Simpson Manufacturing Co Inc (SSD) 2009 Q3 法說會逐字稿

Good day, and welcome to the Simpson Manufacturing Company third 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 CFO, Karen Colonias, and myself. Before discussing the third quarter results, I want to tell you about a stock transaction that I may have to make before the end of the year. I made a charitable commitment to my university, UC Berkeley, several years ago, and it's time to pay it off. The donation will be something like 600,000 shares of SSD. Okay. Enough of that. I have no other charitable commitments that I need to sell stock to fulfill -- and I'm not selling the stock, I'm giving the stock to the charity. Well, we're not happy about our third quarter results. We're never happy if it doesn't beat the prior year's results.

And on the plus side, the cost that we have felt obliged to do has enabled us to make money even though our major market, US housing starts, remains at something like 70% down from three years ago, and as yet, our sales people are not seeing signs of a recovery. When it comes, we'll be ready, but we're not going to sit around waiting for something over which we have no control. In the meantime, we continue to develop new products internally. Recently, a group of structural connector fasteners designed to replace the billions of fasteners now supplied by others, and a bunch of other new products every year. Home center sales for the year were down only 9%, which would appear to indicate that sales for other than new housing are significant. As most of you know, our major objective is to become more and more of an international Company, and we're making progress. For example, in order to better serve the Middle East and Asia, in December, we're opening a sales office and warehouse in Dubai.

In Europe, despite the economies there being in rather bad shape and our sales being off 23%, we made a profit, and the fourth quarter is off to a good start. The costs of integrating Agency, Liebig and Ahorn are pretty much behind us, and their products should start to have a positive effect on sales. Not on profits yet, but on sales. Our long-range target is Eastern Europe, and from our operations in Poland and in the Czech republic, we're making progress. But it's going to take time to be really significant. China's coming along, but like Eastern Europe, it's going to take a while to figure out the product for that huge market, to develop relationships with potential customers and to get the tooling made to manufacture them there.

But like Eastern Europe, we have a bunch of first class people working on it, and the basics are roughly the same as made us the leader in both the US and Western Europe despite a considerable difference in products in those two, and China probably will be like that. Dura-Vent, which has cut our profits by over $2.5 million this year, actually contributed a small amount to profits in the third quarter. But we're still looking at it and figuring out just exactly how to develop it. A plus is that our cost-cutting measures have kept our gross margin around 36%, but I understand that not all of you were happy with that, that you expected it to be a little larger.

We actually feel pretty good about it because with that kind of margin, we can spend the money to become more and more international and still make a profit while we're establishing a strong position in future major markets. On the acquisition side, as usual, we're looking at several potentials, but none where we have enough information to make an offer as yet. However, unlike many companies that depend on new construction, we've kept a strong financial position so we can take advantage of acquisition opportunities. So, questions?

Thank you. (Operator Instructions). Our first question comes from Arne Ursaner with CJS Securities.

Arnie Ursaner, yes. Good morning, Arne, again.

Barc, how are you? Good morning.

Okay.

Can you give us the percent of revenues and profits from international, please?

Okay. Karen, have you got that?

And if you can, separate out China or give us a sense of the magnitude of the losses you're incurring there?

The magnitude of losses are not cutting down there yet in China, and it's pretty substantial. I don't have exact numbers because we haven't got them really separated out yet.

Okay.

Revenue is 22% -- and getting the profit number here, in just a second.

Okay. While your doing that, Karen, if I can, let me ask Barc a different question. As you think about seasonality in your business, typically you get some activity if there's hurricanes or other events that occur in this time of the year. We don't seem to have had a very strong hurricane season. Going into the winter, I'm assuming both you and your customers going into that period are looking to reduce your inventories. Can you give us a feel as best you can for your inventory levels going into the seasonally slow period and your customer inventories going into this period?

Right. Karen, you want to take that?

Sure. Let me finish up the first question. So profits for international pretty much flat. Revenue 22%, profit level flat.

Flat meaning similar percent? Of -- similar percent of the overall Company?

They're looking at those numbers.

I'm just trying to understand what flat means.

Oh, sure.

I assume it's the same percent of revenue, but I want to be clear on that.

Right. And we lost some money in Asia.

Lost money in Asia. We made a little bit in Europe.

Right.

But as a percent of the profitability of the Company, it's much less than the 22%?

Oh, yes.

Right.

What is the percent these days? Can you give us a feel for that?

Well, it's very low. Very low.

Okay. Okay. And going back to the seasonality and inventory question?

Yes. Our inventories -- we're at a level at this point where we need to start building inventory. As you -- we are pretty seasonal, and fourth quarter is typically a slow time based on winter conditions that happened in the Northeast, and it's just typically a slower time. However, we don't think there's a lot of inventory in the pipeline with our customers, and it does take a little time for us to build inventories. So we will be looking at fourth quarter to build some inventory so that we will be able it take care of any customer demands as they come into the first and second quarter.

Would you expect your facility utilization to be higher or lower than it was in Q3 and the impact that Could have on your margin?

I would expect that it would be similar to Q3, so it will help cover our overhead absorption.

Okay. Thank you very much.

Yes.

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

Good morning, Trey.

Good morning, Barc, and good morning, Karen.

Good morning.

Okay, so just to touch on China. I know that you said at one point, I guess a quarter or two ago, that the plant there was only about 20% full or 20% utilized. Do you guys have a goal of kind of when you want to get that plant full and fully utilized? Do you have an internal goal set for that?

Oh, yes. We have an internal goal, which at this point, we don't have enough information, so that that goal is -- really has enough behind it. So I don't want to discuss it. I can tell you that we're going to make every effort to get that plant going as quickly as possible.

Okay. Well, and then, Arne asked about the drag, I guess, you're seeing from China on profitability. And I guess we can't get that number currently, but can you give us a sense for, do you think that that will be a -- less of a drag in 2010 or more of a drag in 2010 based on kind of overhead or sales people you might be hiring, et cetera?

Well, right now, I'd be surprised if it's considerably less drag in 2010. I think it may be somewhat similar because we're not cutting back to make current profits better in things that are important for the long run, and certainly China is very important for the long run. So we're spending there.

Okay. And --

And we'll continue to spend to develop that market to find out exactly what products we need to make there and to get them going as quickly as possible, even though at the very start we lose money on them.

Right. And just to try to get a broad sense of maybe the amount of losses you're experiencing there. I mean, you say you didn't break it out exactly. But I mean, is it 5 million a quarter, 10 million? I mean, is it -- just kind of a range? Could you give us just some sense there?

Well, let's see. What do you think the range is, Karen?

It's less than 5 million a quarter.

Okay. Thank you for that. Just one last question on steel. Last quarter, you said that you were in the market buying some steel with the prices being lower. And with prices -- with steel prices moving up, are you getting more or less aggressive in the steel buying now? And then what kind of impact did you guys see from lower steel in the third quarter?

Well, we -- as yet, we've had very little impact from lower steel. We think that in the fourth quarter we'll have some impact, but as yet, not significant. And we're not -- it's very hard to -- it's kind of like trying to predict the stock market, trying to predict the price of steel these days, and we've got a very smart lady in charge of buying our steel for many years, and she has great relations with the steel mills. And still, you do occasionally make mistakes and pile it up -- which we did last year -- pile it up for the future because your afraid it's going to go up more, and it doesn't. And now the other way, we have a very strong inventory of steel now at relatively low cost, but we're still using steel at high cost. So it hasn't affected us much yet.

Okay, and then I do have one final question. Barc, last quarter you said for the full year you thought that gross margin might come in about 35% for the year. Is that still your current expectation?

Well, maybe that or a point higher.

Okay, perfect. Thanks, guys.

Okay, Trey.

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

Hello, Keith.

Hey, good morning. Hope you're doing well this morning.

Well, yes!

Good.

Yes, sales aren't as good as I'd like to see, but otherwise.

They'll come around.

Yes.

Just kind of following up on Trey's question on steel, just to make sure I understand correctly. If I look at some of the published steel indexes -- of course this isn't in detail based on the steel that you buy -- but some of then indexes show that steel and North America sort of bottom in the June, July time period and has steadily risen as we've come into winter. Is that consistent with, I guess, what you guys have been experiencing?

Yes.

And you use a weighted average cost to do your steel inventory and to your costs of production?

Yes.

So --

But we buy it in big coils.

Right.

And until we cut those coils to fit a particular product, it isn't part of the cost structure.

Okay. And so that low-cost steel, is there a way you could give us a little color on kind of in the amount of inventory or how it's kind of being weighted with the current purchases as you've come through the last --

I really don't want to go into that.

Okay. Okay. Fair enough. The SG&A accounts, the cost savings there on a year-over-year basis was very good. Most of the cost-cutting efforts you guy did really started in the first quarter of '09. Is that when they begin to take hold in the SG&A accounts?

First quarter --

I would say most of those started actually second quarter.

Okay. So if we look kind of -- if I look historically at, say, general and administrative costs, you generally see a pretty good dropoff as you go into the fourth quarter every year, if I look at the last four or five years going back in time. The majority are coming at a pretty low level of around 19.3 million. Can we continue to expect similar seasonality in some of these cost line items as we move through the year?

That's -- I would say you should see similar reductions in fourth quarter.

Okay. And then, I guess, last question, just on the vending products, pretty substantial kind of year-over-year decline in sales relative to what you guys did in the second quarter of 2009. Was there anything that shifted from a seasonality standpoint or is there some other factors affecting that market that we should be aware of?

Well, the -- there are other factors affecting the market. We have had -- as you've heard before from me, we have had some customers decide to make their own venting products themselves, and that has changed the market quite a bit over time, and new products that we provide venting systems for have changed some, also -- things like tankless water heaters and that kind of thing, which take a different kind of ventilation -- and it takes a little while to adjust to it. So we're really looking hard at Dura-Vent, and it did not cost us any money this last quarter. It was on the positive side -- not much, but on the positive side. But we're looking very hard at how to make it better in the future.

The seasonal products in Dura-Vent -- I guess pellet vents those types of things, did that not see a seasonal pull onto the -- on the sales system this year? I guess it was good last year maybe going into winter?

Well, you always see the -- it's -- seasonal affects it, definitely, just like it does our structural connector.

Okay, all right. Thanks a lot.

Okay.

Thank you. Our next question comes from Gene [Pevlinco] with D.A. Davidson. Go ahead, please.

Good morning, Gene.

Good morning, Barc. Good morning, Karen. This is Gene Pevlinco in for Steven Chercover. I just wanted to get the operating earnings for connectors and the Dura-Vent. Do you guys -- I didn't know if you guys have some kind of approximate number. Do you have anything to give us specifically?

Surely.

Operating income from connectors, 20.783 million. Operating income from vents, 597,000.

597,000. All right, great. Thank so you much. Good luck in the quarter.

Thank you.

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

Good morning, everyone.

Good morning.

Good morning. Barc, I guess the first question, I guess, would be the gross margin 30 to maybe a point higher. Is that a function of steel -- of lower cost steel flowing through, or better volume? What sort of it behind that modest increase in expectations?

Well, there are a whole bunch of things. Yes, it -- probably a little better steel cost. Probably.

Okay. All right. But nothing on the volume side to make you incrementally more bullish in the --

No.

Okay.

No, there isn't.

Okay. And then I just want to understand the SG&A question that was asked earlier. Typically you see a seasonal decline form third quarter to fourth quarter in the 10 to 15% kind of ballpark. Should we be expecting a similar sort of seasonal decline in the fourth quarter? It sounded like we should. I just want to make sure I'm clear on that one.

What do you think, Karen?

I think you'll see a seasonal decline, but probably not of that magnitude.

Okay, all right. And then can you run through a little bit on relative to where you were a quarter ago, exactly what you're pumping through China and some of the operational progress you've made, just ignoring the numbers? But what have been some of the successes from either a product or marketing or sales perspective there?

Well, we're really just getting started in that market, and it's a huge prospect for the future, and as yet, we really don't have the information that we need. What we have been able to do is develop a strong sales force, and we have run through some people there. We have a very strong bunch left. I think we've got what we need to figure out those markets, but man, it doesn't happen overnight. It didn't happen overnight in Western Europe, but the same things that worked there will work in China. But I really don't have -- I wish I had some numbers for you. Right now, I don't have them.

No, and I'm not -- I am actually not interested -- I am interested in numbers, I shouldn't say that -- but I was thinking more from an operational perspective. Are you putting through -- more products through that planned or different products?

Not yet.

Okay.

We have some planned already, but the majority of the products that are going to be made in that plant, we don't know what they are yet. Our sales force is out there getting that information. And I think next year certainly we will -- I expect that by the end of the next year we'll have those facilities pretty well used.

Okay, all right. And then I guess on Dura-Vent, if I'm able to read body language 1,700 miles away or whatever it is over the phone, it sounds as though there's strategic questions there in terms of, A., how do you make the business more profitable or have it grow faster, or B., potentially, is really a core asset? Am I reading that right? Can you maybe discuss what sorts of recent thoughts you've had on that business in terms of how to grow it or really how to strategically position it?

Well, you've -- yes, you've analyzed it quite well, and as yet, we're not happy with what we've been able to there. But we've got ideas of what we're working on, and I'm not ready to talk about them yet.

Okay. I appreciate the color and the answers. Have a good day.

Okay. Thank you. You, too.

Thank you. Our next question comes from Josh [Borgstein] with Longbow Research.

Good morning, Josh.

Hi, good morning. This is Josh in for Garik Shmois. I just have a demand question for you. There've been a few estimates out there with regard to home starts for next year in the 700,000 range, which implies about a 20% increase. Just generally speaking, could you talk about how much demand needs to be out before you bring back some of the costs that you've reduced so far?

Well, if housing starts come back that way, yes. We will put into use some of the facilities which we have shut down. But that's something that's extremely hard to predict, and you have a lot of optimists coming out with great predictions about things have turned around. We're not seeing that yet. Our sales force is not seeing that, and we're ready. Any time it flips around, we're ready. What we have done -- like what we did -- a typical example is in Southern California. We've shut down a lot of operations there, but we are keeping the facilities, and we will have the facilities. We'll flip some around, but we'll have the facilities ready, so that when the market flips around, we can flip around with it. But I don't see that happening yet.

And just a related question. Are you seeing any signs of stabilization,n either in various parts of the US or in the US compared to Europe? Some parts stabilizing before others?

Well, the Midwest has been less hit, and we have been able to get a higher percentage of the market in the Midwest and the East. So we've had less of a hit there. California has been the worst. California and Florida have been really hit hard percentage-wise. So -- but, no, I don't see -- there is not -- in Western Europe, and it's largely because we're doing more and more better effort there, and our acquisitions like Liebig and Ahorn and [Janco] are starting to help our sales there. European sales are not as badly -- bad as they were. They have come back some, whereas the US sales have not. But I'm looking for European sales next year to be better. Whether that would come about or not, who knows? I've learned you can't predict it. It's like trying to predict the stock market.

Great, and just a final question for you. Could you remind us how much cost savings you've taken out this year and how much have been reflected so far through the third quarter, and then how much is permanent versus temporary?

Okay. Give us just a moment there, and I'll pass that over to Karen.

Our regional cost savings plans, as we've discussed, was to save $67 million Company-wide. We've seen a little less than half of that. Most of those plans were put in place early second quarter. How much of that is permanent would definitely be a function of what sales start doing and what starts happening in our industry.

Great, thank you very much.

You're welcome.

Thank you. Our next question comes from Alan Robinson with Royal Bank of Canada.

Good morning.

Good morning. I have a follow-up question on the steel cost issue. Now I appreciate there's a time lag between the time you buy your steel and the moment the price of that steel gets reflected in the cost of goods. So could you give us an idea of when the low point of steel prices will hit your cost of goods? Did that point already happen in the third quarter or is the time lag longer than that?

What do you think, Karen?

The low point certainly has not hit in the third quarter, and it's a very staggered system, so it's very hard to determine an exact point at which we would see that. We have not yet seen our lower cost steel be impacted on our standard cost of our product. And again, I would anticipate that we would see some of that occurring in the fourth quarter.

Okay. But by the sound of it, it may also have an impact through to the first quarter or perhaps beyond?

Again, that would be a function of our sales and the production of those parts using that steel, yes.

Okay. Okay.

And one thing we have not done is raised prices when the steel goes up. We have in the past raised some prices. Here in the last -- this year certainly, we're pretty careful there because our customers -- some of them are in trouble. Their business has gone way, way down. So as you notice, our profits have gone way, way down, also. And that's because we have had some steel costs that we haven't put into higher prices.

I appreciate that. That was going to be the next part of my question, so thank you for anticipating that. And then it looks -- looking at your balance sheet, you had some very strong cash generation during the quarter. Karen, could you give us some detail there? What was your operating cash merger in the quarter? And what were the sources of cash, I guess?

Well, the main source of cash would be the reduction in our inventories.

Okay.

That's the main difference you're seeing in that cash balance.

Okay. Okay. And then what was your operating cash flow during the quarter?

88 million.

That was for the quarter or for the nine-month period?

That was for the -- that's the cash for operations in third quarter. I'm sorry, excuse me -- that was for nine months.

Okay, all right. That makes sense. Thank you. That's all I have.

Okay.

Thank you. Our next question comes from Barry Vogel with Barry Vogel and Associates.

Well, I hoped you were there, Barry.

Thank you, Barclay. I'm sorry. I have a couple questions. Barc, can you give us the percentage change for the quarter in terms of sales, starting with the West excluding California?

Yes, the change in the West was 29% minus.

And California?

24%.

South-Southeast?

South-Southeast, 23.

And Midwest?

17.

And Northeast?

31.

Okay. And as far as the home centers, I think I wrote down in your initial remarks that overall home centers were down 9% in the quarter versus last year.

No, that's what they were down all year, 9%.

Can you give us what they were down in the quarter?

The quarter was -- I think 23, was it? Yes, 23.

And what about the largest customer in the quarter?

Beg your pardon?

Largest customer, how much were they down in the quarter?

We don't have to --

I know you don't have to.

We don't have to talk about that and I'm not going to.

Okay. Now, going back to the strong wall and the anchoring systems, you have mentioned that Europe sales were down 23% in the quarter, am I correct?

Sales where?

In Europe.

Just one moment.

You made a comment earlier in your remarks.

Let me take a look here. Yes, that's correct.

And what about anchoring systems? What was their sales?

Anchoring systems was down 17%.

And how about strong walls?

Shear walls were down 23%.

Now, did you -- Karen, while I have you on the phone and you have all the numbers, was strong wall profitable?

Yes, it was.

Can you give us some -- was it very small?

It is a small component, yes.

So it was profitable. And what about anchoring systems in terms of profitability in the quarter?

Well, we had big costs on anchoring systems introducing them into China and so forth. So we had a loss there didn't we, Karen?

Yes.

Can you give me some idea of the size of the loss, Karen?

It was a --

That's spread around so much that it's pretty hard to figure. But it was substantial.

Okay, now, Karen, can you give us your current reading on capital expenditures this year and depreciation and amortization?

Capital expenditures, 14.5 million.

And D&A?

29 million.

And can you give us your best guess for effective tax rate for the year?

That's still too hard to anticipate based on what's going on in our industry.

Okay, now Barclay, going back to Dura-Vent, historically, the fourth quarter usually was the best quarter of the year, and it's very nice to see you have a small profit rather than large losses. On a seasonal basis, is it wrong to assume they would be profitable in the fourth quarter?

I really -- as yet, we don't have enough information to give you a good answer to that. I really -- I don't feel confident about any estimate there on Dura-Vent right now. That market is so hard to figure and it has changed so much. It might well be okay, or it might not.

Did you finish your consolidation of the Vicksburg plant into California?

Yes.

So those costs are behind you?

Yes.

All right. That's good.

Yes, that's a major reason that it wasn't showing a loss.

Okay. And Karen, I have one more question. As far as the inventory rebuild, you have some idea of what inventories might go up, just generally, in the fourth quarter versus where they were at the end of September?

I think that's obviously a function of what our sales will be in the fourth quarter. Currently we are at a level where we're producing less than we're selling. So that's where we will be using a little bit of an inventory build, but I don't have a feel for what the percent will be.

Would it be in numbers 5 to $10 million?

I think that's a little difficult to determine right now.

Okay, thank you very much, Barclay, and thanks, Karen.

All right, Barry.

(Operator Instructions). Our next question comes from John [Kohler] with Oppenheimer and Company.

Good morning, John.

Good morning. How are you?

Good.

Good. I had a question regarding some of the actions that you had taken in the downturn to preserve margins, some of the reduction in the 401-K benefits and employee benefits in general. I was wondering if you had given a portion of those back at this point, or when you might consider reinstating some of those?

Well, we haven't cut employee benefits.

The pension plan --

Well, but that's --

That's the one.

That's a long-range deal. The only thing that we have cut is the pension plan. But we had -- and I'm sure you don't know too many companies that put 15% of salaries into the pension plan for that individual, and we were. We cut it back. We cut it back some. Eventually, I expect that we'll go back to 15, but just when that's going to happen, I don't know.

Okay. Thank you.

Yes.

Thank you. At this time, there are no further questions in queue.

Okay. Thank you all.

Your conference has concluded. You may disconnect at any time. Thank you for joining us, and enjoy the rest of your day.