Simpson Manufacturing Co Inc (SSD) 2007 Q4 法說會逐字稿

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

Good morning, and thanks to all of you for joining our CFO Mike Herbert and myself, despite our company -- or maybe because our company having a lousy fourth quarter and earnings, partially due, of course, to one-time charges. In addition to those charges, we had others that were part of spending for the future of the company. But before going into any detail, let me make our lawyers happy by saying that we will not say anything that we do not believe. I know you will be surprised to hear that we do make mistakes.

There are a couple of charges that occurred last year in the fourth quarter that had a significant effect on reported earnings. The goodwill write-off for the plant closing of a Canadian plant was $10.66 million, and a slow-moving inventory write-off of $2.2 million and a one-time amortization on the Swan purchase of $660,000, plus continuing Swan write-offs of $1.3 million.

But even without these one-time charges, the fourth quarter was not a good one in terms of earnings per share. Housing starts in the U.S. as well as sales of existing housing do not appear to be showing any signs of improving. In fact, just the opposite.

Although we are unhappy about short-term profits being down, last year, of course, was the first year in the 13 since we went public that they have been down. We're much more interested in the long-range future of Simpson Manufacturing than in short-term profits. Consequently, such costs as internal development of new products, merchandising, and going after new markets geographically and by acquisition are going up rather than down. And we are somewhat slow to lay people off -- although our total number of employees has gone down in our structural connector manufacturing plants, but not enough to prevent a reduction in sales per employee. Our goal has always been just the opposite. So we're not too happy about things right now.

One number that went down substantially last year, 24%, was our quarterly cash profit sharing for our own people, and our people were unhappy about that. It's the way that they make a lot of money, and they are working hard to make that number go up again, regardless to what happens to U.S. housing starts. These are the people who made this company so successful. They came here for a career, not as a bus stop, because they know this company is not for sale.

New products are a major way that we built the company. Those developed internally and those by acquisition. Internally in the past year, we've developed quite a few that will help earnings in '08. Last year Swan Secure was our only acquisition, but it is going contribute to profits this year, despite the amortization charges. We acquired a bunch of products that are an excellent fit, as well as the people who make Swan so successful.

Currently, we are looking at several acquisitions that look promising. No acquisition is a sure thing, though, until all the papers are signed, but one or two look likely within the next few months. As most of you have heard, that surplus cash that we have is to grow the company by acquisitions. Also, as we have for several years, we use a bit of the cash to prevent dilution because of internally granted stock options, but as our options are based on profits, there won't be many granted for last year.

Sales in Europe were up 14% last year, 14.6% to be exact, and we made money despite substantial costs in restructuring German and Denmark operations. Reports on western European economies are not especially optimistic, but we do expect sales to be up with perhaps some help in eastern Europe from our Polish operation.

With sales offices now in Beijing and Hong Kong, and a 170,000 square foot factory on 8 acres, 50 miles from Shanghai, which we're planning to be in operation in early '09, we feel that China will be a major part of our future. And while we expect China to become profitable quicker than did Europe, it's unlikely to become so for at least a year and perhaps longer. But this year, our major objective is to find out what products we can manufacture in China for that market and for elsewhere in Asia. Our Hong Kong sales force will cover India, Japan and Korea, and anywhere else that looks promising.

So what are the prospects for Simpson Dura-Vent? Better than in several years. Our analysis shows that closing the Vicksburg operation in the next year and a half should add to future profits. Although in the short run, there may be some one-time charges. In the fourth quarter, Dura-Vent showed a slight profit and is expected to add, rather than reduce, SSD's profits this year.

Relations with Home Depot are excellent. We were honored by being named building materials vendor of the year last year, and sales were up 5%.

While we're working on making Europe and Asia, especially China a much more important part of our future this year we still have too much dependence on U.S. housing starts and the U.S. economy and neither looks especially healthy either, of course. I don't have to tell you all that. So if you are buying or holding our stock, you do so because you have confidence in the ability of our people aided by a strong balance sheet to again do what they have for the first 12 of the past 13 years since we went public. The odds that it will happen this year, though, are no good, but we are really excited about the future.

Questions?

(OPERATOR INSTRUCTIONS)

Our first question comes from Arnie Ursaner from CJS securities.

Good morning, Arnie Ursaner!

Good morning, Barc Simpson, how are you?

I'm doing fine.

First question on international sales. You mentioned Europe for the year was up 14.6%, what was it up for Q4 and what is it as a percent of your total sales, please?

Okay. Europe in Q4 -- Q4 was up 12.9% and in Q4; it was 13.8% of our total. What was your other --

Well, that's a lot lower than what you were having as a percent of your total.

Oh, no,, not for Europe.

I thought international, though was 20% of your sales last quarter.

Oh, international. I thought you were asking about Europe.

No, I was trying to get a feel for --

Oh, international?

Right.

Oh, okay. International was 20.9% in the quarter, and for the year, -- god, it's hard to read. Is that 19.6? Yes, 19.6%. And both of those are up substantially from the prior year.

My second question relates to the whole facility you are building in China. Can you give us some feel for what do you think it will cost you in terms of CapEx? What do you think your '09 revenues might be? You mentioned you didn't expect it to be profitable for perhaps a year. I'm assuming you mean a year after you start it up?

Well, it's -- at this point, any estimate of when it's going to be profitable, really doesn't mean much. All I can -- all I can say is that we are pushing hard and we'll get it that way as soon as we can, but we've got to find out a lot of things about that market first. And, Mike, what's the -- what's the cost?

In 2008, our projected capital is $23 million. In that is $9.2 million for the China plant.

And I guess my final question, and we'll give some others a chance, Mark. Obviously last year was the first year that you had down earnings since you have been public. I know you don't give formal guidance, what is your thought about '08 relative to positive or negative versus '07?

Well, I -- I can't see, from everything I read, where '08 -- two things. One is that the housing market in the U.S. is kind of in the tank, and it doesn't look like it's going to get better. Now, you people can guess that probably better than I can, but it just doesn't look good, and all the things we are doing in China, Asia, Europe, acquisitions, et cetera, I -- I just can't see that balancing off the big drop in housing.

I think we're going to be down some this year. And how much, I don't know, because any estimate I made wouldn't be based -- based on much. All I can tell you is that I feel great and our people do about what we are doing for the long run. The short run, though, is not going to be good.

Thank you very much, for your answers.

Our next question comes from Barry Vogel with Barry Vogel. Please go ahead, sir.

Good morning, Barry.

Good morning, gentlemen.

Mike, I have a quick question for you on the breakdown of operating profits from connectors and venting products in the quarter.

All right. For the quarter, for operating -- income from operations, connectors, $5.7 million. Venting products, $0.1 million, and administrative and other, a negative $0.7 million.

Now, did you add into -- is that 5.7 after adding 10.7 million of goodwill write-downs?

That's reflecting on the goodwill write-down.

So it's 10.7 and how about the severance charges, is that included in there?

Right.

What is that, about $1 million?

That's correct.

Okay. Barc, could you give us the percentage changes for the quarter in the different geographic regions starting out with the west, excluding California, California, south, southeast, Midwest and northeast?

Okay. Okay. California was down 19% in the quarter, and the west was pretty flat. It was down 1%. The Midwest was up 11%, and the south, southeast was down 15.5, 16%, call it. And the northeast was up 18% real mix.

Yes, how do you have an increase in sales in the northeast and the Midwest in this environment?

I haven't got the details on that, but I do know that apparently -- well, of course, housing has not tanked in those areas like it has in the west, and in Florida.

Okay. And in the quarter, can you tell us a percentage change or the actual dollars in anchoring systems and shield wall and, I know, Europe -- maybe you could repeat the European sales in the quarter.

What, you didn't have your pencil ready?

I have a pen. I don't use a pencil.

Okay. All right. Let's see. You're looking for the quarter on quick drive?

No, anchoring systems first.

Okay. Anchor systems was down -- is that a -- oh, this is clearer. Okay. Anchor systems was down 6.5%.

Your shear walls or whatever you want to call it.

Well, the shear walls were down 27%, but that -- that was a mix but by far the big down was in the wood shear wall, largely wood. Our metal was up, the sales of the metal shear wall were up. Let me look at that. Have we got that separated? But I think it was.

All right. The shear wall group was down 27%?

Yes, that's right. And the problem there, of course, is that these shear walls all go into housing.

Right. All right and I think you said Europe was up 14.6%?

That doesn't sound right.

You said it before. I just want to make sure.

Yeah. Okay. Europe --

Or that must have been the year.

Europe in the quarter was up 12.9%.

Okay. And quick drive.

And quick drive -- quick drive was down 5.5% for the quarter.

Okay. Now, in terms of your closure of the Canadian mechanical anchor production, to be sourced in China, was all of the mechanical anchoring production in -- was that all in Canada?

Yes, it was.

And were they -- so they were shipping into North America. Where else were they shipping from Canada?

Well, they were shipping to China, but the sales in China, because -- well, we were losing money on them. So that's why we're flipping the production into China.

Now, will the Chinese plant handle worldwide production for mechanical anchoring systems going forward?

No decision on that yet.

Okay. And as far as, Mike, on Swan Secure, Barclay made some comments about some charges. One, he said was amortization of $660,000, and one was Swan write-offs of $1.3 million. Could you explain what the amortization is?

The amortization is where we wrote off the inventory when we acquired them. This will be the last quarter of that.

Okay. What was it in the third quarter?

It was -- it was approximately two-thirds of that number.

Okay. So let's say $500,000 and the Swan write-offs of $1.3 million,, what was that?

That would be money that we attributed to the Swan name and the customer relationships.

All right. So did you have any of that stuff in the third quarter?

Yes, we did.

How much was in the third quarter?

It's going to be 2/12th of the $1.3 million.

Okay. So let's call it $200,000, just for argument purposes. So is it fair to add those together, we would get $1 million in amortization and $1.5 million in write-offs. So that's $2.5 million, and that's directly in your P&L?

That's correct.

And so for 2008, is that going to disappear?

We will continue to have the $1.3 million.

Okay. Okay. Now, as far as the sale of the San Leandro property, where are you in that process?

As you may remember, we had put that property for sale. We had a little bit of contamination that we had to clean up, approximately $300,000. That work is ongoing and we would hope to put that property back on the market in the next few months.

Is there any indication that you should be able to sell it in 2008?

We hope so, but we never -- never know.

Okay. Now, Barclay, on the Dura-Vent -- I'm sorry, the Vicksburg facility is closing. I know you had problems with turnover at that plant for a couple of years now, and I know there was a major management change that was a positive. Can you tell us if Vicksburg in totality, in the P&L affected you negatively last year?

No.

And could you talk to us a little bit about your savings in 2008 because of the closure, versus 2007?

It's too early to go into that, Barry.

Okay.

Anything I told you wouldn't be based on enough fact. All I can tell you is that the very -- very careful research that our manager did on that, I don't think there's any question, but what is going to be a real plus to profits.

Okay. Now, you mentioned Home Depot is up 5% in sales for the -- was that for the year?

Yes.

And what about the other home center business -- how much was that up for the year?

I haven't got that separated out yet.

Okay. Thanks very much. I will go back to the queue.

Okay, Barry.

Our next question comes from Steve Chercover with DA Davidson.

Good morning, Steve.

Good morning, how are you? Thanks for taking my question.

Sure.

First one, over the past couple of years, you have been trying to migrate some of your exposure to industrial and nonresidential markets. How is that going and how do you feel, perhaps, at risk if the next shoe to drop in U.S. construction hits the industrial/commercial enterprises?

Well, I think we're -- we're doing, especially considering the market itself, we are doing very well in Europe. And the manager there has made some major changes, which should be a real plus for the future, particularly in Germany, the biggest market.

Well, and it's good to see that you are getting strong growth in Canada and, you know, modest growth elsewhere.

Oh, Canada is doing very well.

But is that enough to move the needle? I mean, if Canada was up 20% in the quarter and the year, is that a penny or can you quantify that?

Sure. Just one moment. Is that separated out here? A lot of papers here. Give us a minute.

Canada is approximately $0.03 a a year.

$0.03 a a year. Okay. Thank you for that.

My other quick question is, if you were to look at -- and I know it's a broad index, but your content per start -- structural connectors is the category, it's up way over 2007. I mean, clearly the denominator has almost fallen in half. How do you -- do you attribute that to Swan Secure or -- you know, obviously shear walls aren't responsible for it. Are you getting a lot of new SKUs into each house?

I really don't have an answer based on fact. It's a good question, Steve, but we just don't have a decent answer for it.

Well, I know that you are always striving to, you know, sell more product regardless of what the market is doing and innovation is the way that you achieve that.

Absolutely. We constantly work on getting more dollars per unit.

And I know it's just, you know, rough arithmetic, but you are doing it. I'm wondering how you're doing. Will you attribute that to Swan Secure or --

Oh, No. Well, there's a little bit of it. Swan Secure is -- let's see, selling like 4% to 4.5% of our sales.

Your sales were down a couple percent last year and housing was down 25%. You must be gaining share or content for start. Maybe I will leave that as a compliment. But as a question, I would love to know how you are doing it.

Well, and it's new products also. We spend, as I mentioned -- we are not reducing our expenses on such things as development of new products, and I don't have numbers on just what they add, but I know that they added quite a few million dollars last year, and will this year also.

Great. Well, thanks, guys. Appreciate it.

Okay, Steve.

Our next question comes from Timothy Jones. Please go ahead, sir.

Hello, Tim!

Hi, Barclay, how are you?

I'm fine, how are you?

You sound wonderful, as usual. Anyway, a couple of questions, please. First of all, you said, you know, you expected -- you know, given the economy and housing and so forth and, completions, will still be tough no matter what happens to starts, to be down. You said in your earnings, were you talking pre-all of these write-offs that you have taken, especially the goodwill charge?

Yes.

I thought you were. I just wanted to clarify that.

Right.

Secondly, I remember when you were disappointed with Vicksburg, and I remember when you changed managements, and how pleased you were and I remember also that you put a fair amount of money into that plant and when business was, you know, better than it is now, you -- you were very upbeat about a year ago or a little bit more about the Vicksburg operations. What is the change? Has it been the operations or has it just been that you are not getting enough demand on the Dura-Vent to support the two plants?

Well, that's it. Demand is a large -- a large item there, but also, you know, we didn't have any sales force out of Vicksburg, and it was run from Vacaville, California. And the efficiency there was not nearly what it was in Vacaville, and adding up the whole thing, and considering that the market had gone down, why, it just made sense to take it out of there, and we're in the process of figuring out how we're going to handle markets where the warehouse being in the south there met some markets. We will have to do something to take care of that, probably set up a warehouse here and there.

And will you have enough capacity in California to handle the additional work from Mississippi, and do you have the ability to add capacity at the plant?

Yes. Absolutely.

Could you give me -- could you --

It's not going to be a problem.

Could you add 50% capacity if you had to, if the market turned around?

We are moving all the equipment from Mississippi to California.

Oh, you are? Okay.

You may remember we did an expansion there of that building approximately a year ago. So we do have the room there.

Lastly, why didn't you set up a sales force out of Mississippi?

No, we don't -- we didn't have any sales force.

I know, why didn't you have one?

Why not?

Yeah, when you were running, it you know. Not obviously now, I understand.

We just figured it wouldn't be nearly as efficient to do it that way, as to do it out of Vacaville, and the same thing is true now of the plant.

It seems -- it seems logical. Thank you.

Okay.

Our next question comes from Keith Johnson with Morgan Keegan. Your line is now open.

Good morning.

Keith.

A couple of questions. I'm just trying to get a better understanding of the gross margin line. I guess the fourth quarter came in around 33.8%, and that has several charges, I guess, rolled up in it.

Yes, indeed.

Just to make sure that I'm looking at it correctly, could you just go over those charges one more time and hit the cost of sales line in the quarter?

The -- We have to shuffle the papers for a moment.

We had on the $2 million, slightly over $2 million in slow moving inventory charge.

Okay.

We saw higher price costs, basically cost of fuel. Same for shipping costs. The Canada impairment -- I'm sorry, the Canada severance packages. We had a little bit of impact on currency, so adding a little bit of -- a little bit of pressure from steel, a little bit of pressure as volume has slowed down. We've had our factory, the presses slowing down. Some of that overhead also slipped into the P&L.

Okay. What about any of the Swan charges, were those getting in the cost of sales line, just to make sure I'm looking at it right?

Approximately $500,000.

Okay. Okay. And so if you were to kind of clean all that up for the one-time charges, would that put the gross margin somewhere back in the 35, 35.5% range?

It would be in that range, yes.

Okay. And then kind of looking at it sequentially as we dropped off from the third quarter, where you guys did about 37.4% down, or where you -- to the adjusted number in the December quarter, what were the main drivers kind of pushing that margin down?

Primarily the reduction in volume.

Okay. And as you -- I think you mentioned CapEx guidance for 2008, around $23 million. Do you have -- can we get an idea on the depreciation and amortization, and the tax rate.

39% for the tax rate.

Okay.

And $31.5 million for depreciation and amortization.

Okay. And I noticed, I guess on the selling expense line, as you come through 2007, it looks like you have been noting your press release, you know, continued additions, I guess, against the personnel-type spending. Will you continue at that pace as you look into 2008, or are you getting a staffing level or size that looks like it will be kind of stable as you go into 2008?

Well, we -- we probably will be going up again because of Asia.

Okay.

And also perhaps because of Europe.

Okay. Okay. Great. I will jump back in the queue. Thanks.

All right, Keith.

Our next question comes from Tom Zeifang with Lucrum capital. Your line is now open.

Hey, guys.

Good morning, Tom.

I don't think I got the Home Depot for the quarter. I got it for the year what was the gross? Or that channel if you can give it to me that way.

You mean the home centers?

Yes.

Oh, okay. Home centers in the quarter -- the quarter were -- all the home centers down 2.4%.

2.4. And then once again on the international, I think I heard you say 20.9% of total revenues. What was total international growth?

Total -- excuse me as I shuffle through some papers again. In the quarter, international grew 16.7%.

16.7.

Right.

And then what was the impact from currency on the company, both revenues and profits, if there was one at all.

From currency, we gained approximately $3 million and on net income, we lost approximately $1.6 million.

$1.6 million?

Yes.

Okay. Great. And then on the international, because what we are hearing out of Europe, it seems like they are a little behind us, could you give us a sense of what's going on the last six weeks versus the previous quarter?

In Europe?

Yes.

Flat. Pretty flat.

Year-over-year, correct?

Yes.

Okay. And then on the steel prices, on the inventory, is a vast majority of it raw materials or is the vast majority finished goods?

I have to take a look there. I don't know the exact number.

It's approximately a little under 50% in raw materials.

And where's that been historically?

That's about --

That's not too different.

Not too different.

No.

Do you continue to buy steel at these levels or are you trying to -- it sounds like you are not guiding down but you are looking towards a tough '08. Is it safe to say that you are not going to buy steels at these levels?

I really don't want to go into that.

Okay. And then what was the last question I had here? On Canada, just so I have the number right, up 20% in the quarter and that -- at the current run rate, that would be about $0.03 a year?

Canada is -- oh, let's see. Last year our sales for Canada were around $44 million.

$44 million.

And that was up for the -- for the year, that was up 16%.

Plus 16. Okay.

We have a lot of efficiencies in Canada once we move the plant and the $0.03 number will go up.

Okay. And then you made a comment on the shear wall being, wood materially worse, metal materially better.

Yes.

Is it safe to say the metal is more industrial/commercial?

No. No. It goes into housing.

It does go into housing?

Yes.

Is there any way you can give us a sense of what you believe your exposure is to commercial and industrial, versus residential?

Well, residential in the past -- past year, and right now, the exposure is a great deal more than commercial, but it is changing a little because commercial isn't in the tank like housing is.

Yes, so I guess what I'm getting at, I'm trying to get a sense of how bad it could be if commercial and industrial get soft this point forward, at this very point when residential doesn't see an uptick?

Our problem is the distributors, most of them sell everybody and we don't have numbers that you can count on. I can tell you, though, that in the past three years, because housing boomed so much, the percentage that went into housing compared to what went in commercial just changed drastically.

Okay.

I think it's changing back the other way now.

And so won't even venture a guess of your mix between residential and commercial?

No. It wouldn't be worth enough. But I will give you this, that I think that probably 50% -- we got so maybe 50% of our business was based on U.S. housing.

Okay. Okay.

And that's our fault that we let it get that way, and we are working hard to change that.

Understood. Okay. Thank you.

You're welcome.

Our next question comes from Robert Kelly with Sidoti. Your line is now open.

Hello, Bob.

Hi, Barc, thanks for taking my questions.

Right.

Quickly on the 4Q erosion margins is there a mix issue here, maybe some of the higher margin stuff going into the residential, that being weak?

No, I don't think so.

I don't know if you have covered this already. Maybe like orders of ago magnitude as far as the margin decline in 4Q between volume and raw materials.

Don't know.

Is volume the biggest driver?

Well volume, yes.

All right. And then secondly on the -- the China initiative, the facility based out of the Canada, is the production there? Is that, like, enough to base load China? How do you think about that?

Well, right now it's -- it's anything -- any guesses we made on what we're going to make there wouldn't be based on enough fact because we just established in Beijing -- we just established that office at the end of last year.

Right.

And so we have salespeople now out all through China, and let a few months go by and we will figure out what we need to make there for that market. And it may be -- personally, I think that market is going to boom and it's going to be a major part of this company in a few years.

Yes, I understand that. But I mean, the way I understand the Canada production, that's not going away. That's eventually going to be shifted out to Asia and -- is that correct?

Well, we've got another plant in Canada, and that plant will be operating. It's the anchor systems products -- mechanical anchors --

Right.

That's being -- that plant is closed and those products are being made now -- will be made first part of next year in China, but the question is, we're building 170,000 square foot plant, and it is not just mechanical anchors that we are going to be making, there but as yet. You know, we've got a rough idea, but that's all it is. That's just what products we need to make for that market.

Okay. Great. And then just one final one.

In the release, you talked about some competitors and pricing pressures -- is that just confined to residential or is that pretty much across the board at this point?

It's pretty much across the board, I think. Residential is the worst.

All right. Sir. Thanks for your time.

All right, Bob.

Our next question comes from Jason Yellin with WRA Investments.

Good morning.

Hi, Barc, thanks for taking my question.

Just real quick on steel prices. Is it fair to say that you are seeing most of the pressure since the beginning of the year, and it wasn't a big contributor -- high steel prices were not a big contributor in the fourth quarter?

Well, I think that's correct, yes.

And then what exactly are you seeing? Is it getting harder to find the steel or do you just have to pay more for it? What exactly is the issue?

Well, the steel companies are, I think they are doing a great job for themselves by making the capacity such that the demand increases, and so they can force higher prices and we think that this year, they are going up. The price of steel is going up and we will have some price increases that we'll have to make.

And then roughly, Barc, if I could, by the end of the year, have you seen steel prices go up 5%, 10%? Is there any sort of metric that we could use?

No. I really don't want to go into that.

That's fair. Thanks for your time.

Okay.

Our next question comes from Barry Vogel with Barry Vogel and associates. Your line is now open.

Mike, I have a question on Swan Secure.

Based on your comment in the press release, it implies that they did about $7 million in sales in the fourth quarter. Can you tell us what they did in the third quarter as well? And then can you tell us what was the net overall impact to profitability because of Swan Secure in 2007?

They did approximately $6.5 million in Q3 in sales. And for overall profitability, just slightly, slightly, dilutive.

Okay. So you would expect for the full year of 2008, that they would be adding to -- to the profits of the company?

Definitely.

Oh, yes.

Okay. And Barclay, can you give us a little bit of color on the acquisition front as to what is happening in the market place in terms of your -- what you are finding in terms of deal flow and the odds on doing something constructive for the shareholders in '08?

Well, I have learned, Barry, over the years that until an acquisition actually occurs, there's not much use talking about it because they -- they will look close and then you will find something and we're careful. We are -- we're not going to just go out there and see that we have to have acquisitions. We will work hard on it, but we are going to make sure that just generally after a year's time, that they contribute to our profits. And we're looking at a bunch right now, but I don't want to go into specifics on any one.

Okay. Thank you.

All right.

Our next question comes from Garik Shmois with Longbow Research.

Good morning.

Good morning. Thank you for taking my questions this morning. I was just wondering if you could touch upon pricing a little bit more. You talked, about you know, the possibility of raising prices and the rising steel costs. Can you just talk about prior cycles and your ability to pass along pricing when housing clearly has been so weak?

Well, generally when -- when the cost of steel goes up, which, of course, is our major material component, why, we can raise the prices because so does everybody else's. And I don't think any competitor has a better position with steel mills than we do. You know, we have been buying this stuff for 50 years and when we make a commitment, we keep it. And we pay the bills on time. So our costs do not go up any more certainly than anybody else's, and sometimes less. So right now probably the pressure to keep the raise low is larger than I ever remember it, and the major thing is that housing starts are way down. Sales are way down. The big builders are losing money rather than making a ton of money which they have, and so they are putting a lot of pressure on suppliers. And they will make an extra effort to not have to use the product, unless it lowers their costs of construction, and, of course, that's the major reason they use them, as well as fear.

So generally, I think that we will be able to raise our prices. How much? I don't know.

Okay. Thank you for the detail and good luck.

Right. Thanks.

Our next question comes from Jim Wilson with JMP Securities. Your line is now opened.

Good morning, Jim.

Thanks, good morning, Barc, how are you?

I'm okay. How are you?

I'm just fine. I know it was a bit hard to tell, in the U.S. certainly. If you look in Europe and then in Asia, what is your feel as to your mix of business between residential and commercial in your overseas markets?

Boy, that's a very good question to which I don't have a good answer. I -- I think that in -- in China, from all I hear, from our people and read, that the commercial is a much higher percentage than the residential in relation to America. Now, Europe, I don't know -- do you have any feel for Europe on that one, Mike?

I believe that the majority of our sales in Europe are residential.

Okay. And how much of Europe, give or take is the UK?

Just one moment. It's -- it's about -- let's see. It's about a quarter. A quarter. A little more than that.

Okay. So reasonably well spread in Europe. Okay. All right. That's great. That's helpful. All right, thanks, Barc.

Okay.

Our next question comes from Arnie Ursaner, from CJS Securities. Your line is now open.

He got your name close that time.

My next life, Barc, I'm coming back with an easier name.

Simple question on your inventory. You basically had flat inventories year over year, but the price of steel over the year rose quite a bit. Again, I know you don't want to drill down too much, but should we assume that you have the volume of inventory has dropped pretty materially and if so, can you give us some sense of how much of that is finished goods versus inventory, raw material inventory?

Well, let's see, we can give you a rough estimate as the -- how much is raw material and how much is finished goods, I think, yes. What do you have there, Mike?

Well, raw material, as I said before is slightly under half.

Those are up or down, year-over-year in terms of quantity, volume?

Over all, our steel inventory is down slightly from a volume standpoint.

And finished goods?

It's relatively flat.

Okay. Just a technical question. I'm assuming there were no bonus accrual reversals. In other words, I think you do that each quarter, marking it to the quarter.

Yes, you mean cash profit sharing?

Correct.

Yes, that's quarterly. And it's down substantially.

Okay. But, again, there wouldn't have been any reversals or changes of accruals?

You mean in methodology?

No. No. No. In other words the number in Q4, you haven't been annualizing them and then reverse them?

No. Our bonuses are paid -- what's earned in Q4 is paid in Q4.

And can you focus a little bit more on the costs and the margin impact we should expect from Vicksburg? Again, I'm not assuming you will give us exact details of severance and other costs, but can you give us a feel for -- you mentioned 18 to 24 months in terms of time. You mentioned you will have to move some equipment. So what sort of negative margin hit might Vicksburg be for, let's say the first, you know -- for this year, perhaps?

It will be -- we are going to incur some costs in moving equipment and with the transfer of people and restaffing in California. It will have approximately a $0.02 impact for the year.

Okay. My final question relates, again, whether you try to use this -- weather, you try to never use this as an excuse. But last year, in March and April, California had some of the wettest weather in history. What I guess I'm trying to get a feel for is how easy the comparisons might be in March and April in that market, if you could comment on that.

Well, generally in the -- the market in California has really tanked. It's gone down a lot. And, yes, we've had some pretty heavy rains recently, but it is not -- that is not the major cause.

No, where I was going last year Barc, had you some of the rainiest weather and it had a severe impact on both March and April results. So the comparison this year from a weather point of view should be much easier.

Well, I think it will be but it's -- that's going to be more than balanced by the lack of starts.

Final question I had for Mike, if I can, you mentioned some of the charges like the -- some of the amortization expense related to Swan as ongoing. I'm trying to get a feel for which of the expenses we talked about this quarter are truly one time. I would think things line the Disney are one-time, but some of them appear as though they may be more ongoing. Can you try to perhaps, help us separate out the true one-times from the more ongoing expenses we are likely to see?

Well, the Disney was a one-time expense, as you mentioned. Hopefully the slow-moving inventory is a one-time expense. Additionally, the amortization of the Swan inventory markup is a one-time expense. The -- the Canada severance costs are a one-time expense. Those come to mind.

Well, the tax rate of 92% is also an $0.08 one-time hit as well, if you think about things. I guess where I'm heading to this is to the extent the normalized gross margin in the quarter was 35%, 35.5%, that's still materially lower than what you have done historically.

And I know you don't give specific guidance, but are we seeing a more permanent -- a more permanent meeting for the year or so, reduction in gross margin?

Well, the challenge is, as business slows down, you have less inventory absorption and that becomes the big issue in the P&L decides the loss and revenue. On the tax rate, if we did not have the impairment, our earnings per share, instead of having been $0.01, would have been -- going back, that would have been $0.21.

As I said -- okay. We created a chart that has a $0.28 adjusted number, but maybe we could follow up perhaps offline. Maybe I'm double counting something.

Well, of the pretax profits, instead of being $6.7 million, would have been $17.4 million. Currently we have our income tax has been $6.2 million. It would have been $7 million because so little of the inventory -- I'm sorry so little of the goodwill we got a tax benefit from the write-off. And that was caused by -- we bought MDA a few years ago and that was a share purchase, and that's not tax-deductible.

Okay. Thank you.

Our next question comes from Robert Kelly with Sidoti. Your line is now open.

Hello again, Bob.

Hey, why of the a quick follow on with -- it seems like a magnitude of steel prices across the board from the mills is -- does it give you any confidence that because of such a big increase, you will be able to pass it on?

Oh, yeah, I think we will be able to pass on quite a bit. Whether we will pass on the whole thing or not is another story.

It's a question of how much you will be able to pass on at this point?

Yes, I can't answer that.

Okay.. Thanks, Barc.

Okay.

(OPERATOR INSTRUCTIONS)

Our next question comes from Timothy Jones. Your line is now open.

Hi, Tim.

Hi again. I just missed where you stood. First thing you talked about, you talk about some of the extraordinary items, first number you gave was the plant closing of 10.8. The second number you gave was a 2.2 number. What did that reflect?

That was an inventory charge.

And how did this -- how did that come about?

It was caused by the slowdown in sales and rebalancing our inventory.

Okay, this is a one-time deal too?

Hopefully, yes.

Hopefully. Okay. Thank you.

Right.

At this time, we have no further questions, sir.

All right. Well, thank you all and thank you, Curtis.

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