Simpson Manufacturing Co Inc (SSD) 2009 Q2 法說會逐字稿

Good day, and welcome to the Simpson Manufacturing Company Second Quarter 2009 Earnings Conference Call. I would like to turn the meeting over to your Chairman, Mr. Barclay Simpson. Please go ahead, sir.

Thank you, and good morning, everybody, and thanks for joining our new CFO, Karen Colonias, and myself. Karen, who joined us 25 years ago with an engineering degree, has had a world of varied experience here including being manager for the past five years of our largest manufacturing branch in Stockton, California. Well, the second quarter saw considerable efforts and expenditures to cause Simpson Company to become much more international in the next few years and less dependent on US housing starts.

We opened our first manufacturing plant in China and had customers from ten different Asian countries attending, and across the world in Western and Eastern Europe we expanded operations and we integrated the operations of Liebig, or we are integrating of Liebig and Ahorn, each of which gave us new products for those markets, and others such as Australia where we now have sales and warehouse operations that will serve other areas as well. Ahorn also provided us a warehouse in the Czech Republic, which we have converted to serve Eastern Europe.

These activities designed to build the long-range future of the Company are going to be costly for some time. However, despite US housing starts becoming something like 30% of what they were just three years ago, in our second quarter we were able to absorb the cost of the building for the future and still show a profit. But please do not misunderstand our goals. We are most unhappy seeing our sales and profits go down rather than up and having to a let a bunch of first class people go.

And while there are no sure things, time frames are hard to predict in such worldwide uncertain economic times, we think that we have the people and the financial resources to get us back to increasing sales and earnings. Now, if that turns out to be correct, of course the major question is when and there are just too many variable for us to make projections yet. I hope that maybe in another year that enough of these will be clear so that we can make some projections that I can give out to you.

Not incidentally, and in case some of you are wondering what happened to Mike Herbert, our ex-CFO, he agreed to become Vice President of International Operations, the wave of the future. Gross margin in the quarter came back from the first quarter's to 36.9% due to both overhead absorption and various cost cutting measures starting to have an effect. However, the 24% decrease in sales compared to last year cut our profits by 48%. Both Europe and Canada lost money.

Dura-Vent sales, thanks to the ProTech acquisition were the same as last year and the loss was considerably less. However, this quarter Dura-Vent sales are down. So we continue to work on ways to get Dura-Vent back to being profitable. Home Center sales, contrary to new housing numbers, are up 3% in the quarter. Aside from better sales and merchandising efforts, that probably is an indicator that an increasing percentage of Home Center sales of Simpson products are to individuals doing their own remodeling in these tough times.

As usual, we're looking at several promising acquisitions both in Europe and the US, but none is in the final stage as yet. We remain cautious and really detailed in our studies of potential acquisitions. After all, most are not for sale because of outstanding success and integrating an acquisition almost invariably is more costly than anticipated. You get surprises and they're on the downside. But regardless of continuing tough economic conditions in what have been our major markets, the US and Europe, we remain confident that our geographical and product expansion will get us back to increased sales and earnings regardless of US housing starts. Once again, the big unknown is of course the time factor.

Okay, we're ready to take questions.

(Operator Instructions) Our first question comes from Arnie Ursaner with CJS Securities. Go ahead, please.

That's Arnie. How are you, Arnie?

Barc, good morning to you. How are you?

Good.

You've obviously highlighted international. Could you provide us the international sales as a percent of the total, please?

Yes, they remain around 23%.

Okay, and any major variations in terms of growth rates in Europe versus the US, or -- ?

No, Europe, the UK in particular, they're worse than we are. However, on the average it's about the same.

Okay, you also mentioned in your prepared remarks that you, in the press release, that you had focused on inventory reduction, which was down 24%. But that's basically in line with the sales decline. Could you comment a little more on what you have in inventory, work in process versus raw steel and the price of steel in your inventory?

Karen, can you help out there?

Well, the -- we still have very expensive bill (ph) in our inventory. We're still working through the material from several months ago. The breakdown from raw material to finished goods, we're working down both of those when we talk about our inventory adjustment. Because we haven't purchased steel in several months, you are seeing some of the raw material reduced and certainly you're seeing a slight uptick in reduction of some of our finished goods.

And the raw material you mentioned at higher cost, is it higher than the current -- the steel you have in your inventory, is that higher than the current spot price?

Yes, it is.

Okay, so that is negatively impacting your margin currently?

Yes, it is.

Okay, and that's my final question kind of leads into it. You don't provide formal guidance but in the Q1 conference call you spoke about margins in the 27% range and obviously this quarter blew that number apart. Can you comment on some of the factors that caused the dramatic improvement in margin versus what you thought three months ago, and are they sustainable?

Well, yes, I think they're sustainable. A major part of it was the -- we've let about 30% of our people we've had to let go and you have some initial cost there, and we're getting through those now. So our best estimates as to what the gross margin is going to be is probably around 35%. So it will be continuous.

Again, that's almost 800 basis points than what you had mentioned in Q1. So --

I know.

But that's more than just cost cutting. There has to be some other factors involved. You did change the way you were accounting for your inventory to average cost, didn't you?

The inventory has been on average weighted cost. So that's not a change in how we evaluate the inventory. But as Barclay mentioned, the -- a major impact was overhead absorption that was what really helped on our margins, as well as the cost cutting measures that we put in place, we're seeing some of the impact of those now helping out on the margin side.

Okay, thank you very much.

Okay, Arnie.

Thank you. Our next question comes from Garik Shmois with Longbow Research.

Good morning.

First question, could you provide the income from operations from Connectors versus Dura-Vent?

Yes, it remains roughly, I think it was 89% Connectors and about 11% Dura-Vent.

Yes, the operating income from Connectors was about $20.7 million and the operating loss from Dura-Vent just over $1 million.

Okay, and the slight revenue growth in the quarter in Dura-Vent, you mentioned it coming down here in the third quarter, but if we look back, was it mainly due to the increased sales in the chimney and pellet vents, or was it mostly due to the acquisition of ProTech coming?

It was due to ProTech.

Okay, and can you just talk about the trends that you're seeing I guess as you moved through the second quarter and maybe if you could comment a little bit what you're seeing here in the beginning of the third quarter on sales trends. Are you seeing, I guess, stabilization, meaning that year-over-year declines, I guess, became less severe as you moved through the second quarter here into the third quarter?

Well, we're not seeing anything that says that housing starts have flipped around. We just aren't and until our international operations get to really making money for us, why, we will remain dependent, too much, on US housing starts, and that's going to take, oh, maybe two or three years.

Okay, and just lastly on pricing, can you just talk about some -- your pricing strategies, if you expect steel prices to increase in the near term your ability to pull some levers in getting better pricing to offset the higher raw material cost that you anticipate?

Well, I think we've found out over time that predicting the price of steel might be a little bit easier than predicting what's going to happen to the stock market, but not a lot. So we don't count on being able to guess. We make the effort. We'll buy if we think it's going to go up and we won't if we think it's going to go down, but predicting that's extremely tough.

Okay, thank you very much.

Thank you. Our next question comes from Barry Vogel with Barry Vogel and Associates. Go ahead, sir.

How are you, Barry?

Good morning ladies and gentlemen. Good morning, Karen. Barclay, can you give us the percentage change of revenues in the quarter versus last year starting out with the West, excluding California?

Okay, excluding California, the West in the quarter was down 32%.

And California?

No, in the West.

Oh yes, and the next one, California alone?

California alone, minus 27%.

And the South, Southeast?

South, Southeast was minus 28%.

And the Midwest?

Midwest, minus 13%, and the Northeast, minus 13%.

Okay, and on that same tactic, you said Home Centers were up 3%. Could you tell us what the largest customers are?

Tell you what?

What your largest customer change was in revenues?

No.

You're not going to tell us?

No.

Okay, and I'm going to ask Karen to answer the next question. Can you tell us what the strong wall revenues were or the percentage change versus last year?

Strong walls were down 40%.

And anchoring systems?

Down 20%.

And Europe?

And Europe was down 27%.

Okay, now Karen, could you give us, and I know this question's been asked before, particularly the last conference call. You've made a number of small acquisitions in the last year. One was Liebig, one was ProTech, one was Ahorn, and recently the French company. Could you give us some idea of those four acquisitions combined, what the revenues were in this quarter, and I believe, tell me if I'm wrong, well are they all in the Connectors or are they split up in a different fashion?

Well, they're split all over the place and we just don't have them separated out. Because we're in the process of integrating them, we just can't give you numbers right now that make much sense. If you ask us a year from now, we can.

Okay, now Barclay, your inventories have come down nicely in my opinion and they were down to 190 from 252 at the end of December, and I guess that's what happens when you don't buy any more steel. Do you expect inventories to work their way lower by the end of the year? And if so, to what approximate level?

What do you think, Karen?

Well, we're still working on reducing our inventory levels. Certainly, we'd like to try and keep that trending down for a little bit longer. As we run through some of our steel, we'll obviously have to purchase some more steel. So I would say the raw materials might increase slightly, but we are still working on getting to our finished goods and with our lean principles that we're putting in place, we are really looking at trying to always have the product we need for the customers, but certainly be very diligent on how we maintain our inventory levels.

So what's your best guess for that number at the end of the year? It's 190 at the end of June.

Oh, that's a tough one, Barry.

I know it's a tough one. What do you want, softball?

No, but I think any estimate there is what's going to happen to the stock market.

No, no, but it will be lower, Karen?

Yes, we will continue to work on that number getting lower.

Okay, now as far as again those four acquisitions, did they negatively effect your operating profit in the quarter?

Oh, definitely.

Can you give us some idea?

Oh, well several million dollars.

And, okay, and could you tell us about what China cost you in the quarter and the first half?

Don't have those numbers clear yet.

All right, are you increasing your revenues out of that plant every week?

Well, we're increasing them, yes, and if you look at the percentages, our business there is up, oh maybe 800%. However, when you start out with very, very little, you can show those rate increases. As yet, it is not significant as a part of the total and I do not think it will be until next year.

All right, thank you very much.

Okay, Barry.

Thank you. Our next call comes from Steve Chercover with DA Davidson. Go ahead, please.

How are you, Steve?

I'm well. How are you, Barc?

Good.

Good. Some of my questions have already been answered, but we've discussed steel a little bit. Can you talk about the other input, like chemicals that go into your poxies (ph) and resins? Are they coming down as well and is it meaningful?

Well, the chemicals are tightly tied into what we're seeing on the oil cost and those are sort of leveling out. We're not seeing that spiking every day. SO that's one of the main components that are associated with the chemical cost. So they've stayed pretty consistent.

Okay, and it sounds like you're just launching into a lean principle initiation. What are your objectives? Can you quantify what you think you might be able to obtain?

Well, at this stage we've done some training in all of our manufacturing branches and certainly our China facility was put in place with lean principle concepts in place. We're certainly looking at being able to be more efficient on our changeover and producing products in their byline is not to have to create so much finished good inventory. So we're really looking at changeover time as a key element on our lean manufacturing process.

I think these initiatives can be powerful, but I think you also have to benchmark. So will you give us some sort of scorecard quarter to quarter on how it's progressing?

Yes, I think at this stage it's a little too early to be able to give a scorecard because we had just really started the orientation and the training at each of the locations. So we certainly have not been able to, as yet, benchmark an increase or an improvement.

Okay and final question, maybe it's more strategic. We know that you want to be less dependent on US housing starts and clearly China's part of your initiative. Are there any other product lines that you'd like to get into, whether it would be commercial or kind of drywall fasteners, things like that?

Well, might be able to give you a better answer next week because this weekend we have our annual what we call advance, other people call it retreat, and with the outside members of the board, six of them, six out of eight. And they are going to work on coming up with ideas on new directions to go, and exactly what we'll come up with I don't know but it's going to be a little different.

Right now, we're just looking for products that fit in with our sales and merchandising abilities and that can add to our presence in any geographical area. But we're not doing anything that is really very innovative, and we are hoping that this weekend we may get some ideas that are innovative. We'll see.

Well, last question and then I'll turn it over. Would any of the acquisitions that you're currently pursuing surprise us because they are different lines of business than you're currently in?

Well, yes, there's one of them that might and I can't go into any detail yet, but yes.

Okay, well, we'll wait with baited breath. Thanks, Barc.

Okay.

Thank you. Our next question comes from Trey Grooms with Stephens.

Hello, Trey.

Good morning. A couple of quick questions. Last quarter, you guys had talked about the cost saving initiative that you'd put in place, and I think you referred to them as A and B and they were expected to net you $67 million in savings, but that there was also a third initiative that could be put in place if needed. Could you give us your current standing towards this third leg and kind of what kind of potential savings that could be?

Yes, as we talked about last quarter we had plan A and B, which have both been put in place. Plan C is something that we put on paper and discussed, and really at this point we're not taking any actions toward plan C yet. And so we will basically just watch what's going on with the market and how things are going in our industry, but we are not currently pursuing anything further on Plan C at this time.

Okay, could you tell us what you would have to see in order to implement this plan C?

Well, I think we will continue to maintain the things we put in place with plan A and B, which of course is every month we look at where our spendings are in each department and we've tracked that very carefully. We will certainly continue to do and look at those things and see how things are trending in the market. But I think to, at this time it's a little bit difficult to say when exactly we would start looking at implementing plan C. I think we're pretty happy with how we've been able to implement our first two stages of reduction and certainly are watching those, as I mentioned, every quarter to make sure that we're maintaining that status of reduction.

Okay, could you just give us some idea, is this plan C more focused on international or is it more focused on domestic?

Well, it's a mix, a real mix.

Okay, could you give us an idea of how much of the cost savings from that $67 million from A and B, how much of these cost savings you realized in the second quarter?

I think that's extremely difficult to do.

I mean, are we getting close to a run rate now that could bring us to the $67 million, or is this something that will take some time to roll out?

Well, at this point the $67 million on cost savings may have been implemented. We talked about our last layoff happened around the 11th of April. So the cost savings, the reduction in the pension plan that we talked about, certainly our CapEx reductions and the people reductions at many locations, those have all been put in place and have been. So we are seeing, as we mentioned, when you look at our improvement on gross margin, you are seeing some impact from those cost savings taking effect here in the second quarter.

Okay, and then if you could, how much of the sequential margin improvement was due to the better utilization rates in the quarter?

That's a tough one.

That's a tough one? Okay. I guess the last question, last quarter in the Q you said pricing was up 22% year-over-year. Is that continuing to hold up or are you guys still seeing the pricing pressure that you saw earlier in the year?

Well, you see pricing pressure -- when the economy goes down, pricing pressure goes up and that's not going to change. So yes, it's very strong, but you either have the, either the customer can make enough money off using your product in relation to anything else that might be available, or no.

And our position in the industry in structural connectors is such that we have a much wider group of products. We have locations all the way around the country so that we are usually pretty close with product to a building site and all those other things that make us the leader, they help us to maintain prices. But if our costs really go down, we'll lower our prices. And if they go up, we have to raise them.

Okay, and I'm sorry, I do have one other one. So there was some talk earlier about steel and I think in the press release, the comment was that you expect steel prices to move up with an improving demand picture, but so currently the lower level steel prices that are out there now, are you guys starting to take advantage of these lower prices at all in buying Dutch steel at any degree?

Yes, we are.

Perfect. Thank you, guys.

Thank you. Our next question comes from Robert Kelly with Sidoti. Go ahead, please.

Hi, Robert.

Good morning, Barc. Good morning, Karen. Just, you might have said this already. If you could just repeat the utilization during 2Q.

We didn't mention what the utilization was.

You had talked about running 40% to 50% for the full year. IS that still the goal to reduce inventory?

Well, the goal is still to reduce inventory and the -- we're obviously running the plants more than we were in the first quarter, again, based on the getting some overhead absorption here. But I don't think we talked about the utilization at 40% or 50%. Certainly, again, the plants are being used more than they were in the first quarter.

Is it up meaningfully from 1Q or just a typical seasonal increase?

I think you're seeing a typical, you know, historically the second and third quarter have been our busiest.

Okay, so as far as July trends, are you -- I know someone asked if you were seeing the same kind of deterioration, but on a sequential basis versus, I don't know, May and June, are we up, down in July to the first couple weeks?

Well, it's actually not up. It's down in relation to last year, not quite as much.

I was referring more to May-June. On a month-to-month, are you seeing stabilization up, down? Just trying to get a sense of how we're flowing through the summer.

No, not really.

Kind of static, okay. The high cost steel inventory that you had kind of talked about for the past couple quarters, and now we're at a lower level of steel that you can go out and potentially purchase, when does the lower level of steel begin to show up in your margins?

Right now.

You see it immediately?

Yes.

Was that an impact in 2Q?

It did, yes.

So just, I think a lot of the questions are surrounding the vast improvement in 2Q versus 1Q in your gross margin and matching it up against what you had said coming out of 1Q, running at low utilization and high cost steel being an impact. The --

No, the change in steel as a percentage of total cost was very little.

Okay. I mean the question I guess it raises is when we get back to some normal level of housing activity, is Simpson now a 45 or greater percent gross margin company based on the cost action you've taken in response to the downturn?

Well, I guess we're not waiting for any turnaround in US housing. We're pushing very hard to become more and more international and is US housing turns around, we're ready, but we're not going to sit around waiting for it.

Okay, it just seems like there's significant headwinds on you. You talk about your international operation losing money, reduced utilization from a year ago, it seems like you've raised the bar for future profitability. Is that the case?

You mean on international?

Across the board.

Well, yes, certainly. All these things that we're doing and just spending money on right now around the world, certainly the purpose is to make those things profitable and we'll get there. But it's going to take a while.

Okay, thanks, Barc.

Thank you. Our next question comes from Keith Johnson with Morgan Keegan.

Hello, Keith.

Hey, good morning. Just I guess you covered a lot of the questions. Maybe just a quick housekeeping question on the tax rate and I guess there was evaluation differences and things like that to push it up in the second quarter. How should we look at it through the rest of the year?

Well, I think, again, on the uncertainties that we're seeing in the construction market, it's not really possible for us to give an estimate of tax rate at this time.

Okay, and then correct me if I'm wrong, but if I remember in the first quarter call right, you guys may have talked about that there were going to be some expenses associated with some of these restructuring steps in the second quarter. Were there any dollars you can point to that were kind of one time related to some of your cost cutting steps, et cetera?

Yes, in the second quarter we had the main charge was the severance. We had slightly over $1 million of severance.

Okay. Now, how much was that in the first quarter?

In the first quarter, it was about $300,000.

Okay. Okay, and then on the Home Centers, I guess sales up 3% year-over-year. Was that, you think as well, on top of the better merchandising, et cetera, was there an inventory shift I guess within that channel that may have gotten too low in the first quarter, built it back up in the second quarter?

No. No, there wasn't any real change.

But then in the broader end channels, inventories, was there material change in what you guys saw, the way -- ?

Well, there are constant changes.

Of course.

And we are constantly, also, working on getting more of products into the Home Centers and we're having some success there.

Okay, I think that kind of covers it for me. Thanks.

Thank you. Our next question comes from Peter Lisnic with Robert W. Baird.

Hello, Peter.

Hi, good morning. This is actually Josh Chan on for Pete. You guys did a pretty good margin on the Connector products, but do you think that low to mid teens margin is sustainable kind of for the rest of the year?

Which is sustainable?

Your operating margin at Connector products.

Oh, probably, yes, but it's -- so much depends on the market itself and we haven't seen any change there. So it, well it may or may not be. I think if you have to make a guess, yes.

Okay, and then are you seeing -- how much of an impact was the increased penetration in your Home Center customer this quarter?

How much impact?

Yes.

Well, Home Centers, you mean as a total of our sales or as profits, or what?

Or your percentage change in revenue, how much of that was impacted by you just having more products at Home Centers?

Oh, don't have a number on that.

Okay, great. Thank you very much.

Thank you. Our next question comes from Alan Robinson with Royal Bank of Canada. Go ahead, please.

Good morning, everybody.

Good morning, Alan.

Could I just have you clarify a little on one of your previous comments? Are you currently buying steel now or is that something that's going to be waiting until the end of the year?

Are we buying any now?

We are buying some steel, replacing the steel that we've been using, yes.

Okay, but you still expect your total inventories to be lower at the end of 4Q than they were at the end of 2Q. Is that correct?

No, I think we will be purchasing some more steel. We will see mix of it to try and reduce it, yes, between the finished goods and raw materials.

Oh, I see. Okay, okay, so your total inventory levels may well be higher at the end of the year than they were at the end of the second quarter?

No, I think we will be working on those, the total inventories to be continuing to be going down.

Oh, they will be going down. Okay, thank you. And then I guess if cost absorption was a key driver of your gross margin increase in the quarter, then all other things being equal, approximately what kind of revenue run rate would you need to get to a 40% gross margin?

Oh, man. That's, Alan, that's a tough question.

Well, can I rephrase it perhaps. I mean, you run a gross margin this quarter not a million miles away from what we saw in the second quarter of '08, and yet back then you were pushing revenue over $200 million. So I mean if and when we get back to that $200 million quarterly revenue run rate, what kind of gross margin impact should we expect? I mean, qualitatively perhaps, are we going to be flat compared to what we saw this quarter, 165, or are we going to be significantly higher given the cost savings you made. It's just a little difficult for us to figure given the significant restructuring you have made, obviously.

Well, I don't think that it's realistic when you are expanding into markets where you haven't been and you have costs there, and you're finding out how to do things economically in a particular market to expect us to go back up to 40% isn't realistic in the short run at all, and by short run I mean two or three years. Because we aren't focused on the short run profit. We're focused on the long run.

Okay, no that's fair. So if we do -- so I guess what you're saying in some ways is that we're coming to the limit of this GM expansion in terms of the cost absorption that you can achieve?

Uh-huh.

Okay, that's useful. Thank you. And then you talked about obviously the $67 million of cost savings last quarter. What is the approximate split between savings on the gross margin line and savings on the operating margin line?

We did not break that up.

Is it mainly operating margin type savings or are they equally split, roughly?

It's a pretty equal split.

Okay, that's useful. And then finally, in your prepared remarks, Barclay, you referred to the costliness of your international operations. What are some of the specific investments you intend to continue to make with respect to these international operations?

Well, for instance, we just opened up a 175,000 square foot plant in China and at the moment, we're using about 20% of the space. And as our sales force there finds out in all the different areas of China and Asia just what products are needed, then we'll use the rest of that space. But it's going to take time. And just generally getting familiar in markets where we haven't been in any volume at all, it takes time and we're willing to spend it, and the money, but don't expect a short-term return.

Okay, that's very useful. Thank you.

Thank you. (Operator Instructions) And our next question comes from Barry Vogel with Barry Vogel and Associates.

Karen, could you give us a good estimate of what your capital expenditures are going to be this year as well as your depreciation and amortization? That's my first follow-up.

The CapEx is $16 million.

And D&A?

$29 million.

And could you give us the number of employees at the end of the first and second quarter?

The end of -- the end of the second quarter, 2,188.

The end of the first quarter?

The end of the first quarter -- end of first quarter, 2,270.

Thank you very much.

Thank you. At this time, there are no further questions in queue. (Operator Instructions) It appears there are no further questions at this time. I'd like to turn it back to our speakers for any closing remarks.

Okay, well thank you all and here's to the future.

This concludes today's conference call. You may disconnect your lines at any time. We thank you for joining us and enjoy the rest of your day.