Simpson Manufacturing Co Inc (SSD) 2009 Q1 法說會逐字稿

Good day and welcome to the Simpson Manufacturing Company first quarter 2009 earnings conference call. I would like to turn the meeting over to your Chairman, Mr. Barclay Simpson. Please go ahead sir.

Hello everybody. It is clear that what we need to do to get a whole bunch of people on this call is to show a loss for the first time since we went public 15 years ago. Not the best reason. We will do everything we can to change that.

As most of you have heard me mention, we are determined to become less dependent on US housing and much more of an international company. Consequently, today is the last time that Mike Herbert, our CFO, will be on these conference calls. As of May 11, he has agreed to become Vice President of International Operations. Karen Colonias, who has been head of our largest branch, Stockton, California, has agreed to take Mike's job of CFO and is with us this morning. Welcome Karen.

Okay, so why the loss? It is pretty simple, the depression in housing starts and now commercial construction caught up with us. Our revenues were down 29% and costs related to production could not be reduced enough.

Also administration costs were up, partially due to acquisitions. Generally it takes about a year to integrate an acquisition and we have made four in the past year.

Also, a major customer has filed Chapter 11 and we took the last of the write-off in the first quarter. As most of you know, we are reluctant to lay good people off. But as of today we have felt it necessary to lay off about 30% of our people. And wherever it will not hurt future plans we are closing or combining some operations and cutting some costs, like the contribution to our pension plan.

What we are not doing is cutting costs that are important to the future of this long-range company. And that includes major expansion in China and Asia as well as Australia, where Ahorn's Big Drive tool and fasteners for roofs look quite promising.

I spent last week in China where we had a grand opening for our 175,000 square-foot plant in the city of -- and man, I have trouble pronouncing this -- Zhangjiagang, which is about a two-hour drive from Shanghai. Our sales force was able to get customers from 10 countries to the opening as well as two important Chinese officials. Both customers and officials were most positive about having us there and helping us to build a substantial business.

Obviously Rob Guzikowski and the salespeople and others that he has hired have done a great job in getting us started in China and Asia. And much of China is subject to destructive earthquakes and high wind forces which should cause the adoption and enforcement of building codes, and it seems that our knowledge and products can help to get that done. And we're going to get help from the officials.

Our European operations in the first quarter seemed to reflect even worse economic conditions than in the US. Our loss was $4 million there. Our acquisition of Aginco last month should help this year and we just bought a building for a new test lab which should help our brand name.

Simpson Dura-Vent had a net loss of $2.2 million. We're working on turning it around but unlike Strong-Tie it is no sure thing. So far this year it is hard to find indications that the US or Western European economies are starting to turn around. Our China operation probably may take several years before contributing substantial profits.

Acquisitions which were purchased in the past year should start to help out this year. The DeckTools software purchased this year will have our connectors in it shortly. New products developed internally will help also, but the rest of this year continues to look tough.

But the long, not short, range future continues to look bright. We have the people, the balance sheet, the knowledge and the desire to continue to make progress in becoming more and more international and in time to get us back to making outstanding returns on capital. Questions?

(Operator Instructions). Arnie Ursaner, CJS Securities.

First question I had related to your gross margins. Obviously these are unprecedented low levels for you as a company. You went into the quarter, you had some relatively high cost lingering steel inventory. And I know your plants' underabsorption has been a major factor. I know you have been running your plants on much shorter hours and things like that.

Without specific quantification, can you give us a feel for how much of the margin degradation percentage-wise has been caused by each of those two factors?

Mike, do you want to take that?

The primary reason for the margin degradation is the plants. And those have just started to get -- we started to increase production just slightly in those, so those should come up as we go through the year.

Second question. And what is your sense of the 25 or so margin you showed this quarter? How should we think about that for the balance of the year?

That is a really difficult question. But my personal best guess, and that is all it is, is probably around 28%.

Second question is a little more strategic or global for you. You made some fairly important management change announcements earlier in the quarter and I know you have got your analyst day coming up shortly. Can you perhaps give your shareholders some sense of the goals you hope to accomplish with these changes and tell us about the roles these people are expected to play going forward?

I think it broadens the knowledge and experience of some of our very top people. That has got to be a plus. Also of course I think it was great that Mike agreed to take the job of running International because that is a major part of the future of this company. We need the best people there. And I think it was great that Karen agreed to take over his job, too, and it just broadens both of them immensely.

Do you see it affecting the operations of the company in any material way, or your communication with the Street in any material way?

No, I don't think so.

Okay, thank you very much.

Alan Robinson, Royal Bank of Canada.

Could you talk a little bit about how you are addressing your sales operations in this new environment? Are there any channels you are pulling away from? And I guess more generally, where is your focus in terms of sales channels now?

It really hasn't changed a lot. Of course with our acquisitions we've broadened our products, and that broadens your customer list. And things like Aginco that we just bought in France, that enables us to increase our customers particularly in that area.

We have not changed a lot. But we are constantly looking at acquisitions. And if an acquisition has products or geography that broadens our ability to sell, why, that is a plus. All the time we are looking at about a half-dozen acquisitions.

So you are not particularly thinking of scaling back sales channels that have been underperforming over the last couple of quarters?

Scaling back? No, we are not scaling back anything that has to do with the future of the company and that is major.

On the subject of acquisitions, can you talk a little bit about how the acquisitions you have closed over the last 12 months or so are performing versus your expectations going into the acquisitions? I guess Liebig, ProTech and Ahorn are the major ones. How has your experience with the integration of these acquisitions influenced your appetite for further or additional deals?

Well, the acquisitions generally were bought because they added either products or geographical expansion. They are not for sale because they're doing tremendously well. And so consequently, particularly in the two European ones, the -- integrating them is taking longer than it often does for an acquisition. It always takes roughly -- of course they vary all over the lot, but roughly a year to get an acquisition integrated. In these cases it is taking a little bit longer.

But the reasons we bought them are still there and we are very positive about them. It is just that they hit our earnings in the meantime.

Okay. And one of the items that caught my attention in your release was the bad debt expense again in the quarter. How should we view or what is your view of the potential for further charges going out the remaining three quarters of the year?

Boy, that is a very tough question. How long is the depression going to go on and is it going to get worse or is it going to get better? And those questions, after all these years watching such things, I know I don't know, but nobody does.

I get the impression the charge you incurred this quarter was due to one particularly large customer.

That is correct.

Is there the potential for other similarly large customers to experience those kind of problems going forward?

I really don't have a good answer to that. I think it depends on how long this downturn goes. And if it goes a lot longer, yes, there might well be others. But of course as I think you all know, we have an extremely strong balance sheet and we are ready for whatever happens.

Okay, thank you. Good luck.

Thank you.

Barry Vogel, Barry Vogel and Associates.

The first question a couple questions are for Mike. I know that you're not on LIFO in terms of your accounting. Am I correct, Mike?

You are correct.

Okay, you had $250 million in inventories on your balance sheet at the end of December and now you have $225 million. On several calls over the last year, year and a half, people have always been asking about the impact of steel pricing on your gross margins.

And steel pricing obviously last year continued to rise basically through the whole year. And we know now that steel pricing has come down very dramatically and there has been a deflation in steel pricing. Could you really tell us -- and you didn't answer the question before when Arnie had asked it, what the impact on your profitability or gross margins was strictly from steel pricing?

There was no significant impact.

Now if you are not on LIFO and prices go down, how do you prevent there from being an impact?

Our inventory is based on net realizable value and that is still positive.

So you have not been forced to lower your prices?

We have not had to impact our inventory.

Okay. Do you think this is going to change going forward? Do you think given what has happened here recently that you might be able not to have an effect by that?

The future is uncertain.

Okay. And could you tell us what you are -- now what your expected capital expenditures and depreciation and amortization will be this year?

Capital is $15 million. Depreciation and amortization is $27 million.

Okay. And now, Barclay, can you tell us what the percentage change in sales were by region, starting with I guess starting with California -- I'm sorry, the West, excluding California?

Okay, that was the worst, the West. The West was down 42%.

California?

23%.

South, Southeast?

South, Southeast 22%.

Midwest.

Midwest, 28%.

Now I know you made a comment about changing slightly the way you look at home centers. And so if you could give us an idea on a comparable basis, on the new basis, what home centers sales were down in the quarter versus last year?

That were actually flat.

And that is on an apples-to-apples basis?

Which is remarkably good. Apples-to-apples they were down about 4.5%, which also for the times was extremely good. And I think it has to say that a very significant part of their sales is not new US housing.

No, I understand that. And how about your largest customer?

Now Home Depot is back again where we have to -- they are about 11% of our total and so we have to disclose them again. Actually, they were up a hair.

Okay, slightly. So when you said flat to home centers and then you used minus 4.5%, was that the same number you were talking about?

Say that again.

At first you said home centers sales were flat and then you said down 4.5%.

Using the old method they were down 4.5%. Using the new they were flat. And it only changes that we dropped a couple that really weren't significant anymore.

And can you tell us what the decline in sales were for Strong-Wall anchoring systems in Europe?

Strong-Wall anchoring systems in Europe?

No. Strong-Wall as a category, Europe as a category and anchoring systems as a category.

I don't have an exact number but Strong-Wall was -- wait a minute, what was Strong-Wall. You are getting me to do something I should have done already.

I'm just trying to make you a better person.

I need it. Yes, here we are. It was -- this shows you new US housing. It was down, the shearwall was down 44%.

Anchoring systems?

Anchor Systems I don't have an accurate number yet on that. I think it was down some, but I expect that that is turning around rapidly because the sales because of sales in China starting to get going.

And Europe sales?

Europe sales were down substantially. As I mentioned, their economy looks worse than ours. Like, let's see, they were down 35%.

Now, in terms of -- I don't know if you have this. Obviously you made several acquisitions last year.

Yes.

Can you give us an idea of what the sales from the acquisitions in the first quarter of '09 -- and I know you did not have those in the first quarter of '08 -- how much they added to sales?

No, I haven't got that number.

And I have got another question for Mike, as your inventories come down and let's assume business conditions stay very tough. Do you expect additional inventory reductions?

Yes, we do.

Can you give us some idea of your guess?

It depends how sales go.

No, I understand that. But let's say sales still are poor, generally.

Our plan is to continue to reduce our inventories.

What is your goal? Put it like that.

We look at it every day. We look at it based on how the economy is doing, how daily sales are doing, so we don't really have a specific goal I can tell you.

One other question, Mike. Did you lose money in China?

Oh, sure.

How much did you lose?

A lot.

How much is a lot?

I haven't got a number. We haven't got that split out. There were too many things that -- people who were doing something there and something elsewhere and so forth. But it is quite a bit.

I will go back in the queue. Thank you very much.

Robert Kelly, Sidoti & Co.

Mike had made a comment that you are bringing up your production rates in the plants. Can we infer that the sales declines are getting less severe in late March and April?

Not yet.

You're still looking at down 30% year on year in April?

Well, yes, but as I mentioned earlier, we can't predict that. Nobody can.

Well (multiple speakers).

We're just going to be ready for whatever happens.

April is a backward-looking number.

It is not looking good.

Understood. You had also, Barclay, in your comments talked about cutting 30% of your workforce, closing/combining facilities. Where? What product lines? And can you put a number around how much savings you think that that pulled out of the system?

I don't want to go into detail yet on that but I would be happy to give you a guess on how much we saved. It will take us just a second to figure that out, but we have got the numbers here.

With the cuts we have made so far with reductions in headcount, with moving our automatic production from our Brea, California facility up to Stockton, with our changes in -- the reduction in the pension plan, reducing CapEx, cutting our budgets for things like advertising, anything we can look at, we think we have identified $67 million in savings to date.

That is an annualized number, Mike?

Yes it is.

Now did that show up in 1Q at all or is that more of a 2Q story, those savings?

Those savings will happen over the year. Those actions have taken, so now if you laid off an employee obviously you won't be paying his salary during the year.

Right. I'm just trying to get a sense if any savings were evident in 1Q.

Not as much of those savings. The majority of those are going to be coming in the future.

And then just finally, on your kind of -- your gross margin comment. The 28% for the year, what does that imply? It's certainly better than -- it implies better quarters ahead of you relative to what we just saw. That is all just improved productivity and production at the plants or better pricing? Why 28% and what drives that improvement versus what we just saw in 1Q?

Bob, at that this point all that can be is a crazy guess.

Understood.

It does focus on the plants increasing their production is what my -- I see.

So it is all just better utilization?

That's correct. And you also have to think about when you talk about laying off the people in the factory it is a double-edged sword. We do save half, but those people were running the factories and we had good factory utilization. And so as those people left we do have to right size our factories, so there is a cost involved in there also.

And just a final one on the Aginco acquisition. You're not seeing a lot of movement on M&A activity in this environment. I am just wondering, you don't have to put a hard number on it. Just anecdotally, the multiples you are paying for this type of business what do they compare to what you paid historically? How are you valuing this business now in what you are calling a depression?

There is a huge difference one to another. And, what we are always looking at number one is not the immediate cost but how we can get a good return on that in the future. And sometimes if it is a small acquisition it may be a couple of years. But there isn't any number you can apply to them all. You can be sure that we're not going to buy anything that isn't good in the long run.

Well, how about why Aginco at this point in the cycle? What are they doing that you had to make a move on them? Was it a valuation type thing or is it some product that you needed to have in France?

Let's take one example, Ahorn. Ahorn has products which really fit right in with our Quik Drive products. And so you get two plus two equals five, but it takes in that case, because this company was not in great shape, and it takes probably and that one, it will be probably a couple of years before it really starts to pay off. That is not unusual.

And Liebig for instance, they had mechanical anchors made to metric standards and that enables us to get started in Europe and it also fits China. So, while we are already starting to make some mechanical anchors in China, they had some code approvals in Europe which helped to market there. And we also learned things about the products that will help us in our production in China. That is kind of just one example. Each acquisition is different.

Right. I think I understand the examples, but maybe how do those analogies apply to Aginco specifically?

I beg your pardon? Oh, Aginco?

Yes.

Well, that one is a little different in that looking at the numbers that we paid for it, you would say that it really, boy, you paid too much. However, our European manager who had really gone into it heavily to find out about this company that did become available to us, he flew over here and the only time he has ever done that. He flew over here to talk to the board about how important it was for our production there, particularly in France for the market.

That is why we bought it. It really helped us in the French market and a little bit elsewhere in Europe. It helped in France a lot. France, for the first time since we bought it years ago, is showing a deficit in both earnings and sales. So, it was really needed and came at just the right time. That one is by itself as a reason.

Thanks for answering my questions.

All right.

Garik Shmois, Longbow Research.

Good morning. Thanks for taking my call. First question is related to the headcount reductions. Are there any charges that you anticipate this year?

For the reductions we have done so far we will incur about $1 million in the second quarter.

And just moving on, Mike, do you have the number for the cash flow from operations on the quarter?

Yes I do. It is slightly less than $1 million.

Lastly, can you talk about the Chinese plant and what you are seeing as far as your production schedule there? If you are hoping to see any offset from China relative to the rest of the footprint and when, as you look out on your projections, when can that plant start to become profitable? I understand that it is not obviously because the -- you just started it up, but any guesses?

That is really a good question and it is impossible at this moment to give you a decent answer. I can tell you that it really, having just come back from there and talked to all our own people, talked to a whole bunch of customers from 10 countries and talking to the governmental people who were there for our festivities, I just feel extremely positive about that operation.

But, we are still working on discovering what products fit that market best and we are only making a fraction of what we're going to end up making in that plant. I haven't got the numbers yet, but I do know the prospects there are just terrific. How soon we will be able to realize profits from it, it is too early to even make a guess.

Can you clarify what a fraction is?

What a fraction is?

The fraction of the utilization.

Oh you mean the percentage of production? Is that what you mean?

Yes.

Well, I guess and just thinking about looking at the plant again in my mind, oh, we are using maybe 20% of it.

Great, thank you very much.

Peter Lisnic, Robert W. Baird.

Quick question, I want to explore the crazy gross margin assumption, per se. At 28%, first question would be -- you run at that rate for the year. My guess is it's probably pretty hard to make money for the full year. So is that a crazy assumption on my part?

The second question is you talk about some of the restructuring you have taken so far and headcount reductions, and moving things around. Are there incremental levers you can pull or are planning to pull as you kind of look at this relatively depressed or dour end market?

Well, I'll answer the first part of the question. Yes, it will be tough to make money this year. Second part I will leave to Mike. The tough part I will leave to him.

We had a plan A and B and we executed those. We do have a plan C already written out and we are deciding as the quarter proceeds and as the year proceeds how we execute on those.

Is there anyway you can maybe quantify the magnitude of plan C relative to a plan A, plan B in terms of potential cost savings and how quickly those might accrue to the bottom line?

No. They can be either small or large and it depends on our view of what is really going to happen with the economy in 2009 and 2010 as we proceed.

And then in terms of utilization, you mentioned utilization in the China plant. I'm just wondering if you can give us a sense as to what utilization is like in the domestic factories, to give us a sense as to what really the underabsorption issues are.

It is pretty low. What do you think it is, Mike?

In Q1 we significantly reduced our factory production, so they were extremely low. I will leave it at that. We are starting to -- that was a conscious decision to reduce inventories. We do have to start utilizing those plants some more, so those will be coming up. That is how I would like to leave that.

As far as China, when we talk about 20% utilization there for the space that Barclay mentioned, when we built that building we identified that we only needed half that space. But we decided to build out the complete land for future growth. So, we made -- again it was a conscious decision to give us some extra capacity there.

All right, that makes sense. Last question I guess, in terms of the pricing environment, given how significant the volume pressures are, could you maybe talk about pricing in the home center channel specifically and then also in other markets as well?

Well, everybody has pressure on us for pricing, of course we are in a recession or some say a depression. So, the pressure is on all the time. And of course the price of steel has gone down. So, just exactly how that is all going to come out, I can't say right now. I can say, though, that we are going to have to lower some prices in all probability.

Will that just be a function of materials cost or is that a competitive response?

Both.

All right, I appreciate the answers. Thank you very much.

You're welcome.

Steven Chercover, D.A. Davidson.

Couple of quick questions. Some of my questions have already been answered. Did you give us operating earnings for both Strong-Tie and Dura-Vent? I think you said Dura-Vent was a $2.2 million loss. What was Strong-Tie?

Income from operations for connector products was negative $7.088 million.

$7.088 million?

And bending products was a negative [$3.259 million].

$3.259 million, thanks.

And Barclay gave you the after-tax number.

Got you. Okay, is it possible to identify the customer that went bankrupt?

Who knows.

We would prefer not to, although it is public information.

Okay, you discussed acquisitions a little bit. I'm just wondering if this might not be an opportunity to accelerate deals, given your balance sheet and the fact that some targets might be in distress.

Steve, we are not going to change our general principles in figuring out acquisitions to buy. And of course, we are getting more possibilities all of the time. But usually the reason is something that is not too positive.

So, I expect that we will continue to make acquisitions. Whether we will find that one sizable one that contributes significantly immediately to profits, which if it is sizable it would have to, who knows. But, that is something we are not cutting back on costs. In fact, we are increasing our costs and using outside people to help us look at acquisitions.

Finally, you declined to quantify what the negative impact of China was. But absent those start-up costs, which I think other companies might have called out just in order to make the ongoing operations look better, do you think you would have been profitable without those costs?

Well, no.

Okay, thanks. Good luck this year.

Okay, thank you Steve.

Jim Wilson, JMP Securities.

I was wondering first looking at what you saw this quarter and so far in talking with your distributors, is it worse on the commercial construction side or the residential or just equally bad all around?

Well, the commercial has pretty much caught up with the residential in the wrong sense. And, they are both, we are not seeing a turnaround yet in either.

It appears certainly the commercial building is coming to a complete standstill. But what I was wondering going forward, so my other question is, with all the potential for infrastructure spending and the dollars being allocated or presumably by the federal government, what do you think -- where are the opportunities for Simpson and what can be a role in infrastructure rebuilding around the country?

At this point we really can't give you a good answer on that. Of course, if there are a lot of roads and bridges built, why, our epoxies and mechanical anchors are used there. If they help a lot with mortgages, why, perhaps that gets housing back to going. But at this point, any guess doesn't mean too much.

Fair enough. Thanks.

Keith Johnson, Morgan Keegan.

Covered most of the questions. I guess, one just back to sales by region, I may have missed it. I didn't jot down in my notes how the Northeast did year-over-year in the first quarter.

Right, that wasn't asked. It was down 23%.

Okay. If we look at utilization rates again, I guess you made the comment that you kind of ratcheted back some more in the first quarter. How did that look sequentially as you came from the December quarter, your utilization rates then to where you're now operating in the first quarter?

What do you think, Mike?

From Q4, I mean Q1 they definitely declined significantly as we made an assessment of the economy. As I said, they are starting to go up now. The challenge for us is, as we see a slight increase in demand versus Q1, a lot of people are not carrying inventory. Is there a small inventory buy going on or is this really the economy getting better? And that is very difficult to say.

I just want to make sure I understood. The annualized savings from the latest round of cost reductions, did you say $60 million?

$67 million.

$67 milion, okay, and could you help me understand a little bit better the timing? I think you described it as an A plan that you did, a B plan and then you still have a C plan in reserve. But the timing of how the changes of A and then B occurred as we come through the last few quarters?

The layoffs occurred really primarily over the last nine months as we picked up more in Q4 into Q1. The pension plan reduction was decided by the Board in the first quarter. The home office cut their budget here substantially. We identified all those areas and we're ahead of track for that for the year right now.

Europe has done similar reductions and all those actions have already been taken. Those happened in Q4 and Q1 again. We delayed some software deployments, so, again a savings there, so we are not spending that money. So, we -- Q4 and Q1 was -- I would say more of an emphasis in Q1.

And, I guess given the end market demand environment, have you guys gotten back into the steel market in any way over the last several months?

No.

And I just want to make sure I understood your comments related to steel and gross margins. I guess I would have -- in my mind I had thought that maybe there was some impact on your gross margins as you kind of dealt with some higher cost steel that may have been layered on three or four or five months ago.

Yes. That is a factor.

Okay, so when I look at a 25.7% gross margin, there is some impact because of the timing of cost coming out of inventory versus what is going on in the market?

Correct.

So if we kind of look forward in a more stabilized environment, a much lower steel price environment as inventories correct themselves would we -- I mean is there the potential in that scenario that you see your margin start expanding again?

Well, it is out a ways because we are not going to get rid of the high-priced steel right away. It is going to take several months yet.

You know, this is part of our constant culture that we are never going to run out. That, one thing that our customers can count on, that if one of their customers has a job site where they have forgotten to order the connectors or whatever, they don't have them there and they have carpenters they are paying, we want to be able to get the goods there in a hurry. So we are not going to run out.

Now, that does when something like this happens, when steel -- the demand goes down and the price goes down, that hurts, yes.

Okay. All right, thank you for the answers.

Right.

John Koehler, Oppenheimer & Close.

Maybe I missed this but I was wondering if you had a breakout of the US business percent of commercial versus residential?

No we don't. The problem there is the vast majority of our distributors sell everybody. And they don't keep track for us. So, we don't really have accurate numbers on that.

And as a shareholder I appreciate the long-term focus. Keep up the good work.

Thank you. Just coming back from China, I have not been this excited about the future in a while.

(Operator Instructions). Barry Vogel, Barry Vogel and Associates.

I knew you would be back, Barry.

Mike, I have a couple of little questions for you. The Aginco, I would assume since it was done in April, but I'm not sure, that transaction was not on your balance sheet as of March 31?

That's correct.

Second thing, on the first quarter of '09, can you give us any general idea of the impact of Liebig and Ahorn on your operating profits?

Well, they are negative.

Can you give us an idea of the amount of negative?

No. I can't do that right now, Barry.

All right, thank you very much.

[Chris Harrell, Capital Asset].

I wanted to clarify something. I thought that Mike said earlier that the gross margins were primarily or perhaps totally driven by the underabsorption rather than passing through the high steel costs. And then I think you just said that the high steel costs were in fact impacting gross margin. I wonder if the two of you could clarify what was impacting gross margins?

I don't think Mike said they weren't.

The majority of the impact on the margins was due to the underabsorption. As I mentioned last quarter, I believe, is that the price of steel did go up and in 2008 we were able to raise prices to compensate for that.

Right.

So those price increases have taken care of that for this quarter; Q1 as well.

So, it sounds like the high steel costs are not a factor in gross margin in any significant way?

Not in any significant way.

Okay, that's what I was trying to clarify. I was confused by the last answer. Okay, thanks.

And it appears we have no further questions at this time, Mr. Simpson.

Okay, thank you.

This does conclude today's program. We thank you so much for your participation today and you have a great day.