Simpson Manufacturing Co Inc (SSD) 2009 Q4 法說會逐字稿

Good day and welcome to the Simpson Manufacturing Company fourth-quarter 2009 earnings conference call. At this time all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the question-and-answer session. (Operator instructions). I would like to turn the call over now to -- excuse me -- the meeting over to your Chairman, Mr. Barclay Simpson. Please go ahead, sir.

Well, good morning, everybody, and thanks for joining our CFO, Karen Colonias, and myself. Charles Dickens began his novel, "A Tale of Two Cities" with a phrase that clearly describes Simpson Company's performance last year -- "It was the best of times, it was the worst of times."

2009 was our worst year in terms of profit, the only one in the history of the Company where we've lost money in two quarters. And I must admit, I did not see that coming.

But where 2009 was one of our best years was in our progress in becoming more of an international company. Losses in various operations and entities were largely because of setting the stage for future sales and profits internationally. One substantial loss that was not an investment in the future was Dura-Vent's '09 operating loss of $3.9 million. While we've made a lot of progress in reducing Dura-Vent's operating costs, we continue to work on a long-range program for achieving an acceptable return on capital.

Especially costly last year was the Liebig acquisition. Its metric mechanical anchors and code approvals are a key to substantial markets in China and Asia as well as Europe, and major changes in personnel and manufacturing will continue to be costly there this year. But the future positive financial results from being able to manufacture these products in and for China and other markets is an important part of our future.

The costs of integrating Swan sales in the Strong-Tie branches was another expense that lasted longer and was more costly than anticipated. However, it's done, and Swan should contribute substantially to profits this year. Other one-time costs included the several million dollars in severance packages and integration costs for Aginco and Ahorn acquisitions, and both should contribute to profits more this year than in '09.

Sales in the fourth quarter were a mixed bag. Simpson Strong-Tie sales were down 7.5%. Canadian Strong-Tie sales were up 14%. Dura-Vent's were down 31%. European sales were up 11%. Asian sales, although still insignificant, were up substantially, and our Australian operation is providing increased sales and profits. Strong-Tie's home center business was down 3% for the quarter and 6% for the year.

To summarize our current situation and future plans, first, we have a strong balance sheet with record cash for acquisitions. Currently, we're in the process of hiring additional help in finding suitable acquisition candidates. At present, we have prospects, several of them, but nothing yet where we're ready to make an offer.

Secondly, we are not counting on the US market for our products turning around in the near future. But when it does, we'll be ready. We continue to work on increasing our sales with new products and more sophisticated merchandising.

Third, becoming more and more international remains a major goal. But making international operations acceptably profitable will take time. Last year's opening of the 175,000 square-foot plant in China and the Liebig acquisitions are a couple of important steps forward.

Lastly, we remain a long-range Company, and we are not for sale, which continues to enable us to attract and keep the very best people. And that's an absolute key to success.

Well, thank you for listening. And I'm sure there will be some questions.

(Operator instructions) Arnie Ursaner, CJS.

This is actually Torin Eastburn filling in for Arnie. Can you tell us what percent of your total sales were from international this quarter, please?

Yes. Well, for the year it was 24%. For the quarter -- what was it for the quarter?

20% for the quarter.

20% for the quarter.

Okay, thank you. In your press release you mentioned you're seeing sequential increases in steel costs. I'm a little bit unsure how that flows through your income statement. Does that mean that the steel you are using to make products in the first quarter will be comparatively more expensive than it was in the fourth quarter?

No.

Okay. Also your SG&A this quarter increased against Q3, which I don't think is typical. What caused that?

Karen, what would you think?

The SG&A was actually down -- SG&A was down 13% for the quarter.

Compared to Q3?

Oh, I'm sorry, I'm sorry. Compared to Q3 --

It increased, I believe, which I don't think usually happens. I'm just wondering if you can tell us what caused that.

Yes. We had some severances that were impacting in Q4.

Okay. Thank you. And very quickly, going back to the steel costs, when would you expect to see the increasing steel prices start to affect your market?

I really don't want to go into that.

Okay. And my last question, looking at this year, it looks like you had at least $5 million or more of losses that appear to be one-time in nature. How much of that would you expect to recur next year? And conversely, are there any costs that you've cut that you'll have to add back --?

Well, that's a very good question, and we think they are going to be substantially less this year than they were last year. But there are some that will continue, like we still have a lot of stuff to do with Liebig. And that one last year -- my recollection, I think it was $5.4 million that it cost us. And I think it will be about the same amount this year. But like I mentioned in my talk, with some acquisitions like Aginco and Ahorn, we had substantial costs, but they are done now. And they will contribute to profit.

So generally it's going to be down. But we've still got some, and if we make some acquisitions, you almost invariably get a surprise or two. And they are never a plus and they're always costly. So it's very hard to project right now what they will be. My guess is, outside -- well, this isn't a guess. Outside of any new acquisitions that our one-time costs will be down substantially.

Garik Shmois, Longbow Research.

My first question is, just trying to understand the margin degradation from the third quarter to the fourth quarter. I think on the last call you had mentioned that you had expected margins to be relatively stable, maybe even slightly up. I'm just wondering if you could rank, if possible, the major impacts. Was it mainly fixed cost absorption or material costs or labor or the integration costs? What was the major swing factor sequentially?

Yes; that question is a good one. And I've got to admit that the biggest difference that I've had in trying to project it at the start of the quarter -- and it was acquisitions, largely. These acquisitions, particularly Liebig and Ahorn, just cost us a lot more than we had thought they would. It doesn't mean that they are not extremely important for the longtime future of the Company. But they were major.

What else would you think, Karen?

Those were the main ones, the severances and the (inaudible) for the acquisitions, as Barclay just mentioned, were the main elements in reducing our gross margin.

Okay, thank you for that. And do you have a breakout in the profitability for the quarter for Strong-Tie versus Dura-Vent or venting products?

No, we don't yet. A breakout -- in what way do you mean?

Just the dollar amount of the operating income or loss from Strong-Tie and venting products.

Well, Dura-Vent, as I mentioned, we have not solved the problems there. And we're looking probably for further losses. With Strong-Tie, why, I think it's going to be quite a little better.

I'm sorry; I was referring to the fourth quarter. In the past, I believe you've offered the profitability that you've generated from those two segments.

Karen?

The operating loss from Strong-Tie in fourth quarter was just a little over $500,000. And in venting, the loss was around $185,000.

Okay, thank you, that's what I was looking for. And just lastly, on pricing trends, we are, of course, starting to see steel creep up. Can you talk about opportunities to raise prices to offset in 2010? I believe you've been hesitant over the last year, given what you are seeing with your customers, to raise prices. Just wondering what the appetite is right now for price increases, should you need them?

Well, generally, if there are substantial increases in costs -- like your major cost is steel, of course -- why, everybody's costs go up, and we have to raise them. And the same thing -- if it goes down substantially, why, we will drop them.

But specifically, in the near future I don't want to discuss it.

Trey Grooms, Stephens Inc.

Okay. I have a couple of questions. So you say the primary reason for the margin, I guess, coming in a little bit lighter than you had originally thought was severance and then acquisition costs. Could you tell us about how much those things impacted the quarter or maybe what margins would have looked like if you took those things out?

About 3% increase.

Okay, that's it. So you would have been closer to 33, I take it, in the quarter, then?

33 to 34, yes.

Okay, perfect. And then, Barc, looking back over the last few quarters, you've taken a stab at your thoughts on margins for the year. Could you help us out with your thoughts looking into 2010? Would you care to take a stab at that?

Oh, boy. After the results from the fourth quarter, I'm reluctant. I'll tell you what; I'll leave that up to Karen. So if there's any problem with it, it's her fault. Karen?

I think we'll be running a little bit closer to the 34% to 35% on the margins.

For the full year?

Yes.

Okay, that's very helpful, thank you. One other question -- Barc, are you thinking about or planning on hosting another analyst day this year?

Oh, yes, we are. It's June 2, I -- what? Wait a second; I've got it on my calendar. I'll get it. It's June 3.

Okay, great.

It's June 3, and love to see you there.

I'll definitely be there. And then one last question -- so you said the M&A pipeline, you had some things you were looking at. Would you care to go into any kind of color as far as, is this something along the lines of your current businesses? Is it outside your current businesses? Can you give us any other kind of color at all? Is it international, is it domestic? Anything at all?

Well, it's more international than domestic, but we're looking everywhere in the world, but -- including the US because if we see an acquisition here that will immediately contribute to profits, a good return, we'll take it. But we are really interested now in things that go a little beyond US housing. US housing -- we let ourselves get way too dependent on it, and we are doing everything to reduce that dependency.

So any acquisition that is commercial products for commercial construction, that has maybe nothing to do with housing -- why, we are interested. And we've opened up our minds to various things. They don't have to be exactly what we are doing now.

Barry Vogel, Barry Vogel & Associates.

I have a couple of questions for Karen, first, because you probably have the numbers. Can you give us percentage changes in sales regionally, starting with the West excluding California, in the fourth quarter?

What was that question again?

The regional changes in sales in the fourth quarter versus last year, starting with the West, excluding California.

All right. Just a second. Well, in the fourth quarter the West was down 16%.

And California?

California 9%.

South-Southeast?

South-Southeast, 19, down 19%.

Midwest?

Midwest 17.5%, 18% call it.

Northeast?

20%.

Could you tell us what the percentage changes in sales in the quarter was for Strong-Wall anchoring systems in Europe?

Well, in Europe, all of Europe was up 11% in the quarter.

Okay, and of course, that includes acquisitions?

Yes, that does.

Anchoring systems in the quarter, percentage change?

That was 13% down.

And Strong-Wall?

5% down.

Karen, could you tell us what your actual capital expenditures were in '09 and what your projection is for 2010?

The CapEx expenditure in '09 was $15 million. The budgeted for '10 is $28 million.

And D&A for next year, or for '10, rather?

That was -- well, the depreciation for 2009 was $29 million.

And 2010 projection?

I don't have that in front of me right now.

Could you give --Barclay, can you give us an idea what the Asian startup costs were in 2009?

Oh, boy. We had so many different costs there. Have we got a total?

I don't have that with me right now.

Substantial, though.

Yes.

You don't have a number?

No, we don't.

And, as far as inventories, you reduced inventories fairly decently from the third quarter to the fourth quarter. Has that stopped, essentially?

The --

Relative to sales?

We are working on an inventory increase. We've seen an uptick in our inventories in January, and we are working to continue to build some inventory so that we will be able to take care of our customer needs.

Is that because of seasonal needs?

It would mainly be due to the reduction that you've seen in our inventories, and we want to be sure that we're going to be able to meet our customer requirements.

Okay, now Karen I have a question -- the commentary you had in the press release about valuation allowance -- can you tell us how much that was, that change in tax rate?

I'm sorry; could you repeat that?

You talked about a valuation allowance. Can you tell us how much it was? In the quarter?

Valuation allowance?

Yes; it was in -- at least, the press release that I read, it made a comment about valuation allowance.

Well, we better take a look here.

I'm trying to find it. Yes; it said on page 2, paragraph 3, the effective tax rate is higher than the statutory rate, primarily due to the valuation allowances taken in foreign losses.

Oh, yes.

-- differences in US statutory rate and local tax rate in countries where the Company operates.

Oh, sure. That really hit us hard.

Right. So that's our tax-forward allowances that we had not been able to take until we've got some profits in our foreign entities.

Can you give us an idea of what the dollar amount was? Because it lowered the earnings per share, I believe.

Don't have that right now, Barry. We'll have it later.

Now, I know you are very sensitive about steel because every call people -- I know, for a long time, people ask about that. And you did mention in your press release that there was a negative impact. Can you give us some idea of the steel inventory and pricing effect on gross profits or gross margins in the fourth quarter versus the third quarter?

I really don't want to go into that.

All right, because it obviously created a -- it was partly responsible for a small loss in Strong-Tie.

Okay, next question?

Steve Chercover, DA Davidson.

I'm not going to drill too far on questions where you either don't have the data or won't answer. But I wanted to speak about the inventory build, potentially, for the first quarter. The US economy apparently grew at 5.7% because inventories were stocking in Q4. That's not the time to do it in building materials, but what do you see for the opportunity for yourself and your clients?

Well, we are, as you've undoubtedly heard me say in the past, why, we really don't spend a lot of time trying to figure out what's going to happen to the market here in the US because we have zero control over it. And right now we are not seeing any significant increases anywhere in the country. All of our -- so far, the first month of the year, every one of our major branches here, Strong-Tie branches in the country, is a little bit -- not much, but a little bit below last year. So, when somebody tells me that housing starts are up and so forth, I say, well, maybe they are in this particular little area. But across the country, they aren't. Not yet.

Well, we know you're a long-term company, and we also know that housing will come back eventually. Do you have any new products in the pipeline that will cater to housing when it finally comes back?

Oh, yes. We have all kinds of -- one in particular is that frame that we -- the sales of this new frame that we have are quite low because it depends on housing. Most of the frames go into housing. But when it comes back, that's going to be a substantial addition. And every year we come out with 10 or 20 new products, and we are not reducing that. In fact, we're pushing hard in that department.

And that's why, when you look at the reduction in US housing starts and the reduction in our sales, totally different because we constantly come out with new products. That's one reason, and of course we constantly work on improving our merchandising and making acquisitions.

And final question. After the terrible tragedy in Haiti a couple weeks ago, are you guys going to be giving any material kind of contributions to the reconstruction? And longer-term, do you think that your components will be a significant part of the rebuilding efforts?

I think, longer-term, anything like that -- it doesn't matter where it is -- anything like that in the long run is always good for our products because internationally we have the reputation for being able to provide products that prevent buildings collapsing. But it takes time, it takes time. It's like building codes in this country. It took many years for the majority of the country to have building codes that they enforced.

And something will happen there and we certainly are aware of it and our sales and engineering staff will do anything that we can to help out there.

Thanks, Barc, surprise us in 2010.

Keith Johnson, Morgan Keegan.

Just a couple questions. I guess first off, similar to a question earlier about how much of an effect did some of these severance changes have on your gross margin, what about on the SG&A accounts? Could you give us an idea of the dollar effect related to the maybe severance or some of the personnel or operational changes you may have had to make in the fourth quarter?

Severances were in excess of $1 million.

Okay, and that was all fourth-quarter cost?

Yes.

Okay. And what about operating rates throughout your system as you went from the third quarter of this year to the fourth quarter of this year? Was there a change one way or the other?

The plant operations?

Yes.

As I mentioned at the last call, we are working on building inventories. It takes a little while from the production standpoint to ramp up with what we think is a reasonable production rate. So we were building some inventories, working on building inventories in both fourth quarter and first quarter. You see that we had a decline in the inventories and we were really selling a little bit more than we were producing.

We have just had a slight upturn in our inventories that we've begun building through January.

When I look at the year-over-year change in the connector revenue, I guess it was down maybe, if I'm recalling this correctly, around 7.5% in the fourth quarter -- that's much better than what we saw in the second and third quarter of '09, when it was down in excess of 20%. Maybe year-over-year comps in the first quarter were a little easier, but were there other factors in the connector market where this product may have ended up, either inventory changes at your customers or maybe some underlying improvement in demand in the fourth quarter?

Well, I think what you saw earlier was our customers also burning off their inventory in the second and third quarters. We are looking at many different avenues in which to get our products that aren't necessarily tied to housing starts -- remodels, decking industries. And we've been -- our sales force has been pushing very hard, looking at all possible avenues in which to sell our products. And so that has been helpful also. But I think the main element would have been the customers' inventory.

Okay, maybe a little bit of restocking in the fourth quarter this year?

Yes.

Stabilization in some of the end markets in the fourth quarter -- do you guys -- any feedback from your plants that maybe some stabilization [is] beginning to show up in some of those markets?

Well, let's see. Stabilization -- as I mentioned, we are still down in the US compared to the fourth quarter last year, that is. And January this year is down. So, while we don't see any real evidence of substantial, significant increases, we aren't seeing much more of a drop, either. And as Karen mentioned, why, our customers pretty much took their inventories and got rid of them. And so now they need to replace them.

And one thing that you know about this Company, because I've said it many times, we decided many, many years ago we are not going to run out of product even though it makes our inventory turn not very popular. But that's just absolute key to long-range relationships with customers.

Understand -- thanks a lot and good luck.

Thank you, Keith, but we are not going to wait for luck.

Robert Kelly, Sidoti.

Just a question on the SG&A expense run rate. You did a bunch of cost cuts earlier in the year. Have we hit the floor as far as quarterly run rate being in the $38 million to $40 million range for the next couple years? Or, would there possibly be more you all could take out?

I think we're at a level where we're fairly stable.

So to do more, you would have to see end markets weaken further?

That would be correct.

Okay, great. On the gross margin, what sort of utilization is that implying? You kind of talked about 2010 being closer to 34%, 35% range. What sort of utilization does that imply for 2010?

But I think, as I mentioned before, that our factories are certainly working on building some inventory, since we've drastically cut our inventory, and so have our customers. So we will be -- you should see an uptick in the utilization of the factories. We've started to see it a little in the fourth quarter, and you will continue to see that until we get to what -- we feel very comfortable that we will be able to supply our customers as they are used to being supplied. Again, we don't want to have any backorder situation. So you will see some increase in our utilization over the next few months.

Peter Lisnic, Robert W. Baird.

I guess just first question, clarification -- I thought I heard, for Liebig, $5.4 million in costs for the year. Is that the right number?

Loss, yes.

Oh, a loss? Okay, all right. And then when you look at these acquisitions and some of these higher than expected costs that you are incurring, can you give us a sense as to exactly what those are? Is it just, you are trying to restructure the businesses and incurring costs to move machines around? Is it labor related? What exactly are those costs?

Well, it's -- you said it. It's all around, because when you really try to analyze an acquisition, you go and you talk to their people. But you don't spend a week on the floor watching the manufacturing, and you don't know that the guy who ran the second shift was terrible and you had to fire him and there wasn't anybody to replace him with. You just get surprises, and they are always negative. And they're always costly.

And they are all those things -- inventories, sales force, merchandising, manufacturing, materials. Now, like Liebig -- Liebig, the product line is very, very good and very important to our future; very important, those metric mechanical anchors.

So we're willing to spend whatever is necessary to get the proper dies and equipment in the proper places and get the right people. And we're spending it. And those -- it's just -- it's pretty general.

Well, when you look at it, I would assume that you are still thinking that the growth opportunity is still significant, as it was when you were looking at and consummated the transactions or the acquisitions. Do you have any feeling that the return profile of these businesses might be a bit different than when you decide to actually pull the trigger and buy the company?

Well, yes. With Liebig, I really didn't think that it was as important as it's going to be in our future. We knew it was a real plus, once we got rid of all the problems, but those products -- we are going to end up probably making them in China for around the world.

And when you do that, presumably, again, the returns will be in line with what you thought when you got into the business?

They'll be better.

Better, okay. Well, that's, I guess, even better.

All right, if you switch gears, then, I know this is sort of the second quarter we talked about venting and discussing some strategic options there. But what I'm wondering is what exactly can you do to improve the return profile of the business? Is it something where -- I would imagine you've taken some good looks at the manufacturing footprint, restructuring actions. What's on the table in terms of being able to turn that business around?

Now you're talking about Liebig?

I'm sorry, venting.

Oh, venting? Oh, I'm sorry. I should have caught that. I don't have a good answer. We do not have a good answer yet. I wish I did.

Okay, but working on it, taking costs out?

Oh, we're working on it, absolutely.

All right, I appreciate all the help, and best of luck for 2010.

At this time we have no more questions.

Okay, well, thank you all, if -- anybody who is still on the line, and thank you, Kate.

This concludes today's conference. You may disconnect at this time.