairman, Mr. Barclay Simpson.

Thank you, Sonya. Welcome, everybody, and thanks for joining our CFO, Michael Herbert, and myself. Let me assure you that despite my initials, I will not give you any. You all got the numbers yesterday about our fourth quarter and the year. And we are not happy with them even though the return on sales and on investment remain quite good. The comparison with the prior year was not good. If our sales and earnings are not up at least 10%, it is not a satisfactory period for our people. Cash profit-sharing is the most important part of their compensation and it was down 28% in the fourth quarter. Out of 557,000 possible option grants, only 122,000 were granted for last year.

So why do we not have our usual strong increases over the prior period? Simple, we let ourselves get too dependent upon something over which we have no control -- housing starts in the United States. We now are putting increased pressure in several directions which should, given a bit of time, lessen than this dependency. You do not have to read much to know that China is the wave of the future. Our Anchor Systems products, epoxies and mechanical anchors in particular, are selling in mainland China and therefore have given us entree to that market.

Last month, the person who has been calling on customers in Asia for the past five years moved to Hong Kong, where he has set up an office and is putting together a sales and engineering staff as well as a warehouse, all designed to build our Asian sales, especially in China. He also has the objective of figuring out how to get the manufacturing in China for the Chinese and other Asian markets. His wife and three children will join him shortly and his commitment is for a minimum of five years.

Recent sales there include 1000 tubes of our epoxies to help renovate the Workers Stadium in Beijing, which will host the '08 Olympic boxing. We have also established a first-class distributor in Dubai. Eventually, we plan to manufacture structural connectors in China as well as the Anchor Systems products for those Asian markets. Our expectation is that quite a few products will be different than what we make for the U.S. market, but that is nothing new for us. We did just that in Europe.

Speaking of Europe, that is one of our markets that last year, under its relatively new manager, had a renaissance. He made some major changes in the past year or so that have had a positive effect on both sales and profits, especially in the last half of the year. This year is starting out up double digits, also. Europe, like China, should become a more important part of our future. Our efforts to get substantial business in Eastern Europe are underway also.

New product development, which has built this company, has had some major changes. We did something we have done only three times in the past ten years. We hired a major manager from outside, rather than promoting from within. The new head of R&D comes from the kind of background to provide us with innovative ideas and methods.

On acquisitions, we are making more effort than ever and we're looking at several now with the help of JPMorgan and Euroconsult. Both of those firms have come up with companies of interest. We have hopes that in the not to distant future, we will be able to show all of you and everyone else that there really was a positive use for all of that cash on our balance sheet. Acquisitions as well as internal product development are two major sources of new products and markets.

Quik Drive is proving to be a fine example of a successful acquisition. We are now starting to stock inventory and sell Quik Drive's collated screw products throughout Europe. Quik Drive sales last year had a slight dip in the fourth quarter, but were up 13% to $35 million for the year, quite encouraging considering its past high reliance on new U.S. housing starts.

As you might gather from what has been said so far, we are concentrating on several areas and projects designed to build a strong future for Simpson Company, but which probably will not have much positive effect on sales and earnings in this year. Getting established in China will be expensive and acquisitions usually take about a year or more before effective integration. Plus, housing starts in the U.S. may go down further in the near future.

Our first quarter this year is starting slowly and probably will not even come close to matching last year's very strong first quarter, where sales were up 17% over the prior year's and earnings up 53%. So short-term investors beware. Also this being a long-range Company and not for sale, no one will get a quick return that way. However, if you really are long-range investors and you have examined our record, you know that we have done it before and that our people have the resources and the determination to do it again. Questions?

(OPERATOR INSTRUCTIONS) Frank Wooten, CJS Securities.

Your inventories came in a little bit this quarter, but they still remained up nearly 20% year-over-year. I wonder if you could give us a little bit more information as to what those inventories are composed of.

Well, of course as I have said before, a major objective of ours is never to be out of inventory. That is a major reason that people across this country, in particular -- because we have all kinds of operations everywhere, practically -- we get things there in a hurry. And if you do not have the inventory, you can't get there in a hurry. So we are willing to have a relatively poor turnover and we have had for many, many years. That is not going to change much. We also, because of the slowdown, we are perhaps more concerned about our people than we are about the very short run. So we tend to keep good people longer, even those sales are down substantially.

Got you. I was just looking for a little bit more information whether it was finished goods, work-in-process, steel inventory, anything along those lines to give us any color.

Mike, do you want to grab that?

Finished goods stayed relatively flat as compared to the end of the third quarter and with the raw materials going down approximate 23%

Okay, this is the first-quarter that we have seen what appears to be a slowdown in Quik Drive. Anything specific which caused that?

Well, because Quik Drive's products are dependent on housing in the U.S. Now, we are in process of changing that because Quik Drive is now in Europe. And I presume that given a little time, we will find out that we can get it into Asia. But anything that is dependent on U.S. housing is down.

Got you. I'll hop back in queue.

It is surprising that it is as good as it is.

Barry Vogel, Barry Vogel and Associates.

First of all, Mike, can you give us the connector operating profits as well as the venting operating profits for the quarter?

For connector operating profits, $27.555 million. Venting products, $2 million even.

Okay. Bark, can you give us the percentage change in the fourth quarter as well as the year in a sales breakdown by region, which we know is the West, excluding California, California, the Northeast, the South, Southeast, and the Midwest.

What do you want, the percentages that they were for the year?

Yes, percentage change for the quarter as well as the year for each region.

Okay, well, let's see. Starting with California, in the fourth quarter, down 17%. The West was down 18. The Midwest was down 25. The South/Southeast was down 11. Now for the year --

What about the Northeast? Do you have a Northeast region?

Wait a minute, where is it? The Northeast is part of the Midwest.

Oh, it is? Okay, I didn't realize that. Okay, for the year?

The year, California down 6%, the West down 3, the Midwest flat, the South/Southeast up 10 -- 11%

How about individually in the fourth quarter Florida and Texas. Would you have that?

Haven't got it.

Okay. Now as far as sales by segment, you've been very kind to tell us the percentage change in Strong Wall, Anchoring Systems, and Europe in the past.

Yes, just a moment here. You want the fourth quarter?

Yes, just the percentage change. You have all those numbers in the past.

Fourth quarter, Sure Wall was down 11%. The Anchor Systems down 2%.

Europe?

Europe up 26%

Okay, now in the quarter as well as the year, can you give us the percentage change for your larger -- largest customer's sales?

Yes, just one that we have to. Otherwise, I am not going to go into individual customers. But Home Depot, our biggest customer, for the -- let's see, I've got it for the year here down 7%.

How about the quarter?

For the quarter, down 6%

That is the box stores.

Yes, the box. Okay, what about the total home center, the entire home center business in the quarter?

The what?

The entire home center channel in the quarter, including Home Depot.

Let's see, flat.

How about '06?

For the year? The year was up 21% I believe. No, just a second here. We'd better make sure that. Okay, 4% up for the year.

How about back to Florida and Texas in the fourth quarter, the percentage change?

Have not got them.

That's right. Mike, can you tell us what your expectation is for CapEx and DD&A for this new year?

For capital, we have a budget of $40 million. Offsetting that we have -- are currently constructing an addition to our plant in Stockton, California that will finish up in April, we hope. There will be $11 million of that $40 million. We will be selling our San Leandro plant and we still have our old plant in Texas for sale. Hopefully, we will sell those for between $18 million and $20 million.

Okay, and DD&A for the year?

$25.4 million for 2007.

Okay, can you tell us a little bit about European profits, Bark? You did us a service last time and you told us about European profits in the third quarter, which were very impressive.

Yes, they were also for the fourth quarter.

Can you give us some idea of operating margins?

No, I have not got that. I can tell you, though, that European profits now in the fourth quarter were not quite as good as our general profits, but they were getting there.

What does that mean?

It means that it was maybe about 70%

Are you talking about operating margin?

Yes.

So Europe had 70% of the operating margin?

No, the profits. The net profits were about 70% of the ratio of the whole system.

All right, I will let someone else ask some questions and I'll get back later. Thank you.

Steve Chercover, D.A. Davidson.

Barry asked a number of my questions already -- maybe you know that he's going to ask and we all are interested. Maybe you can somehow include them in the release. But I wanted to ask, I suppose switching gears, to what type of products would be most beneficial from an acquisition standpoint? Would you like to have additional tools or fasteners? Can you give us a little color?

Well, we first would -- any product which does not depend on U.S. housing, that is really important. That means in what is going on now within the company, Anchor Systems, any products that we could add to Anchor Systems would be a real plus, because Anchor Systems does not depend on U.S. housing to nearly the extent that the rest of our structural connectors do. Now, if -- also, I think we're going to find that when we get to other markets geographically, you find out that the products can be quite different. I think we're going to find some of that in Asia, that they will be different. We are looking at companies that are in Europe and Asia. That would be our plus over a U.S. company, because we think the future, certainly China is going to be a major part of it. And there are other parts of Asia. India, smaller parts are also quite good. So, anyhow, that is going to be an important part of the future, geographically. We are looking at companies there and we are looking at companies in Western Europe.

To get into these nonresidential applications, are you effectively mirroring your approach that you have done with the home builders? So for instance, are you approaching the engineering and construction companies and saying this is what we bring to the table or working with them to develop solutions?

Yes, all the time. Our sales force spends a lot of time with architects and engineers and also users of the products. That is where we get an awful lot of ideas for new products. And we also would get ideas for companies to try and buy if it is a product that is pretty hard to develop internally or the markets are well-established with somebody who is for sale.

What about maybe some of the big cement producers like Cemex or Lafarge? Whenever I think of nonresidential, I am basically thinking of high-rises and what not that are made out of cement and rebar. Can you deal directly with them to almost integrate your new product lines into the first principles of cement building?

Well, any way that we can market our products, why, we look at it, of course. I think that in those cases, generally though, you are talking to the architects and the engineers who specify what products are used. That is the way we get to get our products used with concrete and masonry and that kind of thing.

Okay, thanks. I'll get back in queue.

Keith Johnson, Morgan Keegan.

I had a couple questions on, if I could get a little bit more color on the venting products, the decline there. In the release, you guys mentioned several factors were driving that. One of which, of course, is residential construction being down and the other is, I guess, lower natural gas prices. And if there's any more light you could shed on that decline for us.

We are looking at that and at the moment, I do not have a good answer. We are figuring out what really is the problem there and we are not absolutely sure at the moment. So anything that I -- any answer to that question would not be based on enough fact yet, but it is not contributing the way it should right now. And we've got to help out there.

Can't remember. We may have talked about this in the past, but could you give me a little bit of insight into those products, the alternative heating source products, such as pellet vents and wood stoves. How big of a piece of the venting products businesses is that for you guys or was that for you guys?

No, not the moment. We are analyzing all those things right now, Keith. I do not want a give you any answers that are not based on a number.

If I remember right, pellet vents and wood stoves, those were not a big, large percentage of the overall venting products you guys had on the market. Is that what I am remembering correctly?

Woods stoves? No, they are not.

Did you say Anchor Systems in the fourth quarter sales were down about 2% or did I hear that correctly?

Lets see. The fourth quarter, yes, you are right on.

That is mostly nonresidential high-rise type construction and infrastructure projects.

And roads.

And roads. Is that seeing kind of just some seasonal slowdown there or is more of an overall market shift for those types of construction projects?

I think that one, I would expect that we get that one turned around.

All right, I guess last questions, just kind of on the steel pricing environment. I know the press release said, of course, it did not decline during the quarter, but I have seen, I guess, some comments and steel producers just pointing out that maybe the glut of steel inventories and those type of things are working off and that the first half of '07 maybe a little bit better from a pricing standpoint. What are you guys seeing in that market?

That is about what we are hearing right now, although kind of our information is that if you figure it is going to be pretty flat, you are probably not too far off. But it is kind of like trying to predict the market, stock market.

I understand.

Whatever you're guessing is probably wrong. However, really the important point as far as the price of steel goes, if the cost -- if our costs go up, so do everybody else's. And we can raise the prices. If our costs go down, we are going to lower the prices. So it is only effective on our earnings in the very short run. We may not get the price increase in as fast as our cost of steel comes up.

Right, there is always a little bit of a lag in their.

Yes, there can be a lag the other way if we're lucky.

That's true. I know in the past you don't talk about specific percentage changes in prices and volumes, but did you have any luck in trying to adjust selling prices for your products here in the December quarter to offset some of the steel price?

Yes.

All right, that's all I have now. I will jump back in the queue. Thanks.

Cliff Walsh, Sidoti & Company.

Can you talk a little bit about the merchandising in Home Depot, any changes on that front?

Yes, our branches all feel that Home Depot taking over its merchandising from us -- we had people specifically assigned to merchandising in retail outlets, including Home Depot being the number one. We feel that they can't do it as well as we can. They don't know our products like we do. So that is why we think that their sales have not gone the way they should have gone. Now, we are constantly talking to them about us taking over some part of their merchandising again. And maybe that will happen or maybe not.

Okay, but there have not been any real progress on that front?

Well, it is in discussion all the time.

Okay, and you mentioned that January was off to a slow start. Can you give us a sense as to where that compares to, maybe, average levels throughout the fourth quarter? Are we seeing the declines accelerated or are maybe holding steady with what they were throughout the fourth quarter?

I think a major problem with the first quarter is that it was so good last year. And of course, people look at those comparisons with the prior year and so our first quarter is not going to look very good for two reasons. It will be down some just because of housing conditions in the U.S. and all these things we are doing will not have much effect as yet, or in fact, first quarter they won't have any of fact. But that first quarter last year was just too good, so anybody who expects us to be close to the results of last year is going to be very disappointed. And we have not seen any boost in housing.

Okay, if you were to look at activity levels in January compared to the last couple of months, where do things stand at this point?

It is about the same.

Okay, great. Thanks very much.

Brett Hendrickson, Bonanza Capital.

I appreciate your candor in your opening comments. Just a handful of really quick questions. Accounts Receivable, my DSOs as I calculate them on my model are up a little bit to 58 days. Is anything going on there? Is it timing, are customers asking for longer terms in the current housing environment?

Just timing

Similarly on the inventory, Bark, one of the other guys was asking you and I think he maybe got cut off, you were mentioning, and I appreciate this, that you guys are very focused on keeping your good employees around, even through different housing cycles. So are you saying that you're just going to, kind of, to keep the plants running, you're going to keep finished goods incrementally higher? Is that what you were trying to say going forward?

It probably will be incrementally a little higher, yes. You know, we are a people Company and it has built this company. So we have to have a strong feeling for these people who have been with us for quite a while. And we are going to really not let anybody go until we feel we have to.

Good, and if the housing slowdown in California and Florida and so forth was more prolonged than it has been, at what point does finished goods get too high and you have to slow down the production rates in the plants?

It is already they are.

Okay, so there is no more hit utilization and manufacturing overheads leverage. That we've already seen that in the margins, because your margins were pretty decent?

Yes, and, personally, I do not expect them to stay that good.

As in Q4, the gross margins?

I think this year, the gross margins -- and this is just my guess -- I think we are going to be a couple of percentage points off.

For the full year compared to the full year '06?

Yes, the full year.

Last question, I don't know if you guys have it handy, but do you have the effect of foreign currencies on your revenue for the quarter? Was it very material? I have not really been keeping track.

No, it was not.

Good, thanks.

Tom Zeifang, Lucrum Capital.

Can you clarify just one question that was made earlier? The operating profits, the net profits in the quarter were $19 million because I rounded up. I think you answered a question that said that Europe was 70% of some number.

Well, Europe had come -- just two or three years ago, we were still losing money in Europe. It has made a real flip so that in the last quarter, it was roughly two-thirds of the margin that we have here in this country on structural connectors, which is, as you know, out of the ordinary.

Are you talking margin or are you talking profits?

I'm talking both.

Part of his point is that we made $1 in the U.S., we only make $0.70 in Europe on the same sale.

Okay, I misunderstood it. Okay.

But we used to lose $0.70.

I know, that's a great improvement. Then, on the 4X, there was no impact to revenues or profits in the quarter?

Nothing significant.

Same for the full year, correct?

That is correct.

What percentage of sales -- do you hedge at all?

We do not.

Okay, thank you very much.

Scott [Volsigs], CSIG.

Just a follow-up question on Home Depot. Obviously, you had a couple quarters here the sales being down. You mentioned merchandising, but I just wondered what else might be going on there and if you expect some more of the same in coming quarters.

Just generally, we feel good about our relationship with Home Depot now, better than we have in the last year or so. And I think that we are now working with them to do -- looking at product lines, looking at how we can improve sales, generally, and I think it is going to be better. It is better right now, our relationship, so that we can help each other.

Okay, on a different note, you had mentioned in the release about one of the reasons why your margins held up pretty well was lower manufacturing costs. And I just wondered what happened there? If they were more one-time or if this was a general improvement in manufacturing costs going forward.

Well, I would hope it is a general improvement. I'm not sure. What do you think, Mike?

I think it is. We work very hard to make sure we take costs out of the system, we started improvement in freight. We did -- during the middle of the year, we had increased headcount to meet the demand and then we reduced that. So we are constantly looking at all the dials and levers trying to make sure that we are optimizing that margin number.

Okay, that's helpful. So on the headcount issue, obviously we have talked about this in prior calls and today already. And you did mention you have reduced headcount. Would you say that there is more of that, so to speak, to come or is that something where you try to do it in one fell swoop and that has already come through?

I wish I could answer that. Nobody can.

Looking for some indications, that's all.

On things beyond our control.

Okay, while get back in the queue then. Thank you.

Stephen East, SIG.

Just one question left. If you look at your housing business, how much was that down and what were the trends for that during the quarter?

Because -- we don't have numbers on that, because our distributors, most of them sell everybody. So we actually do not know. We cannot factually figure out what has happened there, but what we do know is that it is a high percentage of our business that, it has got to be at least 60%. And that being the case, we are too dependent on something. And I've said this before and I can't say it often enough, that we let ourselves get too dependent on it. And I can assure you, we are working on all these ways to reduce that dependency, but what is going to happen to housing, I don't know.

Okay, fair enough. Then if you just look at your overall businesses as you worked through the fourth quarter monthly from a revenue perspective or for the sales perspective, was the trending down throughout the quarter, I would assume, with the housing market?

I think it was pretty much, yes.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS) Barry Vogel, Barry Vogel and Associates.

I only have two questions that I did not ask before and one is for Mike. What were your capital expenditures in '06?

$60 million.

$50 million?

$60 million.

Okay, and Bark, can you give us any update on Strong Brace? I know it has been a very difficult time to incorporate that product with housing off so sharply, but now you have had it out there for a while. And maybe you can give us your opinion and some numbers maybe, some feedback.

Well, my opinion is I'm disappointed. But two things have happened there. I don't think that we have done a good enough job in getting it out there and selling it and merchandising it. And I think we have run across one or two things we did not expect. Those things are now, I think, in shape, so that considering that it goes into housing -- those walls go into housing -- so the total market is down substantially, but I think that now we are in a position to get a bigger share of that market. So I would expect that this year we are going to show some real improvement there.

Could you give us an idea of roughly what the operating loss was?

You mean the --

The fact that you are spending money on strong breaks without much sales, it probably cost you operating profits.

Oh, no. We did not lose money on them.

Okay, and, all right, thank you very much.

Timothy Jones, Wasserman and Associates.

I missed part of your call, but, again, why was Dura-Vent sales so much weaker than the rest of the operations?

I do not have a good answer to that yet, Tim. I will have a better answer here in a few weeks. But it is a little bit of a mystery and we have got to solve it. And we are working on it.

I think Anchor was flattish also and it is not affected by housing.

Some.

It is some? Okay. Thank you.

Justin Maurer, Lord Abbett.

I want to tap into your tenured expertise in this industry. There has been a lot of guesses as to how long the low-end housing maybe and some people argued the last couple of years that there were no cycles anymore in housing. What is your feel just, kind of how you think about the business? Obviously, like you said repeatedly today, you're planning for the long-term, which I can certainly appreciate. But do you feel that this is a six-month phenomenon? Can be a two-year phenomenon? What does your gut tell you?

I don't think that our guess on that is really worth much. We do not spend a lot of time talking about housing here. We talk about what we are going to do regardless of what happens to housing, so we just don't study all those things. I think there are a bunch of people listening to this call who have a much better feel for what are the odds of going up or down with housing. So anything that we tell you really doesn't mean much, because we don't control it, so why spend time worrying about it?

Just relative to the Midwest business being weak, certainly weather seemed like it was more beneficial than not. So I don't know that was weather. Do you have a feel there as to what -- clearly, everybody is talking about what is going on in Florida and California, but what you think the middle swap of the country is feeling right now?

That is a good question and so far this month, the Midwest is doing better than the rest of the country.

Okay. Thank you, sir. Good luck.

We will make our own luck, though

It appears we have no further questions at this time.

We are all done? I guess so. Okay. Thank you, Sonya. And all you people, thank you for listening.