Simpson Manufacturing Co Inc (SSD) 2010 Q1 法說會逐字稿

Good day, and welcome to the Simpson Manufacturing Company first quarter 2010 earnings conference call. I would like to turn the meeting over to your Chairman, Mr. Barclay Simpson. Please go ahead, sir.

Thank you and thank you all for joining Karen Colonias, our CFO, and myself. And so, we are back to making money. This call is a lot more fun than the last one. But please remember, our goal is to build a long-range profitable company, not to save money in the short run at the expense of profits in the long run.

But it is a pleasure to have relatively profitable quarter where our people get some cash profit sharing and our investors can see where our expense cutting has helped to lead to profits and these are tough times. A surprisingly high gross margin was due to cost cutting, including higher absorption of factory and tooling costs, as well as higher sales of course; however, the cost of steel has risen roughly 20%, which makes some increase in our prices essential so that we do not revert back to a much lower gross margin.

Home Depot sales were up 15%, whereas our sales in different areas of the US were a real mix. California was flat, the West was up 16%, the Midwest 18% up, the South-Southeast was down 1% and the Northeast up 16%. Total US sales were up 7%.

Outside of the US, sales increased to 27% of our total sales, of which Europe was 15%. Canada sales increased 94% to become 9% of our total sales. While sales in Asia were up 137%, great number, they still are but 1% of our total. Sales by our distribution center in Australia were surprisingly good at $975,000 and with a decent profit. Most of those sales were quick drive fasteners, whose sales worldwide were up 75%.

While the sales numbers from our Chinese operations are not yet significant and profits are not in sight yet, China remains an important part of the future of Simpson Manufacturing and we are making progress. Metric mechanical anchors, soon to be made there, and other products are being considered. With the help of an experienced consultant also, we are looking at possible Chinese acquisitions.

Speaking of acquisitions, there is nothing to report right now although we continue to look in Europe as well as the US. A quite small one we made last year is in this country, Deck Tools, got us into the marketing of software. It will take time to contribute significantly to sales and earnings, but we are excited about the prospects by pursuing this brand new direction.

To summarize our current condition and future plans, we continue to have a strong balance sheet and the $200 million cash is for acquisitions, but we have learned to do even more careful research before making any offer.

And to being less dependent on something over which we have no control, US housing continues to be a major goal. Geographical expansion and new products are the major directions to achieve that goal; however, they can and do cause short-term expenses, which hit short-term earnings.

Simpson Company is not for sale, and that is a major reason in today's world that we are able to attract and keep the best people, a major reason for the long-term success of any company. Well-- questions?

(Operator Instructions). Our first question comes from Arnie Ursaner with CJS Securities.

Arnie, how are you?

Barc, good morning to you. My first question relates to the comment you made about a roughly 20% increase in the cost of steel. I assume that's since midyear last year?

Yes.

Okay. And, your inventory value jumped about 10% from year end. How much of that is raw steel inventory? Can you give us a better feel for the inventory of raw steel versus finished goods, and how -- I know you use average price of steel, how the inventory you are carrying reflects the change in the price of steel?

I don't want to go into that, Arnie.

Okay. You mentioned main need price increases to offset the rise, have you already put in -- have you notified customers about that already?

Not yet, but shortly.

Okay. And in prior conference calls you've spoken about you are evaluating alternatives or opportunities with Dura-Vent. Is there any update you could give us on that?

That's a good question and I wish I had a better answer. We still are looking at various alternatives and nothing to report quite yet.

Okay. Final question from me. You are closing the Brea facility. Can you comment if it did impact Q1 at all and if it is closed and you can improve your utilization in other plants, how we should think about gross margin versus what you did in the first quarter?

What do you think, Karen?

Well, the Brea facility is in the process of closing down. It did not have an impact on Q1 because most of that was taken, the closing, from the people standpoint that was done last year. We are really moving that facility to a new location in Oakland, California, and we anticipate that we will have that facility closed and moved sometime probably by mid 2011.

So, in the interim period would it be a positive or negative versus Q1 margins that you reported?

It will be fairly flat against Q1.

Okay. So, saying in a different way, not to put words in your mouth, is it fair to say the margin you had in Q1 you believe is sustainable with continued recovering with end demand?

Oh, boy. Arnie, that question, that's a tough one, because as you know we were way off in guessing when you asked or you and others asked what we anticipated the first quarter to be, we were way off. Now making an estimate, now, I guess, we really don't want to make one yet.

Okay, Barc. Thank you very much.

Okay.

Thank you. Our next question comes from Trey Grooms with Stephens Incorporated. Go ahead please.

Hi Trey.

Hello. Good morning, Barc. How are you?

Okay.

Good. Just kind of on the tail of the last question on the margin, so last quarter Karen, I think, you said your stab was around 34% to 35% for the year. Does that come or you are still coming in that ballpark?

No.

It will be more?

We were really fooled by how it came out, the first quarter, and we really don't have enough information to make an estimate now that would mean anything.

Okay. But the first quarter definitely came in higher than what you kind of were thinking this time, I guess?

It certainly did.

Yes, okay. And so, when you're looking at the margins, how much of a -- I am really trying to figure out the driver. Is it more improved utilization, was that the biggest driver, or was it the cost cutting or just a combination of both kind of equally?

Well, I think you hit it. Those were super important and we feel pretty good about the cost cutting we've made with one exception -- having let a bunch of people go. But now, I think we've hired back something like 70 people, but the cost that we have improved, by improved, I mean, lessened are really -- they are continuing to be in effect and they will.

Okay. And then, you mentioned about the price increase and you said that it's not out there in the market yet, but I guess it's soon to come. Is that, I guess, the kind of price increase level that you have in mind, is that the amount that you have set there? Is it going to offset, completely offset the rise you've seen in the inventory cost, do you think?

No, I doubt it.

Doubt it, okay. And then, one other question; so it looks like things are kind of improving at least in several markets here for your guys. The one question is do you think that is a true increase in demand here, or is it some type of just seasonal inventory restocking, or do you think it's true demand? And then, secondly, can you talk about through the quarter kind of how the quarter trended, and what you have seen kind of going into April here?

Right. Well, I think the increases that we showed in the last quarter were largely due to our own efforts. We don't see a big market change anywhere, but I think we are doing a much better job of marketing and I think that's paying off.

You've taken more share then it sounds like?

That's correct.

All right. What do you think --

(Inaudible--multiple speakers) market share. Of course --

Your market share stays at now, Barc?

As I think, you all know, we come out with new products every year also. So, between those two things, we are showing increases all over now.

And you think your market share is still around the 70ish percent range?

Well, we don't have numbers that are totally accurate, but I think it's at least that.

Okay, perfect. And then, my last question, with -- and this is kind of, I know, kind of a gray area as well, but could you give us kind of your guess on currently kind of where your mix stands as far as how much of your demand is driven by residential and/or repair, remodel, et cetera?

Well, only that the outside of housing starts are much better, like with things like Home Depot up 15% you have to think -- they don't keep numbers for us -- but you have to think that a great deal of that is individuals doing some work themselves.

Sure.

Building a deck or a bench or something with our products. How much? Impossible for us to make an accurate guess but logically it just makes a lot of sense.

Okay. Well, thanks, Barc. Great quarter and we look forward to seeing you in June.

Thank you, Trey.

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

Good morning.

Hi, this is Joshua [Zaret filling] in for Garik, a couple of quick questions for you.

Sure.

Did the increase in sales during the quarter surprise you relative to your internal expectations?

Yes.

It did. Okay. And any kind of color you can provide around that for the reasons why?

Well, just those few things, which I had mentioned. I think we are just doing a much better marketing job and we have new products every year.

Okay.

Those two things, they have been crucial for 50 years.

Okay, great. And, our sales in 2Q are they trending positively as they did in 1Q?

They are positive so far, yes.

Okay. And I know to discuss a lot about inventory, but would you be willing to tell us one of the reasons for the margin outperformance, was it partly the result of working through lower priced inventory that you had bought earlier in the year?

I do not have that thing split up, but that might be a part of it.

Okay. And, in the past you provided a breakout in terms of the profitability for the quarter for Strong-Tie versus Dura-Vent in terms of the dollar amount. Do you have that for the first quarter?

Yes.

Operations income from connector side was $18.2 million and for vents there was an operating loss of $1.3 million.

Great, thank you. And just a final question for you, do you have any idea what kind of lag is between a home start and when strong type products get installed into a home?

Boy, that's a good question. It takes several months.

Several months, okay. Would you say there is maybe a quarter lag there?

Well, there always is. However -- well, it depends on what happens with housing starts and as yet, we don't see in the US a jump there.

Okay.

What do you see? You people are more aware of those things than we are, because we don't spend our time going over stuff over which we have absolutely no control.

Understood. I appreciate taking the time. Congratulations on the quarter.

Thank you.

Thank you. Our next question comes from Robert Kelly with Sidoti. Please go ahead.

Hello, Robert

Good morning Barc, good morning Karen. Was there cost cuts between 4Q and 1Q?

Cost cuts, no.

No. I am trying to figure out why the gross margin in 1Q was so strong despite not terribly different sales in 1Q compared to 4Q, if you could all just help us out with that a little bit?

Well, that I just have to repeat is that we have done a lot of cost cutting and that sort of thing is paying off.

Right. But, I mean, the cost structure hasn't changed materially compared to your fourth quarter time period. The gross margin is something that we haven't seen since housing starts were north of 2 million. I am just trying to add it all up and see how you get a 41% gross?

Yeah, I know. I am too. That's a tough one. Karen have you got a --

I think that actually our factory absorption was a large part in helping us with our gross margin for fourth quarter. As we have mentioned, we have been working on trying to increase our effective utilization. Last year we burned off a significant amount of inventory, and obviously we had a small uptick in our sales which we believe is really, as Barclay mentioned, somewhat of our customers burning off their inventory and trying to sell their pipeline.

But also, we have gone into some different market areas, for example, the quick drive information that he mentioned and we certainly found some different opportunities for our products. They--We have brought a few production people back and really that overhead absorption and getting those factories running was a critical part in helping us with this quarter's gross margin.

So did you have facilities that were idle in Q4 and you brought them back on in 1Q? I mean, what was the utilization in 1Q compared to 4Q?

We had factories that were not idle, but we are running more shifts in...

Okay.

Q1.

That makes sense. And now, some of the sales number you threw out for the international arena, very impressive growth. Was there any sort of currency benefit aiding those numbers or were those straight volume improvements?

The impact from the currency helped the revenues up by $3 million, but the income from operations on that was negligible.

Okay. Thanks guys. Keep up the good work.

Okay. Thank you, Robert.

Thank you. Our next question comes from Barry Vogel with Barry Vogel & Associates. Go ahead please.

How are you, Barry?

Good. Good morning Barc. Good morning Karen.

Hi.

I have a couple of questions to Karen. Could you give us the percentage change in the quarter in revenues for Strong-Wall versus last year and for anchoring systems versus last year and for Europe versus last year? That's my first question.

Well, Strong-Wall was up significantly, surprisingly.

Yes Strong-Wall was 17% increase, anchor products was a 2% increase and I think, Barclay, you gave in Europe was 15%.

Which? Oh, on --

Fine. I want the percentage change of Europe versus last year's quarter?

Europe was up 23%.

And could you give us your best guesstimate, Karen, of what Asian start-up cost will be this year?

Well, we -- it's not really the -- start-up cost we took care of start-up cost for Asia all last year. So, we are not adding any new equipment or anything to that facility. So, we are not anticipating additional start-up cost for the Asia operations.

But there was -- on as far as the P&L impact for Asia last year, can you redo that for us because I do not have it in my notes?

Well, let's see. You can hear those papers flipping. Asia, well, Karen do you think these numbers cover all of Asia?

Yes.

They do, okay. All right then. We showed in Asia, I don't believe this. I think we have got a problem here, because now we have these acquisitions, we have got these new operations scattered around the world, and some of our numbers are hard to figure out exactly where they are coming from. So, I don't want to give you a number that's no good, Barry.

What I was aiming at was to see if -- let's assume that whatever those numbers were, let's say, it was a negative impact of $4 million -- I am just throwing out a number here of maybe $4 million to $5 million and what I was getting at is if you don't have additional expenses, maybe you can lower that negative impact in 2010 versus 2009.

Well, I do not think there is any question about that. We will lower the impact because our sales are going up substantially. So, like we have 15 people in the sales office in Beijing, and we don't have enough sales to cover that kind of thing yet, but we are getting there.

Okay. And Karen, could you give us your current estimate for capital expenditures and the depreciation and amortization this year?

The CapEx for the year is $28 million. In Q1, we spent $20 million. The depreciation for Q1 was $6.3 million; estimated for the year would be $25 million.

So, you are only going to spend another $8 million in capital expenditures for the balance of the year?

That's what we have budgeted.

Okay. And, as far as this, I read in the press release Barclay that you bought this property for $19 million and it's going to essentially replace Brea?

That's correct.

So, you bought the plant and the land and everything completely for that kind of expenditure, am I correct?

Yes, that's right.

And so, where are you producing the products that will ultimately go into this new facility to replace Brea? Where are you producing them now?

Well, a lot is being produced in Northern California.

Okay. So you're going to move that stuff from Southern California and then increase your capacity potentially in another plant?

The Brea operation is not down. We are still making some things there.

Okay. So, you're still operating at Brea?

Yes.

Okay. And thank you very much.

Okay, Barry.

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

Hi, Keith.

Hey, good morning. Just a couple of questions, kind of follow-up on a question earlier related to the improvement in gross margin for the fourth quarter to what we -- to the 41% we saw this quarter. Did the fourth quarter of '09 didn't it have -- was it burdened with some extra cost related to some changes in Europe and some other decisions you guys had to make related to some acquisitions?

We had a little bit of severance in the fourth quarter of '09.

Okay. And how much was that that would have hit kind of the gross margin line?

I believe it was slightly less than $0.5 million.

Oh, only that. Okay. The -- and when you were talking about the 20% increase in steel prices, was that kind of based on where the market was at the end of March or was that kind of based on an average market price going into inventory in March? I was trying to equate that to some of the other -- some published steel indexes and some of the year-over-year price increases that those were showing?

That's where it is now.

Okay. I think you mentioned Home Depot sales were up 15%, did you mention what the overall home center sales were up?

No, I didn't, but we've got that. Overall, home centers were up 8%.

And then, you mentioned how well the European sales trends were. What about the profitability in Europe?

Europe is, we think, going to be positive this year. It was not last year.

Okay. And how about -- how was it for the first quarter?

Do we have numbers on that for the first quarter?

Europe lost $1.7 million in the first quarter.

And then I guess sales up year-over-year, but you didn't seem to talk about account side of your initiatives that there was much increased market activity? I mean are you...

Well, we've been getting considerably more market there.

Been gaining more market share?

Yes, we have.

As we kind of look into the...

And also we made some acquisitions.

And those acquisitions added?

I don't have a number on that.

Okay. From a seasonal standpoint as we kind of move into the second quarter, I mean you guys are beginning to feel that underlying markets were showing a little bit more strength related in the first time homebuyer tax credit improve in the construction activity as we kind of move into the summer?

I think we've got to wait to see. Our branch managers throughout the US are reasonably optimistic, reasonably.

Okay.

And you can make your own definition of that word.

As broad as or as narrow as I want to right? All right. Well, I appreciate the answers. Good luck.

Okay, Keith.

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

How are you, Steve?

I am well. How are you, Barc?

Good.

Great. You've been through a few recessions in the last 50 years, I am sure this is the worst one. But, have you ever seen a snap back like we just saw first quarter versus the previous one?

Oh, man, that's a good question, and I got to admit I don't remember. I doubt it.

I mean, so you just don't --

Yes I doubt it because in history I don't remember a single quarter where we lost money until last year. So, it was easy to make a big jump up when you have a very poor quarter to compare to.

And after all of the fallout, there were numerous, I guess, intermediaries that just went away last year. Has the dynamic with the survivors really changed?

I don't think so.

Okay. Switching gears just a bit, so the facilities that you have for sale in Brea, California, are they of similar value to what you just bought?

Let's see.

Their value is slightly lower than what our purchase value was.

Net-net, it's not a huge change, not that you couldn't afford it. And on the software, as you said, I think it was European product, can you migrate to North America and what is it due to the like calculate the stress and loads?

No. The software company we brought is American.

Oh, it is.

Yes.

Does it like calculate the stress and loads and then the connector that you need to finish --

Well...

The job?

Deck Tools, the name when we bought it, says what they do. You can buy their software and design your own deck.

Oh, it's Deck Tool. I thought you said Connect tool.

Oh, I am sorry. No, Deck Tool.

Got you.

But our people think that it's possible in the long run to advance that to increase the kind of structure that you can use that software for and the software gives you everything; like you design it and it will tell you how many nails of what size, you know, everything. So, it makes it so easy for somebody to do the work themselves. And, we are after the home centers to carry that software, and no answer yet, but we are certainly going to keep after them, because we think they can sell a lot of it.

And it will presumably specify your products to get the job done?

Well, yes, surprisingly it does show some of our products in there.

Very interesting. Okay. And then, finally, there has been wow, like a rash of earthquakes in the last quarter, do you go into those areas and almost, as part of reconstruction, seed the market, so to speak, with your product?

Well it varies all over a lot depending on where the market is. But we have developed -- we do pay attention, our engineering staff does, and we have developed an international reputation for knowledge about earthquakes and such things, natural disasters, so that we do get called as to how you solve it and we are working on them.

Like in Tokyo last year, they have surprisingly the best facility, test facility, and they test at a seven-storey building and we were part of the whole project, had our connectors holding it together, and it was a scary thing to watch that. I have seen the video, I believe it was a scary thing to watch that structure go back and forth, back and forth, but it did not collapse and the pressure put on there was well over 7.0.

I saw, it was remarkable. I was almost thinking you could have like a response team of sorts to go to these zones afterwards. Anyhow, thank you very much. Good luck in following quarter.

Alright, thanks.

(Operator Instructions). Our next question comes from Peter Lisnic with Robert W. Baird.

Good morning.

Good morning, Barc. How are you?

Okay. How are you?

I am doing well, sir. Thanks for asking. First question, I guess, if you look at the Asian operations still don't have a number in terms of what the losses there are, but what sort of ramp do you think you need to get to break even? Is that maybe an end of this year kind of run rate proposition, are we looking a few years out, what's sort of the plan on that front?

Well, nothing with numbers that will be accurate, because there are too many things that we are working on that are unknowns, and as yet, we don't know but a small percentage of the products that we will end up making there. And so, when you make projections or you force your people to make projections, and they are out a ways. I decided many, many years ago that any projection over two years really often, most of the time, doesn't mean anything. Things change and particularly in a different country that's changing itself all the time. So, we know that China is an important part of our future. Gauging how soon we will make real money there is really tough, but of course, that's the objective.

Okay, trust me. After trying to model your first quarter gross margin, I understand how difficult it is to forecast. Yeah, I guess the second question is, if you look at the steel price increase that you have seen, can you maybe give us a sense, just assume those kind of stay flat with where they are, but can you give us a sense as to what sort of magnitude of a price increase you might need just to kind of offset that annualized headwind that you are going to be seeing over the next few quarters?

I am sorry. I really can't go into that.

Okay. Alright that's fine. And then, you are talking about some of these cost savings that are helping the gross margin or operating margin. Can you also give us a sense as to what piece of this might be variable versus fixed or maybe another way of asking would be, let's say, you get to 1 million starts. Is there some number that you can give us in terms of what sort of structural cost you've taken out at maybe that start level or some other start level that would make the math helpful for us?

That's the tough question for me. I can't answer it. Can you Karen?

Well, obviously you would have to bring some employees back, so that would affect some of our gross margin as we begin to bring some of those employees back. And as far as anything on the operating expenses, we basically look at these [dates] still. Every month and every quarter, we are looking at our total numbers and what we need to do. We don't want to make any decisions that would put us into -- till we see how the market is really going. And at this point, we still see it fluctuating pretty significantly. So, other than the employees we brought back into the factory for manufacturing, that has been our only changes at this point.

All right. Well, when I look at that first quarter gross in the context of what you have done historically, let's say you ramp from whatever volume to whatever volume you want to assume, are we looking now at an entity, because of some of the costing that you have done that is more of a normalized mid-40%s kind of gross margin company, is that something that we can assume or is --

Well, we certainly hope that turns out to be the fact, but I certainly wouldn''t make that projection now.

Okay. All right, that is all very helpful. I appreciate the time and thank you.

Okay.

Thank you. Our next question is a follow-up from Trey Grooms with Stephens Incorporated. Go ahead please.

Hi, Trey.

Just one other follow-up and the last caller just touched on it and actually kind of cleared it up to some degree, but just looking at the seasonality, 1Q is usually the seasonal low or seasonally kind of weak. And I just wanted to get some clarity on Karen's comment earlier about the second quarter margin, did you say that you expect or did I hear you right that you said you expected to be kind of flattish sequentially on the margin?

I don't think I said anything on the second quarter margin. I did mention that I would anticipate that our absorption rates would continue at the rates they are at now as we are again building inventory to meet our customers' needs.

Okay. Well, thanks for the clarity on that. I appreciate it.

Okay.

Thank you. At this time, there are no further questions in queue. (Operator Instructions). We have a follow-up question from Barry Vogel with Barry Vogel & Associates.

Karen, could you give us your best guess at your effective tax rate this year?

Yes, we are again -- we are not feeling comfortable at this point with the fluctuations that are going on in the market and also certainly our foreign losses, so we are not estimating the annual effective tax rate.

So you don't have a guess as to what the effective tax rate is going to be?

I do not.

Okay. Thank you.

Thank you. At this time, there are no further questions in queue. I would like to turn it back to our speakers for any closing remarks.

That's it.

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