Simpson Manufacturing Co Inc (SSD) 2007 Q1 法說會逐字稿

Good day, and welcome to the Simpson Manufacturing Company first quarter 2007 earnings conference call. I would like to turn the meeting over to your Chairman, Mr. Barclay Simpson. Please go ahead sir.

Thank you, and good morning everybody and thanks for joining our -- CFO Mike Herbert and myself as always we won't tell you anything that we do not believe. But we are human, and we're not always infallible. Amazing, huh? Because, it is so crucial to the past and future success of Simpson Manufacturing, we want to assure our shareholders that our Company culture has not changed. We continue to attract and keep the very best people. This Company is not for sale, and our focus remains on the future. So, people join us for a career not as a bus stop. And the way that our people make a lot of money is for their branch to make a lot of money.

And the granting of stock options depends on profits also. Last year was a good year as far as return on assets and investment goals, but it barely beat the prior year in sales and earnings. So, only 122,500 stock options were granted, out of a possible 550,000.

Our first quarter this year was not a happy one for our people. Both sales and earnings were down related to '06 and so was their quarterly cash profit-sharing, down 36%. Of course, the first quarter last year was a very tough one to match. Profits were up over --were up 53% over '05. Okay, so where are we? It's essential that we reduce the dependence on U.S. housing starts, something over which we, of course, have absolutely no control. Sure, when they turn around, we will be ready.

New structural connectors have been a major reason that year after year the market has grown, often significantly. This year, we've revamped our R&D department by bringing in up more ideas from outside. One relatively new product, our steel Shearwall is catching on despite the large downturn in U.S. housing. Enough so that our total Shearwall sales actually were up slightly in the quarter.

Another major source of new products has been acquisitions. For example, that's where are our Anchor Systems division came from. And that is how we are getting into the Asian, especially the Chinese market. And with our new office in Hong Kong, as a start, we are determined to make China in particular, a more and more important part of our future. As soon as feasible, we need to manufacture there for that market.

I'm sorry that I can't report on at least one successful acquisition. With the help of JP Morgan and Euroconsult we are looking at several, both in this country and elsewhere. But, we are extremely thorough, and it often happens that our thorough look at all aspects of a prospect turns up a problem. That just happened with a European acquisition that looked quite likely, but we have several others that appear promising. We think that something of import will occur this year.

Europe was a bright spot last quarter and continues strong. Sales were up 22.8% in the first quarter and now are 12.4% of our total Company's sales versus 9.2% in the first quarter last year. Operations were profitable but held down mainly by relocating and centralizing the German operation, which is already starting to have real benefits.

Anchor Systems sales were down slightly for the quarter but prospects for the rest of the year appear positive. Dura-Vent was down substantially in both sales and earnings, actually losing money in the quarter. A major reason was that some large stove, water heater, and heater manufacturers are starting to make their own venting systems. And some new high efficiency furnaces use plastic pipe. Also the supply of pellets for pellet vent stoves dried up. But, we're working on solutions.

On the bright side our sales in the quarter to home centers were up 27%. Relations with Home Depot was well as Lowes are excellent and we're making every effort to continue to increase their sales and profits. Because, of course, because they sell Simpson products. As most of you know we do not make public specific projections of sales and earnings, just generalities. And this year, our too high dependence on U.S. housing starts probably is going to keep our sales and earnings flat or even down some.

Next year should start to show some positive results from acquisitions, China, internal new product development, and Europe amongst other things. Also, our people at all levels are excited about continuing to make this Company successful and they share in that success. And our largest shareholder has never been more pumped up about the future. Questions. Hello.

(OPERATOR INSTRUCTIONS) We will take our first question from Arnie Ursaner, from CJS Securities.

That's Ursaner. Come on, Arnie.

Barc, how are you?

I'm fine. How are you?

Could you -- boy, you are enthusiastic today.

Well, I'm excited about a whole lot of things going on here.

Sure sounds that way. Couple of questions regarding kind of near-term fundamentals. I know you obviously focus a lot more on long term. But last year in California, which is still your largest market, there was some very unusual weather in April. I think they had the worst weather in Northern Californian history.

That is correct.

Can you give us a little bit of a feel for how weather may have impacted your results in both March and April? And part of that also -- well, let me stop with that. I will ask one or two short, short follow-ups on that.

Well, the -- April is -- in California as in comparison to last year looks very strong and that's the reason. Because last year when that weather really impacted us.

Was it also a factor in March?

Yes, some in March. That's correct.

And some of your products are held by distributors or contractors who may have had to reduce inventory given the general trend of housing. Do you have any feel or sense for, if in fact, that process has unfolded or is unfolding and where we are on that?

I think it's a factor now, yes. Yes, and this month is surprisingly strong and that maybe a major part of it.

Okay. One other question regarding steel costs. Can you give us a feel for how much your steel costs are rising? And are you currently able to get sufficient price relief to cover your steel costs?

Well, yes. We have price relief to cover the costs and they are reasonably stable right now.

Okay. Final question regarding the broad question of acquisitions. Can you remind us of your philosophy, your willingness to accept dilution, potential sizes of targets that you might be thinking about and -- just so we get a better feel when -- of the kinds of things you're thinking about.

Right, well that's one of the reasons I'm excited. We have several acquisitions of some size, quite a little larger than we've ever done before in acquisitions. And there -- one or two of them look quite promising. But we go after them very thoroughly and often find out, at the last look at the books, we find something that wasn't apparent. But, I think we've got one or two now in the -- roughly $200 million category that look really promising.

Okay. Thank you very much.

Okay.

We will take our next question from Steve Chercover from D.A. Davidson. Go ahead, please.

Hi, Steve.

Good morning, Barc. First question. Were you even surprised that California posted some growth in Q1. If I'm not mistaken, you had some pretty miserable weather earlier this year that wiped out some of the crops and what not. So --

Well, there was this weather this year --it wasn't -- were really bad, no. Last year, last year but -- yes, I was surprised. I was surprised, and I don't really have a good answer to that. Do you mind?

I do not. Do you think it was market share or anything like that?

Well, I don't think -- one thing we aren't --that isn't happening, we're not losing market share. If anything, we are gaining a little. Although, I don't look on that as the way that we are going to get a lot more business. It's with products, like it always has been, with new products. And now, that we have such a high percentage of the market why you can't expect to get a lot of gain that way. But you certainly can just the way we always have with products.

Good point. And switching gears a little bit. You've talked about acquisitions and it is encouraging to see there is stuff in the pipeline. Would you consider divesting? I mean has there been a sea change with Dura-Vent, if people are going to manufacture their own vents that it might be a candidate for disposal.

What you mean that Dura-Vent might be?

Yes, I mean would you sell it or is it so integrated and kind of not a big drain on management's time that you would keep it in any event.

No, we are not interested in selling it, no. We think that we can flip that thing around we've got some very good people there, and some things have happened over which they had no control. And yes, it's kind of like U.S. housing, perhaps we should have had a little better foresight, but we didn't and we're working on solving those problems.

Okay, and final question. You mentioned that you want to be there in Asia. Do you need an acquisition in order to get there or could you do something greenfield and basically start the market?

Well we are, as I think most of you know on this call we recently, our man who'd been calling on Asia, particularly China, for five years went to Hong Kong and set up an office there. He's hired some people engineers, sales, and we're going after that market. And in the process, he is going to find out all about that market. He is committed to stay there with his family for at least five years and he is really excited about it and we're going to find out what products we can make there for that market, and then how we're going to get to manufacturing there. And maybe it's -- maybe we'll be lucky and it's by acquisition, or maybe we'd just figure it out like we usually do, like we did in Europe. Well, Europe was a combination.

Yes, what I mean -- I've heard you say that you got to be there, it's the future, and I don't think anyone would disagree, but I guess so. Again, my question is do you have to have a joint venture partner, or do you have to buy something that's already existing, or is it worth setting up a small manufacturing facility on your own knowing that sooner or later it's going to be important?

Steve, I'll be able to answer that question a great deal better in about six months when our man has been there for a while. Right now, any answer wouldn't be based on enough fact.

Okay. Thanks --

I can tell you though it's an absolute determination.

Got you, thanks.

We'll take our next question from Barry Vogel from Barry Vogel & Associates. Please go ahead.

How are you, Barry?

I'm surviving.

That's good.

I got a couple of questions. First of all, in looking at the market, can you tell us the percentage change for the West, excluding California and continue to California, the South-Southeast, the Midwest and the Northeast?

So, okay. Let's see. In the first quarter, California was up 4% -- of all things. And -- but every place else was down, and like the West down 21%, the Midwest down 20%, the South-Southeast down 14%, and the Northeast down 22%.

Okay. And can you tell us what the percentage change was, and which is the leading state going to Texas, Florida and California?

Well, Florida has been the worst state in the quarter. Florida, was down. Let's see here, down 38%.

And Texas?

Texas. Texas actually was up 4%.

And so the leading state is what -- it's California still, I presume. And which one is number two?

California, yes. And let's see, now number two, it used to be Florida, let's see if it still is. Yes, Florida is still number two.

And number three is Texas?

That's correct.

Okay. And usually you give us the sales breakdown for Strong Wall and Anchoring Systems, you gave us Europe up 22.8%, could you tell us what Strong Wall was up?

Yes. Strong Wall was up a huge amount, 1.4%, but considering the U.S. housing market, that's a big leap.

Now, I forget what you call it, is it called shear wall or steel, or shear -- I forget the name, what's the name of that new product again?

Well, the new one is called the steel Shearwall.

All right, the steel Shearwall. What kind of sales did they do in the quarter?

So, we have two types of Shearwalls now, one -- the new one is all steel, and the old one is wood, and some steel.

All right, so the new steel one, how much sales did they do in the quarter?

I'm not going to put that one out.

All right. So, it's now -- it's meeting your expectations considering the circumstances?

Expectations for what?

For success in terms of sale.

Of Shearwalls?

Yes, the steel Shearwall because it was delayed and the new housing market it's difficult. So, are you happy with your progress now in sales for the steel Shearwall?

Yes, Barry, yes. We surely are, and it took longer than I thought it would. But this housing starts, they're down substantially, and yet our sales are up.

I know that. Now, how about anchoring system sales?

Anchor Systems were down 6%.

Okay. And Mike, can you tell us what the margin was for -- the operating margin was for the connector product segment as well as the venting products segment?

The income from operations for connectors was [$29,000,013], venting was negative 1943 and all other minus 500.

All others minus 500. Okay. And as far as the Home Depot, can you tell us what the change in Home Depot boxes was versus last year's first quarter?

Yes, up 10%.

Okay. Up 10%.

That's a big change.

Yes, that's -- well, because the fellow who is giving a lot of trouble he is no longer there I guess, right?

Our relations with Home Depot now are very good.

All right -- tell me if I got this right, the total home center boxes sales were up 27%.

That's correct.

Now, what about the other Home Depot sales, were they up or down percentage wise? It has nothing to do with the boxes.

I'm not going to separate that out.

All right. And Mike, can you tell us net of the property sales, what you expect capital expenditures to be this year?

Our capital spending is projected at the moment to be $45 million. We still have those two properties to sale, which I'm still hopeful we will sell this year, and we will get approximately $18 million for it.

Okay. And your D&A projection today for the year.

$28 million.

Okay. Let me just see here. All right. I'll get out of the line. So, I -- let someone else ask some questions. Thank you.

Okay.

Next, we have Keith Johnson from Morgan Keegan.

Hi, Keith.

Couple of quick questions. Yes, real quick, how about Quick Drive, how did those sales do on a year-over-year basis?

Which sales?

Quick Drive sales.

Quick Drive?

Yes.

Just one moment. Quick Drive was down 3% for the quarter, and I don't know -- I don't expect that to continue. I think Quick Drive -- we're working hard on Quick Drive in Europe. And I would suspect that will be positive from now on.

Okay. Littell bit more on the home centers, since they were -- showed good increase on a year-over-year basis. Any color on kind of what the driver was that kind of pushed sales into that segment, or that channel for you?

Well, I think a major driver was that -- with the majors the big boxes both of them, and well, there are more than two, but there are two that dominate the market as we all know. I think that the cooperation and the -- letting us help them to merchandise and sell the products, I think that was a major factor.

Okay. I guess one of the big boxes has had a more of a focus on customer satisfaction and making sure there is stock throughout to satisfy customer needs, was that --

Well, I think they're -- both the big ones are -- have been recently really cooperative with us because they've realized that we can help them to sell the products.

Okay. On the -- kind of looking at spending trends and research and development knowing that you've revamped done -- brought in I guess new talent and that sort of thing in that category. Would you look for that spending in that category to be up in 2007 versus 2006.

Maybe just a hair.

Okay. It look like in the March quarter, kind of as a percentage of sales, it was running at a little bit higher rate than you historically have seen. And I didn't know if that was to, kind of, be continuing through the year or not.

It is really because sales. Spending was about the same, it is really because sales were lower.

Okay. And on the gross margin line, of course it was down on a year-over-year basis. Given the environment that you're operating in today, do you see the ability to see that increase a little bit as you move through to the summer months, from a seasonal standpoint. Or, kind of, what are your thoughts, I guess, kind of as you look forward just based on the current market that you are facing?

Well, I think -- I don't recall in all the years we've been in business when it's been tougher to estimate the market, that because it's so dependent on housing starts. And we've got mortgages now coming into it, and all kinds of things. I don't expect this year, to -- I expect it to be either flat or down a little bit. I don't see us having a real turnaround because if we make a good acquisition or two, why it takes about a year to assimilate? And we don't go about it quickly because the purpose isn't to make that quarter's earnings go up, it's to make the long range future of the Company better. So, just generally, I wouldn't expect an uptick, no.

Okay, on the Dura-Vent product line on the year-over-year decline in sales, could you give a little bit of color on how much of that was related to pellet vents versus some of these competitive, new competitive, pressures that you're seeing in the market?

Well, I think what -- no, I don't think we've lost market share. I think the market has gone down significantly. Because of those things that I mentioned, that large stove and heater, water heater manufacturers, and heater manufacturers are -- more than one are starting to make their own venting systems. So, the market has really been clobbered. The total market and also pellet vents, where we're the number one supplier of venting systems for pellet vent stoves, the supply of pellets somehow dried up. And I'm sorry; I don't have an answer as to why.

There was a supply --

So, there are a bunch of things that we've got to -- we're working on. And there are some substantial problems, but we're going to solve them.

How much were pellet vent sales down year-over-year?

Way down 82%, can you imagine that? And it wasn't because of losing any of the market.

Okay, was that -- how much of that translated into a dollar?

Let's see, I haven't got. I'm sorry Keith, I don't have that number. It's not -- it was starting to be significant the way it was going up. But, it didn't get there.

Okay, I guess last question just has the price -- I know pricing pressures from customers is always present in any business environment. But as you've come through the first quarter, has that increased from more, your customers wanting more price relief because of the decline, and your continued decline of residential construction versus where you were in the December quarter?

Well, I think the big builders, yes. When they're in their business, so when it falls off why -- they're going to put more pressure on. Anybody is, in those kinds of circumstances. Well, that's just normal business.

Right.

That -- and it isn't any different than what you'd expect. And you better have a strong brand name, and you better be the one that they can make more money by using your product, and somebody else's or you're going to lose the business.

That's true. Okay, well, I appreciate it.

Okay, Keith.

Thank you.

Next, we'll go to Tom Zeifang from Lucrum, please go ahead.

Good morning.

Good morning guys. And could you tell me if there was any foreign exchange impact in the quarter?

Nothing substantial at all.

Zero, and then on the steel prices, the way you guys synthetically hedge is through pre-buy?

Well, we -- whenever we have really what we think is really good information, we attempt to pre-buy, yes, if the investment is going to go up.

Did you have any pre-buy in the first quarter? Outside the normal is what I'm getting here.

It is kind of normal.

Okay, and then Home Depot -- or in the retail channel, the home centers. Do you track sell through versus sell in?

Say that again.

Do you track sell through versus sell in?

No, we don't.

So, you don't track the scanner data that --

No.

Have you had any feedback from the home centers because 27% seems a tad high. And I know they all drew down inventory in late '06. But if you listen to other manufacturers, they're saying there was a lot of restocking. I'm trying to get a sense of what trend line would be.

Hard to say, I really don't have a decent answer for that. I think that's part of it. But I think the major part was that the cooperation between supplier and seller just went up in both cases, so that we were able to help out.

Okay, and then going back to the foreign exchange. I think clearly the sales in Europe were extremely strong in the first quarter.

Correct.

But also a lot of -- it appears that there must have been some currency impact on the revenue. Is it because you hedge it away?

We do not hedge at all.

Okay, thank you, I'll get back with you.

Okay.

Next, we'll go to Joe Hausman from Willow Creek Capital. Go ahead please.

Hi, Joe.

Good morning, I am [taxing in front of] Willow Creek. Thank you for the upbeat start to the day. You made a reference in the press release to steel prices. And just on a hypothetical basis, if steel were to stay at today's price for the entire quarter? Could you quantify, just ballparkish, what that would impact your margins.

Well, if it stayed, it -- right now, probably we would have a very little effect, very little.

Okay, great. And I'd like to clarify a comment that the first questioner asked about acquisitions. For the right type of property, you would be willing to do a dilutive acquisition. Is that accurate if it's a strategic long-term important piece of the puzzle?

We're not going to bet the store and risk the whole business on an acquisition. But it looks like now there are some acquisitions available, and they become available through people, we weren't using outside people at all. Now we're using JP Morgan and Euroconsult, and they have come up with some companies that we were not able to get at, at all.

And so, the size that we're willing to take on has gone up substantially, but we check them out very thoroughly. And we have -- one major criteria, criterion is that within a -- after a year that it should, an acquisition, should, contribute positively to earnings per share.

And we'll take on if the reasons are so clear. And by so clear, I mean they'd be so clear to all of you people not just us but you people. We'd take on one that it took two years. But that would be rare.

Okay, great. Thank you for the update.

All right.

Our next question comes from Soon Lee from Royal Capital, please go ahead.

Hi, Soon.

Hey, how are you, Barc?

Good.

Question on your SG&A expense, could you quantify how much profit sharing dollar amounts that there was in the quarter versus last year?

Yes, I got that here somewhere.

It was approximately 12 -- not the exact number, we were roughly $12 million last year, and approximately 7.5, 7.7 this year.

Okay, so $4.5 million but SG&A really stayed sort of flat, I'm guessing it was just headcount, more hires. Is that right?

Headcount on the indirect side did go up.

Okay, how much did you increase your headcount this quarter over last year?

For the total Company, quarter-over-quarter last year including hourly really was $27.65, this year it was $26.46.

The headcount went down.

Because the hourly went down. The salary went up from -- and from 883 to 944.

Got it, I guess what I'm trying to get at here is trying to understand your margins, which were -- operating margins, which looked like they were down almost 500 basis points year-over-year. How that trend line should continue through the rest of the year?

I mean should we expect SG&A sort of roughly to be, in terms of dollars, flat from last year, and maybe R&D going up slightly. Is that the right way to divide it?

Yes, I think that's as good a guess as could be made right now, yes. You can be sure of one thing that we are not going to cut back on anything like new product development or merchandising or things like that, that affect the long range future of the Company. We're not going to cut back.

Got it. Okay, and then going back to the acquisitions. What types -- you mentioned you wanted to be accretive, sort of, at least in year two. What other financial measures do you look for in terms of pricing? How do you think about acquisitions in terms of multiples and on what metrics.

Well we really don't look on it that way. We look on an acquisition and usually it's because of one or two things. It's either a product or products they bring or distribution they bring. Like somebody in China might bring distribution as well as a product. In Europe, same thing. Here, it's pretty tough for us to get anybody who has distribution for our products that would increase our sales. But, generally it's products, we are looking for products.

Got it. And the last question. Do you have operating profit break down, Europe versus North America?

Yes, well Europe -- Europe went from 9% to 12% of our total sales for the whole Company in the first quarter.

And operating profit dollars.

Operating dollars were down a little bit because they were in the fourth quarter. They went way up and made a very good profit. And there were some major changes that our relatively new manager there had to make in Germany. And it costs a ton of money when you have to fire somebody --

Got it.

--in Germany, and so there were changes in the operation there that are made now that took our return down substantially. We expect it to turn around this quarter.

Right, do you have the dollar profitability for the quarter?

No.

Do you have the impact that the severance or the restructuring of the German operation had on the quarter?

Well, in the bottom line it cut it down -- as I recall that was about -- I think it cut it maybe two thirds. The return on Europe is not as high as it is in the States but the fourth quarter was quite good. Quite good but that quarter -- maintaining that was impossible because of major changes in Germany. Now, I think in this quarter we should start to come back to a higher level.

Right, I am just trying to quantify the amount of that, sort of, one time charge.

Well, and it's -- it was a series of things. Very hard [to query]. I don't know we don't have a number on that. But it --

Tell me how much did it cost to fire -- for the severance in Germany.

I think the best way to answer this question is we were down -- we saw our operations over there in that segment, they are down about -- the operating profit line of [about] $500,000. The cost of moving -- closing the old warehouse distribution area, opening the new one and also realigning the personnel.

Got it 500 K, year-over-year you are talking about this quarter versus 1Q last year.

Right.

Okay, that's it thanks guys.

Okay.

Next, we have Jim Wilson from JMP Securities.

Yes, Jim. Are you there, Jim?

Mr. Wilson, your line is open.

I guess he is not.

Then next, we will go to a follow-up from Barry Vogel from Barry Vogel and Associates.

I knew you would be back, Barry.

Thank you. Mike, I have two quick questions. You had turned $9 million in inventories into the quarter. Are you comfortable given what market conditions are, given what your desire to have in inventories you don't lose any business.

Yes, I think so.

So, I know Barc, but it's a little different environment today. So, do you think Mike, that your inventories could go lower.

No.

So, they are okay right now.

They are okay or they might move up slightly.

Okay, and what about your tax rate for the full year.

Between 37.5 and 37.75.

Thank you very much.

Okay.

And we will go to Bob Littell from M.D. Sass please go ahead.

Hello Bob.

Good morning Barc. How are you today?

Good.

Good. Just a little bit of a followup on your comments about the major home centers being much more cooperative and allowing you to help them. Does this mean that they are stocking higher inventories of Simpson products?

Let's see higher -- more of Simpson products. Rather than higher inventories. The inventory pressures on those people remain high.

Okay.

That is the managers are pressured to keep their inventories down. But when -- they let us help out. In other words, let's put it specifically. Like our merchandisers go into the stores and any time a particular product is -- looks like it's going to be empty why, boom, we get it in there, right away. So, our people helping out really helps their inventory level.

Okay. So, it's not that they are stocking a larger supplies, but then they are never low, they are just allowing you to go in and slag -- when things look too low.

Yes.

That's very good. And a broader product line or are we talking about just the same products that they have always held?

No, in some cases it's a broader product line.

Also. That is good too. And then just the final follow up on the subject. Does this mean that Simpson's -- whether these inventories that are more -- are better stocked at the home centers are those carried on Simpson's books, are those carried on the home center books once they are in those storage.

The home center books.

Great. Excellent. Thanks very much.

And next we have Jim Wilson from JMP Securities. Go ahead please.

Hi, Jim.

Hi Barc, sorry about that. Another call was bouncing in. I was just wondering and I missed that part of the call. But can you -- do you have any sense of a commercial business -- I know it's hard for you on your mix but of -- what you've heard from the storefront even if it's related to California and Texas where I think probably there is a good growth of which from what I know and have talked to people in commercial activity, commercial construction activity out there. Can you -- any sense or color as to how much that might have helped both California and Texas this quarter.

Nothing of any accuracy at all. And of course, once again our major problem is that our distributors, most of them, sell everybody. And they don't keep track for us. Of how much went to commercial and how much went to housing. I really don't have any feel. And our managers they all send me an analysis of what's going on at their branch just before this call a week ago. And I got no split there, no feeling that in Texas that commercial was way up or down or anything. So, I really don't know. I don't have a decent answer.

Okay. All right, thanks that's all of the questions I had left.

At this time we have no further questions queued.

Okay, well thank you.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at any time.