Simpson Manufacturing Co Inc (SSD) 2008 Q1 法說會逐字稿

Good day, and welcome to the Simpson Manufacturing Company Q1 2008 conference call.

I would like to now turn your meeting over to your Chairman, Mr. Barclay Simpson. Please go ahead, sir.

Good morning, everybody. Thanks for joining Mike Herbert and myself. About all we can say about the results for the first quarter is that they were lousy and the rest of this year does not look good in terms of profits. As far as the future, it's looking better all the time. Our contractor distributer sales though in the quarter were off 43%. And practically all of the drop is due to new construction in the US, and to expect that to change this year is not realistic especially with the soaring price of our basic material, steel. It's up roughly 40% over last year and another 20% rise is expected. So we are putting in a price increase as of June the first, and may have to put in another one. And that despite the fact that our competitor's costs have to go up as much -- at least as much as ours, we are not covering all of the increase. With their business way off, and the resulting heavy losses, contractors are looking for ways to reduce, not raise costs, so we are going to work harder than ever on other ways to reduce our costs, other than steel.

A disappointment with home center business, off 25%, despite the probability that we have more of their business than ever before. And except for the sales figure only down 1.4%, there was a bad quarter at Dura-Vent which lowered company profits by $2.8 million. Are we concerned? Yes. Are people working on correcting the loss? Yes. Am I going to go into more detail now? No, because we need to get the Vicksburg plant closed in order to find out how good was our research.

On the positive side we are making real progress and becoming less dependant on U.S. housing and more of an international company. Sales outside of the U.S. went up in the first quarter from 18% of our total sales last year to 23.2% this year. And we are just getting started in Asia. The major part so far of that increase was Europe, where sales went from 12.4% to 15.5% of total sales. And Canada also was up over 20%. The way that the economies are growing in the two most populous companies in the world, China and India, especially China, makes us believe Asia, starting with China, must be an important part of the future of Simpson Company. As most of you know, we are spending a lot to get firmly established there.

A sales office in Beijing of 15 people, one in Hong Kong of six people, plus 175,000 square foot plant which should be in production next year are a sure way to lower short-term earnings, but to build long-term sales and earnings. We feel really good about the acquisition last month of the German and Irish company Liebig. Their metric mechanical anchors with their code approvals are the basis for our anchor systems division getting started in the European market, where they build with concrete and masonry. Also until we get to manufacturing in China, we will ship Liebig's metric products to that market. A German-owned company Liebig was started in 1946. Perhaps they had a little help from the Marshall Plan.

At any rate, our anchor systems people are excited about their products and how they open up new markets. As I think most of you know, I invested my company's pension plan for 42 years, so I do understand how easy it is to get concerned about short-term results. All I can do is assure you that our people and our balance sheet are dedicated to the future. But it may take a year or two to see earnings go back to going up. We're not going to stop spending on the future. Questions?

(OPERATOR INSTRUCTIONS) And our first question comes from Arnie Ursaner with CJS Securities. Please go ahead.

Good morning, Arnie.

Hi, Barclay, how are you? First of all I want to thank you on behalf of your investors for your analyst staff, thought it was a very productive use of the day. Gave us a chance to meet your team. One of the questions I have is, can you give us a sense, on your inventory levels and on your customer's inventory levels, and specifically given the dramatic rise in the price of steel would seem both you and your customers should almost be hoarding or inventorying steel relative to the cost of capital or debt to hold these inventories.

Well, our customers have been pushing hard to get inventories down. That's with business the way it is, why that of course you can understand why. And we ourselves as far as our inventories go, where are we, Mike?

Regarding steels, per pound in the U.S. North America, we are flat.

Pounds in terms of units?

Pounds of steel.

And again, given the rapid rise you would expect, would you anticipate building these inventories?

Say that again.

Given the expectation you have of dramatically higher cost of steel, would you be trying to expand your inventories?

Well, of course.

Okay. Can you comment at all on final inventories? Again, I know you try to keep anywhere from two to four months of inventories of essentially all of your products to make sure your customers can get their delivery, do you see that number expanding? Is it expanding out of your control in the short run?

No, it's not, we are keeping our inventory levels with our raw materials and our (inaudible) at the same historical levels as they have been at.

Final question you mentioned, Barc, you anticipate taking some actions to reduce your other costs beyond steel. Can you give us some sense of what these actions may be and how you might attempt to quantify them if at all?

Well, our -- we have asked all the branches to come up with ways that they can reduce costs. Excuse me. It was surprising how many different ways they had. Simple things like the lighting and whether you're going to have free coffee and all kinds of things. It would take me a half hour to go into all of them.

Thank you very much.

Next question comes from Robert Kelly with Sidoti. Please go ahead.

Good morning, Bob.

Morning. Thanks, for taking my question. Just a question on the decline to contractors, pretty steep relative to what you guys have done in the recent past here. As these guys push down their inventories, historically how long has that taken for -- it sounds like a temporary issue. Historically, how long does that take to really rebalance? It sounds like a medium to short-term channel issue?

I think any prediction we make isn't nearly as good probably as all you people listening to this call can make because you're on it all the time. And we don't waste time worrying about the market or housing starts or that kind of thing. We spend our time figuring out what we are going to do and not worrying about things over which we have absolutely no control. So, I'm not a good guy to ask a question like that, Bob. I'm sorry.

Maybe separately, did your customers do you get the question they pulled forward orders ahead of price increases, into the back half of 2007? I'm trying to figure out, just based on what you guys did in '07 why you had such a steep drop-off in Q1 here.

Well, they haven't as yet.

And then just sequentially, at least in Strong-Tie, you had basically flat level of sales, yet the gross margin if we pull out all the charges and stuff from Q4, compressed significantly here. Is that all the raw material increase and pricing pressure or is there something else going on there?

We saw increases in material and we also had factory overhead absorption issues that we slowed down.

We had things like shipping costs.

Right. So the back half of the quarter maybe not as strong as you had originally thought, is that what is going on in 1Q '08?

Actually we had softness in January and February and started to improve in March.

Okay. Great. Thanks, guys.

And our next question will come from Barry Vogel with Barry Vogel & Associates. Please go ahead.

Hello, Barry.

Good morning, gentlemen.

Thank you for the gentlemen.

You are a gentleman. First of all, Barc, usually you give us some break downs of the sales of anchor systems and shear walls in Europe, and you gave us 15.5% of total sales as Europe. So by dividing that I got $25.9 million in revenues from Europe. Can you give us revenues for shear wall and anchoring systems and could you give us some color on the operating margins or profits for all three of them? That's the first question.

Let's see. Go through things here. Anchor systems was down 17%.

Okay.

And I do not expect that to continue, because with the new sales forces in Asia, anchor systems products are the things that we're starting to sell there, that is the way we got started there. Now we are going to be selling other things, by the time we get that plant built and we can make them there, but anchor systems products right now are the ones that I think are going to go up substantially in Europe, excuse me, both in Europe and in Asia.

Okay. And do you have some kind of an operating profit or margin, or something in anchor systems?

I don't have a number on that yet. There are too many things that are in process.

How about shear wall revenues.

Shear wall revenues. They depend on new U.S. housing. They were down 46%. In spite of the fact that I get word from our people that we have a larger share of the market.

Okay. And going to the different regions of the country, could you give us a percentage change in revenues for the west excluding California--California, South, Southeast, Midwest and Northeast?

Right. Okay. In the quarter, well, it starts with California, 19.5%. The West was 16.5%.

These are declines, I presume?

Beg your pardon?

These are declines?

These are the percentage of the total sales.

I don't want that. I want the percentage change in sales.

Oh, okay. California was down 37%. The west down 23%. The Midwest down 10%. The south-southeast down 18%. And the northeast up 11%.

Can you just give us some idea about Texas and Florida?

Well, Florida was in the tank. Texas not so bad, pretty good as a matter of fact in relation to the rest of the country.

Okay. And can you, Mike, I have a few questions for you. Can you give us your estimate of the tax rate for the full year?

39.5%.

And can you give us your best guess of capital expenditures and D&A for this year?

Capital $21.2 million. D&A $30 million.

And where are you on the sale of the Oakland property?

We sold the Texas property earlier this week.

Texas?

Yes.

And what were the proceeds from that?

$1.8 million.

And how about the Oakland?

We are still doing remediation and that will be (inaudible) go back on the market later this year.

Okay. And Mike, was there any start-up expenses in China in the first quarter.

There are all kinds of expenses there. All kinds of them. You hire all those people and they don't produce to start. You've got to train them.

Are you still using $0.04 to $0.08 as what you considered start-up expenses for what you're doing in China?

That's as good of a guess as any.

I'll get back in the queue, thank you.

Our next question comes from Steve Chercover with D.A. Davidson. Please go ahead.

Good morning.

Good morning. Thank you. First question, how do you rationalize putting through a price increase that doesn't even cover your immediate increases in costs?

Well, the reason all of us have jobs is our customers, and we are highly conscious of the huge problem that builders have in this country right now. And we think that probably, not taking the entire increase and charging it to them, may end up with them not having to make so much effort to reduce costs, including trying to figure out how they can use less of anything, anything.

So --

We are doing that because we are very conscious of what is going on with our customers, and we think in the long run that that's a plus.

Certainly being conscientious of your customers is great, by the same token, do you think they are actually cutting corners to the extent it would compromise the integrity of a home?

Well, I don't think so. No. No. But there is -- the majority of our products are not sold just because of codes. They are sold because you put the structure together faster and better with the use of our products. Now as the price of the product goes up, we've got to look at it and say, is it going to enable me to build this house faster and better.

To the extent that maybe the urgency of building a home fast has diminished, that's also part of the equation?

Well, putting it that way, yes, I would presume it is. But we are going to do everything we can as we have in the past to reduce other costs, and generally we have been pretty successful. We don't have to always -- in order to keep things balanced, we don't have to increase our prices as much as our basic material increases, because constantly we are automating more products, we're getting more efficient, we are getting better technically and handling production. All those things. So we will make every effort to balance it, whether we will make it or not all the way, I don't know.

Okay. Sticking with the theme of balance, we know what you're doing in Europe and Asia, any other initiatives domestically to branch out beyond residential construction into more commercial applications?

Yes. Our sales force and merchandising, we are pushing hard in all kinds of other areas, and of course every year we are not reducing our efforts to develop new products, both internally and by acquisition. And every year we come up with 10 or 15 new products and we're working on that all the time and harder than ever.

Great. Final question, can you maybe elaborate how the Liebig acquisition is going to kick start your whole metric initiative, how quickly do you think that's going to pay off?

Any guess as to how quickly at this point really doesn't mean much. We just acquired the product line, but it is extremely important in getting started in Europe. We do not sell -- our anchor systems products do not sell at all in Europe. We have not made an effort to go in there because we needed some basic things. And this is one of them.

Will it be branded Simpson Liebig or still sold as Liebig?

It's a good question, it's a little early to say to answer that. Liebig has been around for 60 years, and we will find out just how important that name is and we may keep it.

(OPERATOR INSTRUCTIONS) Our next question is from Scott Macke with AAB Capital. Please go ahead.

Good morning, Scott.

Good morning, gentlemen. How are you. I just want to hone in and understand the comment earlier about overhead absorption and the impact of steel costs. If I look at the year-over-year decline in gross margin is that more attributable to steel at this point or is that a lack of overhead absorption?

What do you think Mike?

It's a lack of overhead absorption.

Okay. And then, I probably asked this about every call, could you remind me or refresh my memory just in terms of steel as a percentage of cost of sales for you guys?

We don't discuss that.

I think that's the answer I get every call, but I'm going to keep trying.

Yes. You haven't missed anything.

Okay. Fair enough.

I'm sure you can understand why we don't discuss it.

I certainly do. And then just with respect to the product line and the pace of sales, residential versus nonresidential, the talk of home centers and the distribution channels. Is talking about anchor systems the product line, is that a proxy for talking about a product more designed, or that's going into the nonresidential market relative to the residential market? I'm curious what your read is in terms of how the products are doing that are going into the nonresidential market versus a residential right now.

Yes. Anchor systems is -- the majority are nonresidential. And that's why we push hard on that particular -- on developing the products and why we are excited about the new metric anchors that we just acquired. And that -- it's a little hard if you're not familiar with the construction in these various areas, but anchor systems products for instance, go into roads and bridges. We sold a whole bunch of our epoxy, 4,500 tubes as a matter of fact for a -- about a year ago and we've been selling it ever since for a bridge and a road outside of Beijing. And we also sold a whole bunch of our epoxy for repairs to the bridges in the San Francisco Bay area. So it gets us into markets where we weren't at all. And that's exciting. And also the fact that Liebig makes things metrically, that's extremely important. You can't sell in those countries, because they don't go with feet and inches. They go metrically. And now we will be shipping to China, we will be shipping those products, those mechanical anchors, to China until we can get to manufacturing there ourselves. Not only does it get us started in Europe.

Okay, guys. I appreciate the time this morning.

All right.

Thanks.

You're welcome.

Our next question comes from Garik Shmois with Longbow Research. Please go ahead.

Good morning, Garik.

Hi, good morning. Thanks for taking my call. I'm just wondering and I might have missed it, can you go over the currency impact during the quarter?

As far as impact on revenue, it was up $4.4 million, had no impact on net income or income from operations.

Okay. And the strength in Canada, was that largely due to currency or is there something else going on there?

Just doing a better job of merchandising and selling.

Okay. And I have a question, with respect to inventory management and the rising steel price environment, do you look to liquidate some of the raw material inventory to take advantage of rising steel prices? Is that something that you look to do?

No.

Okay. Is that something you look to do in the future or is that something you don't do as a practice?

We don't do that.

Okay. Very good. Thank you very much.

You're welcome.

Our next question is from Alan Robinson with RBC. Go ahead.

Good morning. Just one quick question. Given the general decline we see in the construction vertical, are you finding more attractive valuations for potential acquisitions now? And perhaps could you discuss more generally how you view your acquisitions strategy over the next year or so?

Right, well, we are looking to become more and more an international company. So more than we ever have in the past we are looking overseas for acquisitions. At any particular time, why, we usual have about a half dozen that that we are either starting to look at or we're further into them. It takes a while, it takes quite a while, because we have been quite successful with our acquisitions. We've made I think it's 13 of them since we went public in 1994 and all except one have worked out okay. And that -- some think that's too high an average. I think that's got some logic behind it. But anyway, we are careful, we go through them very carefully, particularly now we are looking at a large acquisition that we are going to have to spend quite a little time there, because if it's a big one, we better make sure we know everything possible about it; about their numbers; about what the markets are; about what kind of management skills they have or that we are going to have to provide. So acquisitions are extremely important to us now and we are spending a lot of time and money looking at all kinds of them.

Okay. So you really totally focused on the overseas acquisitions and even with some of the better valuations arguably here --

We are not totally focused overseas, we are still looking here. But it is for the long-range future of this company, we have to get more and more international. So that we are not subject to as we are now too dependant on one particular area and one particular type of construction.

Okay. Thank you.

You're welcome.

Our next question is from Barry Vogel with Barry Vogel & Associates. Go ahead.

I only have two questions. First of all, Barc, your largest customer, what were their sales down for the quarter versus last year?

Largest customer, that would have been Home Depot. And they were -- what were they? I haven't seen those numbers yet. We are just putting them together. But -- we haven't got it yet, Barry. I'll have to -- we will have those within a week.

Within a week? Okay.

You can't change the past.

No. Not trying to change the past.

They are more interested in spending money for the future.

I know all about that. I know all about that. Mike, could you give us an idea about the accretion from Swan, if any?

Well Swan sales are strong. They are very strong, and what did they add? About --

About $0.01 per share.

$0.01. And would you expect that to grow as the year progresses as you do things with them to get them into your system?

Yes. Yes. And they are difficult to integrate because of a very good reason. They have very good sales force themselves. So it isn't just an automatic as it often is when you take a company and the reason they are for sale is their sales aren't good, not so with Swan.

Alright. That was a good acquisition, thanks very much.

You're welcome.

And our last question comes from Keith Johnson with Morgan Keegan. Go ahead, sir.

Hello, hello, again.

Couple of questions. Could you talk a little bit about your -- the business trends in Europe. I think if I remember correctly sales up just slightly in Europe over a year-over-year basis for the quarter?

Yes. Let's see. Let me take a look here. Our sales in Europe were up 5.5% --

Okay.

-- for the quarter which of course that made them, because our overall sales were down, it took them of course as I said from 12.4% to 15.5% of our total sales.

Okay. Are you --

It looks pretty good there right now. They are up -- this quarter is starting out well there.

Okay. And what about the April trends in the U.S. markets? Did it improve off of what you were seeing in March or did it slow back down?

No better.

Okay. So I guess, make sure I heard correctly, January, February were pretty slow in the U.S., then March got better and April is flat where we saw March?

That's about right, yes. It isn't the market, because we let yourselves get too dependant on U.S. housing. That isn't getting better. It is not.

Okay.

We are doing everything possible to lessen that dependency, but it takes time. We are looking for products that, as in anchor systems and what we just bought, Liebig, products that do not depend on housing and particularly don't depend on U.S. housing. We are looking hard for such things.

That's true. I guess like you are just saying longer term that will definitely be a positive. As you came across from the December quarter, '07, into the March quarter, did you guys have to lower your operating rates even further to deal with the market condition?

No.

Operating rates sequentially fourth quarter to the first quarter, kind of in line, I guess?

Similar.

That's correct. We did -- we are taking the Vicksburg plant off line and moving that equipment to California, so that also impacted our overhead.

Okay. And did that -- was that a factor in the -- I think you said $2.8 million loss at Dura-Vent?

That's correct.

Okay. How much was attributable to the Vicksburg decision in that Dura-Vent operating loss?

I don't have a number, but a substantial amount. And the projections that we've made pretty careful research looks like it's going to make a real difference when we finally get it closed and the costs out of the way. There will be some costs that continue for a while. But we are expecting that it will have a substantial -- make a substantial difference in profits.

Okay. Alright. Well, I appreciate it.

Right.

You have a follow-up question from Barry Vogel with Barry Vogel & Associates.

On the subject of Vicksburg, it lost $2.8 million in the quarter. What's your best guess when you complete the move, and can you give us color on how that's going to help you in the balance of the year in terms of your losses at venting products?

Well, probably it's going to continue to cost us. You can't -- it will take most of the year to get that plant closed.

Really? So are you expecting venting products to lose money this year all in?

Yes.

Okay. Thank you.

And Mr. Simpson, there are no further questions.

Okay. Thank you very much. So that's it.

This concludes today's teleconference, you may now disconnect your lines. Thank you and have a great day.