Simpson Manufacturing Co Inc (SSD) 2007 Q2 法說會逐字稿

Good day and welcome to the Simpson Manufacturing Company Q2 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 greetings everybody and thanks for joining Mike Herbert, and our CFO and myself will only tell you what we believe. But unlike stock market analysts, we have been known to make mistakes.

I won't bore you by repeating the numbers that were in our press release, we're not happy with them. This is the first year since we went public that we're not going to be ahead of the prior year in sales and earnings. So what are we doing to reduce the level of dependence on new housing in the U.S.? Well, for one thing, we're looking at acquisitions of varying size and we have arranged credit, or we're working on it, of $200 million in case we find a large, for us, acquisition that's a great fit.

Now, just this week we made a small one that has a first-class line of largely stainless steel quality fasteners that fit our channels of distribution as well as broadens those channels. Swan Secure has built a $3 million profitable business with products that offer the ultimate in corrosion resistance and in tying together wood and polymer decks, marine structures such as piers, and a variety of siding materials. A wide variety of other fasteners includes hardened self-drilling screws for attaching wood to steel studs, as well as attaching fiberglass, fiber cement, and other composites. And using Swan's stainless steel nails and screws provides permanent protection from rust and stains.

Unlike many acquisitions, Swan should contribute immediately a small amount to Simpson's profits. Their quality people are remaining and now we'll have the capital to establish several new branches. We think that the synergy with Swan will make their people and products an increasingly important part of our future.

Some quarterly numbers that might be of interest, Simpson Strong-Tie sales were $216.2 million versus $217.4 million last year. Profits were $44.3 million versus $48.2 million. Dura-Vent was $15.1 million in sales versus $23.8 million. Profits were a loss of $77 -- $70 -- pardon me, $788,000 versus profit of $2.3 million. We don't have a quick answer to Dura-Vent's problems. The obvious one and one we're really working on is new products, both developed internally and by acquisition.

Homecenter sales were down 17% in the quarter versus last year. Anchor system sales were down 8.5%, whereas quick drives were up 8.8%. Shearwall sales were down only 2.4% and as the major majority of them, by far the major, go into U.S. housing, we must have gained market share with our steel shearwall.

As most of you know, we feel that China must be a major part of our future. We now have an office in Hong Kong and are in process of setting one up in Beijing. Our Asian manager has future plans for sales offices in Shanghai and two other major cities and their names I can't pronounce. Obviously, we're making a major investment in the future, which will take a little while to pay off, just as it did in Europe.

Europe was strong in the quarter, up 22.8%. It went from 10% of Simpson Manufacturing sales to 11. -- no, to 13.1%; Canada was up 11.5%; and total international sales went from 15.3 to 19.1% of total sales.

To conclude, and just in case anybody is wondering, we do remain a long-range company. We are not for sale and our people, and this one in particular, are excited about the future. So questions.

(Operator Instructions) Arnold Ursaner, CJS

One quick question regarding kind of gross margin. You, at least relative to my expectations, had some nice improvement. How did the steel prices impact your margins during the quarter, if you can give us some help on that?

Not much. Steel was relatively flat. Maybe up a little bit. So it had a little effect, but not much, Arnie.

Okay. And an obvious question, you benefited in the quarter from terrible weather the year ago in California. It was one of the wettest periods in history. As you -- as the quarter has ended and you've moved into July, could you give us a feel for how current trends are in your business, particularly in places like California that may have benefited last year from the comps in Q2?

Well, it's looking better than it has for a while. The one state, our second biggest state, is still a disaster, and that's Florida. But elsewhere things are looking better.

And I'm sure you'll get asked this, given Dura-Vent, the performance of Dura-Vent and kind of the multi-year disappointment it's proven to be, once again, have you given any thought to whether this is a good candidate for disposal?

I don't want to talk about that because we're not thinking about disposing Dura-Vent, we're thinking about improving it.

Barry Vogel, Barry Vogel & Associates

First question, Barc, could you give us a percentage change, which I always ask this question, in the quarter sales for the west, excluding California, California, south southeast, Midwest, and northeast?

Yes. Okay. California in the quarter was down 4%; the west was down 5%; the Midwest was down 16%; the south southeast was down 15%; and the northeast was down 11%.

And could you give us the percentage change on your three largest states, which are California, Texas, and Florida?

No, I can't. I don't have them separated out, except for California.

Okay, and could you tell us the minor things?

I can tell that Florida, my recollection is it's down almost 50%.

Okay. Now, on the steel strong wall, I know you've been introducing that product in a very difficult environment. Could you give us some idea of what you think sales might be, first of all, what they were in the second quarter and your conservative estimate what they're going to be in the year? And can you make some money this year on that particular product?

Well, I -- of course. The problem is that they depend on new U.S. housing. The steel wall, the vast majority, go into new U.S. housing. So maybe you can predict what's going to happen there, Barry, I can't. And I'm not going to try. But whatever you think is going to happen to U.S. housing, we expect we'll get a larger share of the market, just as we did this last quarter, but what it will be I don't want to project because I don't think I can.

Okay. And then your largest customer, what were they down in sales in the second quarter?

17%.

Your largest customer was down 17%?

Yes, that's Home Depot.

Right. But then you said the homecenters was down 17%.

That's right.

So they both are the same numbers?

Yes.

Okay. Now, Barc, did I hear you right when you talked about Swan Secure that it was a $30 million business?

Yes.

You said a $30 million business?

That's right.

Okay. So there's $30 million sales.

Yes.

Could you tell us anything about the profitability of that company since you paid a decent amount of money for that company?

Just that it's good.

It's good?

Yes.

Will there be goodwill on this acquisition?

Yes.

Can you give us some amount?

No.

Okay.

Don't want to give that amount.

All right. Can you tell us what your new estimate for CapEx would be this year and D&A?

What do you think, Mike?

D&A of $29.5 million, and CapEx up $37 million.

$37 million, does that exclude the sale of that property?

Correct.

And when do you expect to sell that property?

We are hopeful those properties will sell in Q3.

3Q. Okay, I will pass on the questions and then I'll come back in queue.

Steve Chercover, D.A. Davidson

I also guess wanted as much detail as possible on Swan. I guess, first of all, do you at some point tend to give it the Simpson moniker or will it stay as Swan?

Well, Swan has built a very strong brand name themselves, so we'll see how that develops. We're not going to change it right away. We think the two names together, unlike most acquisitions, the two names together will make three.

Good. Now, as you provide them with capital and support, how fast do you think that business can grow maybe on percentage terms and will it be faster than your other businesses?

Well, I think it probably will, but it's too early to tell. We just made the acquisition. So certainly we thought when we, and we looked at them very thoroughly before we bought them, we thought that it was really a plus and that each company would help the other one. That their channels of distribution and ours fit together beautifully and will add to both.

Okay, so by extension, are there any synergies that we can expect are to that cost savings or it's really just going to accelerate you and them?

Well, I think they would -- there wouldn't be any to start with. There always are extra costs when you're trying to figure out how to integrate an acquisition. And this one, probably there will be less because it's very strong all by itself. So I can't give you a decent guess. We just aren't into the thing enough.

Okay. But it's immediately accretive and that's great.

That's correct.

You also made it fairly clear that this does mean that you have stopped looking for other acquisitions. Are they still primarily overseas or in a different product line?

They're both -- all of the above. We are looking at all kinds of companies and no, we certainly haven't stopped. We're looking harder than ever. Because, obviously, we haven't bought a sizeable acquisition in relation to our size and that's why we have this credit line that we're working on, so that if we find something that's really good and large in relation to us, we can buy it. Now, whether that's going to happen or not, who knows, but we want to be ready in case it does. I think from everything I've heard in the last couple of days, maybe there are going to be some companies become available that weren't before.

Yes, the whole world is available for the right price.

Oh, that's right, and we certainly are looking overseas as well as here.

Okay, and just last question. You made it quite clear that you're not going to beat the 2006 results, but I think these numbers were fairly good at first blush. It seems like you beat most people. How are you feeling for the next quarter? It'd be kind of similar?

Well, I -- yes, I would be surprised if it's a lot different from what the second quarter was. But I've learned over all of these years in business that it's like trying to project the stock market.

Tom Zeifang, Lucrum Capital

Just a follow up on that last question. What type of visibility do you have going into a quarter?

What do you mean by visibility?

Well, I think you said this, to put words in your mouth, you said flattish with the second quarter for the third quarter. Do you have 90 days worth of visibility?

No.

No.

No. Really don't. And I have never projected earnings. Only just very broad generalities because I found over time that it's pretty hard to project, so won't try.

Okay.

I don't want you people to expect us to do better than we do.

Yes, because the volatility in the centers seems pretty extreme given -- I think last quarter, you were up mid-20s and now you're down 17. Is there something going on there that is -- sequentially that's driving such volatility?

No. It is -- they are really hard to project because they'll have big changes in their inventory and the pressure on the managers to keep it down or let it get larger. And it just changes drastically and we've learned that we can't project it. I would be surprised though if this quarter isn't better than last quarter because our positions there are strong.

You mean Q3 versus Q2?

Yes.

Okay. And then, in Europe, it looks like the growth is very strong. Is there any currency benefit in there?

The revenue was up $2.5 million because of currency. The net income had very -- had very small change.

So there is an extra $2.5 million in gross margin profits, is that correct?

In revenue.

Yes, but that's 100% gross profit. Because you don't hedge, correct?

We do not hedge. But, in fact, we're naturally hedged with all of the expenses are in the local currencies over there.

Okay, but -- okay. And then, given what I'm seeing in euro-zone mortgage loans, Ireland, France, and U.K., both housing starts and mortgage approvals that have fallen recently, are you guys picking up significant share over there?

Oh, yes, I think so.

Any idea of what type of share you're picking up?

Well, no, it's -- it's even harder to figure out than it is here, where -- because each country is different and some of the products are different in each country. So I'm sure that we have the largest share of the markets in western Europe, but because they are so scattered I think we probably have, oh, maybe a third or something like that.

A third of the market?

Yes.

And what do you expect it to be?

I expect it to be going up all the time.

Okay.

And we've got some very strong -- now, our manager there in Europe is just doing a great job and we think that we've got a lot of prospects still to go there, like he's determined to do much better. We're just getting started in Spain and also in Eastern Europe. We have a Home Depot-type outfit we're selling in Moscow, but it doesn't amount to much yet. So we've got a long ways to go in Eastern Europe.

Okay. And then, in the quarter, in the second quarter and even into July, are you seeing any slowdown from April through July in international sales?

No.

So it's been pretty even throughout all four months?

Well, some fluctuations, but yes, fairly even.

Stan Westhoff, Paradigm Capital

Most of my questions have been answered, but I've just got a couple of quick ones in here. You mentioned the property sale coming up. Is there going to be -- can you quantify, like, gain or loss that might come with that?

Mike.

On a pre-tax basis, we're anticipating a $6 million gain.

Okay. And just one quick question on the acquisition. Over the past few quarters you've been -- your mantra has been you're looking to diversify away from the U.S. residential construction. Can you give me some more commentary on what your thinking was on this acquisition?

Oh, gosh, a huge variety and in more than one country. Just generally, our criteria are very broad. And one thing, we won't turn down an acquisition that depends largely on U.S. housing if it's cheap enough. We won't turn it down if it's cheap enough, if it can add to our earnings better than we can make with them with the money otherwise. But it gets extra points if it doesn't depend on U.S. housing. So we are looking -- we're more interested in companies that have products that don't depend on U.S. housing or they're -- say if they sell in the U.S. or companies that are in other countries.

Can you mention anything about what their margins are like?

Whose margins?

The acquisition, the Swan Secure?

No.

No? Okay, that was it.

Keith Johnson, Morgan Keegan

Quick question for you. How were the trends, I guess, in the connectors business, particularly in the United States as you came through the June quarter? Did business tend to pick up or was it stronger in the first part of the quarter as maybe distributors restocked inventory and those types of things? Could you give a little bit more color on that?

Well, let's see, it was actually fairly flat. Maybe --

A little bit stronger in April and May. It slowed down in June a little bit.

Okay. You mentioned that, I guess, the home channel or homecenter channel was down, I guess, 17%. Was it the distributor channel that was a little stronger than what you guys may have expected entering the quarter given the continued decline in residential construction?

Well, of course, we -- Europe went up considerably as a percentage of our total sales and that helped a lot.

Okay.

I think -- I don't think there was a big change, do you, Mike?

No.

Okay. And you mentioned that, I guess, July trends are still looking maybe a little bit better than June trends. Is there one area showing stronger performance than another area right now?

Well, what do you think, Mike?

California is doing very -- doing nicely in July so far.

I guess in -- from some of the housing numbers or estimates on construction numbers in California that really are you guys starting to see a bottoming out in that market [in central] improvement or are these connectors or demand, is it strong to the distributor in the end-to-end markets or do you think there may be an inventory, potential inventory, build in the channel?

Well, we aren't seeing an increase in housing starts, no. No. I -- so why is our business perhaps a little bit better? I think it's very hard to project. It might well be that we've got some major customers who let their inventories get way down and now they're filling them out again. Very hard to say. But I don't see in the market -- you look at the numbers in California in housing starts and they're not going up --

Right.

-- they're going down.

Okay. And I guess that's what I was trying to just get a better understanding of when I looked at the last couple of quarters, the December quarter and then the March quarter, the connector business was showing kind of year-over-year sales down about 8% and you guys did -- looks like you did a great job and held them flat in the June quarter, even though what appears, based on all of the publications you read, to be a continuing deterioration in the housing market. So I was trying to get a better understanding of what may have kind of driven that change in trends.

Well, we like to think that we're doing continually a better sales and marketing job.

Well, that goes without saying, so I was -- I didn't know if there was -- had been maybe a shift in one, like I said, the distribution channel or, like you mentioned, maybe people letting their inventory getting a little low and trying to make that up.

Nothing that we can really -- no, I don't think so.

Okay.

I don't think so. If you look at our numbers, you'll notice that we are spending more on sales and merchandising, so that just isn't a broad generality. We are working very hard on improving there.

Okay. All right, I think you guys have covered most of my other questions. I appreciate it.

Arnold Ursaner, CJS

Just a quick follow up to Mr. Vogel's question regarding some of the markup, if you will, on the acquisition you're making. In the filing you have, you discussed the 338(h)10 election. Typically that would be done to have the selling company mark up the asset prior to the transfer, reducing your amortization. Care to comment further?

We have not finished all of that work yet, so I have no comment.

But assuming you have one that would dramatically reduce the amortization you would have on the acquisition.

There are tax benefits of doing that election.

Okay.

Barry Vogel, Barry Vogel & Associates

First, I have a couple of quickies for Mike. What would be the effective tax rate for 2007?

37.5%.

And would that be the same rate on the sale of the property?

The property, it will be -- there will be some long-term gains there.

So what do you think the rate would be?

I'm taking -- I'm sorry. I believe that will be the same rate as the property. Thanks. I'm correcting myself.

Going back, Barc, to Swan Secure, in the order of importance in terms of end user markets, could you give us the top four end user markets in order of importance in terms of sales?

No, I can't. I'm sorry, Barry, I can't right now.

Okay. How much is the housing related? Can you give us that?

Well, yes. I attempted to get a number and what I got was something that was a crazy guess. Maybe 20 to 30%.

20 to 30% is a crazy guess?

Yes. Yes, because it wasn't based on enough fact. Now, I think after we've worked with Swan for a while we'll have a better feel for it, but right now I didn't feel very confident on that guess.

Okay. Could you give us, again approximating the geographic breakdown, of sales to Swan?

Well, just generally, their sales are much more in the eastern part of the United States than ours are. So that's one of the reasons why we think that we really fit together.

And can you tell us where their manufacturing facilities are?

Yes. In Baltimore.

They're all in Baltimore?

Yes. They only manufacture about 30% of their sales.

And where do they get the rest from?

The majority come from Taiwan.

Okay. And as far as their -- do they have room for capacity growth in the current facilities and the supply from Taiwan without having to build additional facilities where -- in that particular market that they're in?

Yes, they do, but now we have the money so that they can expand.

Okay.

And that has been kind of a hold with them.

Okay. And as far as leverage for you purchasing steel, you have more leverage in theory than they do because you're bigger, but I guess you may not buy much stainless and they may be buying stainless. Could you get any leverage for them using your steel-buying power?

I doubt it.

Okay. And you've mentioned that they had some distribution that you could benefit from? Could you explain that?

No. It's -- that's a nice generality and I'm sure it's true, but as far as breaking it down yet, don't have the numbers yet.

All right. I think you did a great job, even though I know you're disappointed because you want to have earnings grow every year. But I was looking at the housing statistics in June and there was -- sequentially, there was nothing really happening and sequentially you had a seasonal pickup in business. So I think that was pretty damn good.

Well, that's -- I appreciate that, Barry, but we're still unhappy as long as we aren't up double digits.

No, I understand. That's good. I like to see that attitude.

It won't change.

Tom Zeifang, Lucrum Capital

Just a follow up. Your opening comments, I think you said there's -- that Swan had $3 million in profits, so now I'm using a $30 million run rate.

No, I didn't say that. No, their sales are $30 million. I didn't go into their profits.

Okay. I could have sworn you said -- you gave a $3 million in profit number, but I guess not. I'm mistaken. Sorry about that. Thank you.

Okay. No, I did not. Unless there was some kind of slip that I certainly didn't know about.

(Operator Instructions) Jim Wilson, JMP Securities

I just had a couple other questions. With your California and west, what percentage of total revenues did they make up? I know I know what they changed.

California was 24% of our total.

And the west?

The west was 20%.

Okay. So those are your two biggest markets, right?

Yes. Well, they're tied with the south southeast. That was -- well, 19.3% was the south southeast and the west was 19.7%.

Got it.

I just round them off.

All right. And then just one other question. When you give Depot, the homecenter numbers, and then the regional, are the homecenters a part, or the calculation, a part of the regional or is it totally treated separately when you give those out?

No, they're part of it.

Okay. So California down 4% included some level of decline in the homecenters among -- within it?

Yes.

Got it. Okay. And did it look like the homecenters were particularly better or worse in any given part of the country?

Yes. They -- I was surprised they were down that much. And I'll be very much surprised if they aren't better this quarter.

Chris Harrell, Capco Asset Management

The question I have is I am still trying to understand better the difference in price and volume and how in the housing market that's declining as dramatically as it is you can have relatively flat connector sales. How much is coming from price offsetting volume losses?

Well, there's some coming from price. It's -- now, I'm trying to think exactly what in this last quarter -- there may have been help there of 5% plus.

And so the rest of the difference, in terms of thinking about a housing market now of 20, 30, 40%, depending on where you're looking, or more, the rest of the difference would simply be an expansion of product sales and perhaps gains in market share?

Yes. Yes, although -- yes, that's true.

Mr. Simpson, it appears at this time there are no further questions.

All right. Thank you all.

This concludes today's teleconference. You may disconnect your lines at any time.