Simpson Manufacturing Co Inc (SSD) 2010 Q2 法說會逐字稿

Good day and welcome to the Simpson Manufacturing Company second 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, Beth. And good morning everybody and thanks for joining Karen Colonias, our CFO and myself. We also have with us Brian Magstadt, who was responsible for most of the press release. So I guess I'll have to be pretty careful.

Before we give you any numbers, you need to know that some of them are not as close as usual because of the required methods of handling home office costs that used to be applied to Dura-Vent. By the end of the third quarter though, Dura-Vent should no longer be part of our statistics.

The sale of Dura-Vent was essential because we could not figure out, no matter how hard we tried, how to get the necessary return on investment. The Dutch acquirer plans to get a foothold in America by using the experience and the talents of Dura-Vent's people and assets. Okay.

The second quarter was a relatively good one for Simpson Strong-Tie, despite the U.S. housing market responding as poorly to various governmental and other incentives. Still, our domestic sales were up 3.6% and our gross margin was up quite significantly.

Regardless of market conditions, we plan to continue increasing our merchandising, our sales and our new product development efforts. At the moment, our customers are not optimistic about U.S. construction in the next year or two. Well, they're not as optimistic as they were just a couple of months ago.

Regardless, when this market turns around, we'll be ready. But we're not waiting for it to happen. We continue to increase our efforts and finances to build markets outside of the U.S. International sales at Simpson Company reached a new high of 28% of total revenue so far this year.

Of importance was Canada, where sales were up, and Europe was up 10.5%. In the first six months last year, Canada lost $1.5 million. This year it was profitable. In the second quarter last year, Europe lost $1.6 million, and this year made a profit of $1.7 million.

In those two operations, we need to recognize their managers and people did an absolutely outstanding job and, of course, they were not alone amongst our people in doing a great job everywhere. We have people who are outstanding in these tough times and it's this kind of people who built this Company and will continue to do so.

Home center sales were down 8.7% for the year. A good gain in the first quarter was more than offset by 20.5% drop in the second quarter. Apparently, their expectations for the U.S. economy were like many others, lowered, which meant even tighter inventory control.

We always are looking for innovative ways to help our customers' sales, and DeckTools software and the way that it makes the design of a deck so easy and specifies our products to do the job, has caused this DeckTool software to be under review by our major customers. This software gets us into a new sophisticated market that we feel can be an important part of our future, and we're just getting started.

China and Asia still are an insignificant part of our sales, but we do not doubt their importance for our future revenues and profits. And we're willing to spend whatever it takes to become a significant brand in those areas. And we are making progress in the number one essentials to building a company in a new area.

Hiring and training the right people and giving them the tools to succeed. Such as a brand new 158-page catalog of products for the Chinese market and it's in Mandarin. Of course, the Chinese market isn't the first time that we've gone international in the areas where we really had nothing going on.

We did it in Europe and now we're -- we actually have a brand name in Europe. It took us a while to build it, but that's what we have to do in China and Asia. Quick Drive collated fasteners had sales increases of 50% for the first six months. These products helped to make our relatively new Australian operation successful and profitable.

It's taken longer than expected, but we finally have the products of our Swan acquisition integrated in our branch's and sales were up 7% year to date. Speaking of acquisitions, we made none this year despite having a strong balance sheet with lots of cash and examining closely many companies. One positive reason is that we have learned to do more and more exhaustive research before making an offer.

We continue to look hard at Asia, especially China, as well as Europe and the U.S. Because we consider China such an important part of our future, we just hired KPMG, highly experienced in China, to help us. To sum up the current situation of Simpson's strong transparent, Simpson Manufacturing , it may take a while to achieve our first major milestone, $1 billion sales, with 10% profit after tax.

The seeming likelihood of further delays in the recovery of the U.S. economy is likely to slow down our achieving that goal, as it takes time to get real power in foreign markets. But our people are excited to be part of an international company, and we will get there. But investors, you may have to be patient.

(Operation Instruction) Our first question comes from Garik Shmois Longbow Research .

Good morning.

Hi. Good morning. Thanks for taking my question. I guess first off, if you could give us a little bit of idea of how sales trended throughout the quarter. We've been hearing from a number of companies that it seems like April and May were strong months, then June slowed down. If you could offer some color on what you saw particularly?

Surely. Well, April was, with us, was an extremely strong month. And May and June were disappointments. That just kind of summarizes the whole thing. They -- here we had this booming month to start the quarter, and then the next two were flat.

Okay. Does it seem like that momentum from May and June is continuing onto July?

No.

Okay. Does July seem like it's getting off to a stronger start, weaker start?

Weaker start.

Okay. And you I believe raised some prices during the quarter. Was any of that reflected in the sales growth?

No.

Okay. And does it seem --

Any price increases didn't occur until the 1st of July

1st of July. Okay. Just wanted to be clear on that.

And we were a little disappointed that June, in anticipation of the price increase, was not a big month. I think it says something about the U.S. economy.

Sure. Does that suggest that maybe the price increases are being a little bit more difficult to implement than you anticipated?

Price increases always are difficult.

Okay. And Barc, you laid out this billion dollar sales 10% profit target. Could you offer a little bit of color around what assumptions you're using, maybe any benchmark with respect to U.S. housing or what kind of contribution from international markets you're expecting?

I guess some years ago I decided that any projection more than two years out really doesn't mean much. Now, you can have goals and but when you -- when each branch sets a goal, don't ask them to set a goal way out there. And the way the U.S. economy's going, I think it's going to take us longer to get there, to our first major goal, $1 billion and 10% after tax. We have -- this isn't the first time, wouldn't be the first time we've made 10% after tax. And as a matter of fact, I think, didn't we make 10% in this quarter? Last quarter?

11% this quarter.

Yes.

Right

But we are doing all these things around the world now to get things going internationally because it really doesn't look like there's going to be a quick turn around in the U.S. economy. I hope that's wrong. But I don't think it is.

Okay. And just lastly housekeeping question on G & A expenses. They cropped up from the first quarter. Guess they were flat year-over-year. I guess is this $20.5 million run rate, is that a pretty good number to use going forward?

What do you think, Karen?

The main increase for the SG&A is because of the increasing cash profit sharing. We haven't really added additional people, but it's the increase you're seeing is from that cash profit sharing element.

Okay. Great. Thank you very much.

Thank you. Our next question comes from Trey Grooms from Stevens.

Morning, Trey. How are you?

Good morning, Barc and Karen. I'm doing great. How are you?

Good.

First off, can you talk a little more about how the sale of the Dura-Vent business is going to impact some of your costs?

It's going to what?

Impact some of your costs. You mentioned some of your, I guess --

Oh, oh yes.

Things like that

It's not going to have a big impact. But Karen, you want to go into that a little bit?

We will have to allocate the -- some of the home office expenses that we had going to Dura-Vent will now be going to the strong type. And that's not significant. It will probably be approximately $400,000 a quarter.

Okay. All right. And then Barc, could you give us an update on some of the European acquisitions that you've done over the last few years? Kind of where they're at now as far as profitability?

Yes. Well -- ArGEnCohas been a great acquisition. It gives us much more control over the French market and our sales are up there significantly. Ahorn has been -- it took us a while to get them integrated, but they are going to help us in Europe in particular and elsewhere in getting into markets where we don't have -- did not have the right products to really get started. Now, Lebig, that has cost us a lot more money than we thought it was going to. However, its products are an important part of our future. And we are planning to make them in China. These are products to metric standards. And, of course, the rest of the world. We're all by ourselves. And we need metric products. So these -- not only will help us in China, but also in Europe. Help us to get started when anchor system products in Europe. We're just getting going there. And Lebig, it's still costing us.

So just in general sounds like they're three continuing to drag on the European operations even though Europe as a whole made money in the quarter. Is that a true?

Well, I think that's true, Trey. But it just has taken longer. It's been more complicated, particularly with Lebig in integrating these operations. But we got a guy there who's terrific at doing such things. Now he's got it done.

Oh, okay. So now that he has it done, when do you think these are going start contributing to earnings over there?

Well, they are right now.

Oh, okay. Great. Okay. And then last question is so the home center sales were down quite a bit. Did that trend continue into July? Did it start to flatten off any?

I have to look at July. I haven't seen that

Home center sales are fairly consistent with what they were in the second quarter.

Okay. To make sure I'm clear on this statement from an earlier question, you said July was weaker. Is that weaker than May or weaker than the quarter as a whole, just speaking of the connecter's business?

Well, the last three months, May, June, July were all, in our view, weak

Yeah. But you said May and June were flattish. But that kind of continued into July or did it?

Yes.

Perfect. All right, guys, thank you very much. I appreciate you taking my call

Okay, Trey.

Thank you. Our next question comes from Arnie Taylor with TGF Securities.

Hello, Arnie.

Hi. Barc. Good morning. Actually, I'm going to start with a couple questions for Karen. If I can?I think if I understand this right,you had a $20 million NOL and probably could generate another NOL of $21 million or so on the sale of Dura-Vent. Will that be in your queue and can you comment on that?

Right. We had a 21 net operating loss from the Dura-Vent sale. That's just as we've got listed in the press release. The $21.4 million was our impairment on the discontinued operations. That will be a spelled out a little bit better in our 10Q.

So when you report in the balance this year, your tax rate should be impacted by these NOLs and ability to use them?

Correct. Correct.

Second question, Karen. Do you have any thought of you about putting out an 8K detailing your starts just without Dura-Vent impacting results?

Well, we will continue with the income statement, with the with and without Dura-Vent. And that will be in all the months and the quarters that we report.

Okay. So when I look at that over the last 12 quarters or so, the gross margin in Strong-Tie has been, pretty much even in the worst downturn, Somewhere north of 40% for almost that entire time in the 40s to 43 this quarter was particularly, a particularly strong. Should we be thinking about the sustainable gross margin in the low 40s for Strong-Tie given that's what you've done and the severe housing downturn.

I think it will be difficult to maintain our current gross margins. We are seeing a softening of the sales and I think that will affect our overhead absorption. We are already starting to see that a little bit now into the third quarter.

Okay. But again, relative to the 12 quarter period which had been north of 40, as high as 43 even in much lower utilization, should we be thinking of that level as a pretty normalized level, even if things were to slow a little bit?

It's a little difficult to state a normalized level. We will continue again to look at our overhead absorption and the things associated with gross margin and the materials, but I think it would be a little hesitant to say a normalized gross margin.

Okay. My final question relates to just the operating leverage in your business with the facility shut downs and other cost-cutting actions you take. When I look at your business year-over-year you had a $13 million revenue improvement and $24 million EBITDA improvement. That's even after what appeared, very sizable increases in discretionary and compensation expenses. Even if things were to slow, how much of the cost cutting actions that you've taken are permanent and are likely to continue to show pretty good results on the EBIT margin line?

Well, I think a lot of these things are permanent. We are constantly working on increasing our knowledge of how to manufacture things automatically and also to save costs in all kinds of ways. It's been surprising how many things we have been able to really save money on and we're constantly working on that. So I don't see that being anything be a help in the future.

Okay. Thank you very much, Barc.

Okay, Arnie.

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

Barry, I wondered if you were there.

Well, I'm here. I have a couple questions for you and a couple for Karen. Why don't I start with Karen. What would you say Karen would be the effective tax rate this year?

Well, we are still a little bit hesitant to look at that based on what we're seeing in sales. We're doing better from our foreign operations. If I was to take a guess, it's probably going to be in the mid 40s.

45%?

Yes.

Okay. What's your outlook for the full year in capital expenditures excluding sales of properties and your depreciation and amortization expense for the year?

We're looking at the CapEx to be about $33 million for the year. And depreciation $22 million for the year.

Okay. And for Barclay, going back to the breakdown of your sales, can you give us some idea the percentage changes for Strong-Wall anchoring systems and Europe in the quarter versus the quarter last year?

Yes. Okay. In the quarter, Europe for instance went from -- went from 16.4%to 16.9% of the total. Total sales.

You don't have the sales -- the percentage change?

What's that?

You don't have the percentage change? That will make it easier.

Oh, yes. It's 10.5% up.

All right. So in the quarter, Europe was up 10.5% in revenue?

Correct

And anchoring systems?

Anchoring systems, I'm uncomfortable with those numbers. What do you have there? I just can't believe them.

Anchoring systems is up only 1%.

Anchoring systems up 1%.

And sheer walls 9%.

Okay. And can you tell us, the Sheerwall, did they break even or make a little bit of money?

Well, Sheerwalls, it is profitable.

Okay. Sheerwall is profitable.

Sheer wall always has been profitable.

Did I hear you correctly that Europe earned $1.7 million pretax in the quarter?

Yes

Okay. Could you, Barclay --

Wait a minute. Was that pre or after tax? Just one second. Let's have a look here. One second.

Yeah, that's net. 1.7 net

So what would be the pretax number?

That's after tax.

Yes. What would be the pretax -- the operating profit number? The EBIT number?

You mean the pretax number?

Yes. Instead of $1.7 million, I liked to have the pretax number on Europe?

Well in the quarter it was $2.5 million.

Okay. And could you tell us the percentage change in the quarter on the different sectors of the country starting with the west, excluding California?

Yes. Let's see. Well, the west in the quarter, excluding California, was down 4%.

California?

California down 2%

South/southeast?

South/southeast was up 5%.

Midwest?

And the mid-west was up 12%.

Northeast?

14% up.

Why do you think -- do you think the disparity is because the west, including California, has been hurt the hardest?

Oh, yes. California has really been hurt.

Okay. So the fact you were able to have sales gains in the south, southeast, mid-west and northeast, that's not a negative thing, that's a positive?

Oh, yes, absolutely.

Okay. You mentioned steel -- I'm sorry. Let's go to Asia for a moment. Karen, can you give us some idea what you think the startup costs in Asia are going to be for the year?

Wow, that's a tough one. Yes. Well, we pretty well have taken care of the startup costs for Asia last year with the selling offices. We are adding a few more sales people, but as far as the plant and the sales office, there's no additional startup costs this year.

So how would they affect your P & L in your opinion on an estimated basis?

Asia sales are doing much better. And they're looking like they're trending to soon be profitable in the total Asia plant and selling offices.

So do you think they could break even this year?

I think that would be still a little bit tough to get to that point.

But a smaller loss?

Yes.

Okay. I know you commented a reasonable amount about the steel situation in your press release. And you mentioned the fact that steel prices had come down. And of course this issue has been discussed several times in your quarterly reports. Going forward, it seems to me you have complete control apparently about your pricing relative to steel costs promulgated by the steel industry. Do you think that's a correct statement?

Well, that's a pretty strong statement, Barry. We actually have very little control.

Well, but your margins have done very well. Given all the --

You know, the way steel affects our profits varies widely from one quarter to another. It can vary widely. And you just can't guess it. So there's no use trying to. We're very happy when we happen to be lucky on buying some steel ahead of time and it's lower than what steel ended up. Well, right now steel is going down again. And who knows?

One more question for Karen. On your asset sale on your balance sheet, it was about $40 million. You have had real estate in California. I think it was the San Leandro facility up for sale last couple of years. Is the $8 million of the $40 million that particular situation and the balance the proceeds from the Dura-Vent sale?

That's both San Leandro Building and Dura-Vent sale that your seeing that you saw for sale. That's correct.

Maybe $8 million was San Leandro and maybe $32 million in the proceeds.

Correct.

Okay. If you sell those things for those prices will there be any tax, would there be tax affected, in your opinion , or would that be cash, pure

Most of that would be cash.

So it's possible by the end of the year, if San Leandro was eventually sold, you could take in $40 million in cash.

That's correct.

Okay. Thanks very much. You did a great job. I must commend you for the performance given the tremendously low level of activity in the United States and housing activity.

Thank you, Barry. We've got some great people.

I know you do.

Thank you. Our next question comes from Steve Chercover with D.A. Davidson.

Good morning, Steve

Good morning. How are you both?

Okay

Great. So, Karen indicated that you will be eliminating or I guess restating results going forward to eliminate Dura-Vent. Is that correct?

Yes. They're already in the current press release you have. Discontinued operations and continued operations.

Okay. I can see that. So, what you gave us just what the operating income for Strong-Tie was. Do you have that available?

Yes. Strong-Tie's operating income was $34 million.

And is Dura-Vent in there now or is it stripped out and we can kind of forget about it?

It is stripped out.

Okay. My other question was more about your channels. There's one specifically thatyou're not in, which is Fastenal, which is a huge retailer. Is there a reason for that?

Well, we've certainly been in contact with Fastenal and would like to get our products into their distribution line. It works very well with some of our anchor systems products. So it certainly something we've been working on and we'll continue pursuing.

Okay. But you're not in there currently. But it's an opportunity

That's correct.

That's correct. And we -- Fastenal is really a terrific company. I don't have to tell you that.

I don't know them all that well, but I happen to go in one of their stores and I was poking around. I looked for some Simpson product. They said they didn't have it, they'd love to. Just maybe that was an opportunity. Okay. Thank you very much

Okay.

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

Good morning, Bob.

Good morning Barc, Karen. How are you?

Okay.

A question on what you saw in May, June, July, and disappointing. Is that broad based or is that just tied to the U.S. residential market?

U.S.

So did the pace of growth in Europe and international, is that holding up or are you all seeing a slowdown there in?

Yes, it is.

But not to the degree of the U.S.?

We're getting, as I think I mentioned, our manager there in Europe, he's had a tough job for the last two or three years integrating these acquisitions, which two out of three prove to be a little tougher to get them integrated than we thought they would. But now, he's got things going there. I think Europe now is doing to stay profitable.

So despite all the headlines in Europe, you're not seeing any sort of slowdown in the pace over there?

We are -- I think there's a difference in Europe, in that we have a great deal more market to gain than we have in the states. So, if that's exactly what our operations there are doing. They're selling more products. And getting more business even though those economies are varied, they vary a great deal and they are booming.

Okay. Great. Where was utilization in 2Q '10 and where was it in 2009 for Strong-Tie?

Well, we're -- as I mentioned, our overhead absorption has been very helpful in both first quarter and second quarter to helping out our gross margins. We are starting to see that slow slightly again because sales are being reduced. So we don't want to have a huge buildup of inventory. And yet we still want to be very responsive to our customers. But we are seeing a little bit of reduction in our work force on factory utilization.

Right. Is there a number that you can share with us?

No

Okay. But higher in 2Q '10 than '09 utilization?

Yes, it was. I think if we looked back to '09, we were at the point where we had an abundance of inventory and we were greatly reducing our work force in the factories, in the running of the factories to give us time to burn off that inventory.

Okay. What I'm trying to figure out, the improvement year and year in the Strong-Tie, operating and gross margins. You don't have to give exact numbers, but maybe in order of magnitude, cost cuts, productivity improvements, raw material benefits? Why such a big improvement year on year on not such a tremendous improvement in volumes?

Well again, if we go back to the factory utilization, as I mentioned in 2009, we had quite a bit of excess inventory and we spent probably the first three quarters of 2009 very low utilization of our factories. We were burning through our inventories and our customers were burning through their inventories. So we are seeing much better utilization into the first half of this year because we are now at the point where we have got our inventory level where we think is a good spot to maintain them, but we want to again be able to be sure we can meet those customer needs.

But, utilization is the proponent of the year-over-year improvement solely?

Not solely, but it is a large piece of that, yes

Okay. Great. Now, you threw out the billion dollar target open-ended and a 10% net margin. At a considerably lower level of sales, even in peak 2 million starts in 2006, you were earning north of 12% margin. Why wouldn't that, with Dura-Vent dropping away and a big restructuring in 2009, why wouldn't that 10% be wildly conservative, given what we're seeing here?

Well, we hope it is. But I think over time, we've learned to -- it's much better to achieve more than what people think you're going to achieve. So you make your public announcements less than possibly you're going do. If you go the other way, that's no good at all.

Understood. It seems like you've really improved your business structurally here despite still very weak demand.

Well, we have. But I think that 10% after tax in the construction industry, how many companies do you know who make that?

Not many, Barc. One final one. And this is kind of a follow-up from an earlier question. If we kind of want to estimate for ourselves what Simpson did with Dura-Vent out of he mix, if we were just to strip out the Dura-Vent numbers from prior Qs, would that get us to a sense of what you will report going forward for previous quarters?

Yes, I think it will.

And then what effect does pulling Dura-Vent out of the numbers have on the corporate expense line, if any at all?

Well, I think it has some, of course, because they were losing money. Like, as I recall, they lost, was it $2.7 million last year?

Yes. But I'm more -- you have a corporate expenses line that you report in the Qs. Would that number change dramatically if we were just to exclude Dura-Vent from the numbers?

No.

Okay. Thanks.

Okay.

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

Hi, Peter. How are you?

Good. How are you, Barc?

Okay.

Excellent. Couple questions. First, now that you've sold Dura-Vent effectively, can you maybe talk about capital ail location priorities? You mentioned Europe and international acquisitions. I'm wondering in terms of cash on balance sheet, still focused on, kind of the connecter product portfolio or is there an appetite to go after something different in the building product space as well now?

We try to have very open minds when we're looking at acquisitions and something like, for instance, Deck Tools. That's a totally different thing, software. And I think it fits right in with our objectives. We -- were constantly looking for acquisitions that not only add to our current list of products, and distributors, but will enhance the number of kinds of kinds companies we can go after to handle our products. And we'll constantly look hard.

Now in Asia and in Europe. We're not -- we don't restrict it to products we see immediately adding to our product line. Because if you broaden your outlook, yes, it's very difficult to find them, and we haven't found one this year that we felt was worth while. But, we're not restricting our viewpoint. And that's kind of a mixed way to describe it. But, we've looked at so many different acquisitions that I don't have an easy way to describe it.

That's actually a very good description. Thank you on that front. If you could just follow up, you just mentioned, obviously, you haven't required this year, but what is sort of the pipeline look like? And if you can get into maybe what pricing on any of the things that you've seen or are in the pipeline, that would be helpful.

Well, we're always looking at several. And we've got one or two, don't we, Karen, where there's maybe at least a 50% chance. But I have learned over time that a 50% chance ends up more often than not, not to work out.

Okay.

I can guarantee we're looking harder than we ever have. And KPMG is another example of that. Hiring them.

Yes. I understand that. If you look at those acquisitions, given what you've experienced with let's use Lebig as an example. Have your thresholds, in terms of financial metrics or returns, have those tightened or has your funnel sort of narrowed because of some of the heavy lifting you've had to do on some of these integrations?

That's true. We have -- well, our research has increased before we make an offer. We've learned that you almost invariably, once you buy a company, you get a surprise or two and they're never positive. So we're looking harder to see if -- with Lebig, we really didn't realize what it was going to cost us to get that, those products, which really, they're still an important part of our future, but it's costing us a great deal more to get them going than we thought it would. So we're looking harder.

Okay. All right. I just want to circle back to I guess the home center comment and what you saw there in terms of comparison in the second quarter. You eluded to the fact that basically the economic outlook on their part weakened or they became more conservative and took inventory down. Do you have a sense as to what the inventory levels are at your customer base in terms of, what it might mean for second half production? Are they under inventoried? Are they, sort of at an optimal level? Any reading on that front?

Well, they definitely have cut back on their inventories. And I think, as far as we're concerned, the wrong reason. We hope they're wrong, but we suspect they are right in not expecting any upturn significantly the rest of this year at least. And I think just from talking to our customers, specifiers, our own people, other companies, the expectations for the U.S. market, particularly housing, have gone down some in the past few months. I hope that's wrong, but you have to prepare for it. And they are.

Okay. And then by the same stretch then, can you maybe comment on how you feel about your inventory levels, if indeed we're looking at a second half and potentially 2011 that might be a bit weaker than people thought two, three, four months ago?

Did you say Europe?

No, no, your inventory. Simpson overall

Oh, our inventory?

Yes.

How are we doing with those, Karen?

I think we look at our inventories and the product mix in those inventories on a weekly basis. We always wan to make sure we mentioned keeping in tune with what we need to meet our customers' requirements. That's certainly one of our strengths. So we are fairly happy with where our current inventory level is to be able to work our factories and still be able to provide our customers excellent customer service and with the product on time. We look at that on a weekly basis.

That would also mean that you've probably adjusted as well to the weaker second half outlook, when it comes to inventory, correct?

We are adjusting, Correct.

Okay. All right. Thank you very much for your time and your help.

Okay. Now just one more comment there. It has long been a major purpose of ours, never to run out of a product because you have a customer who has a customer, contractor, and he's got carpenters on the job and he forgets to order the connecters, or he orders the wrong one, or he doesn't know how to install them quickly and efficiently. Well, you want to get the product there right away. And that's been a constant objective of ours. And I think it makes money for the customers and their customers in particular. And it saves them money.

Thank you. Our next question comes from Julian Allen with Spitfire Capital. Go ahead, please

How are you, Julian?

Morning, Barc. Thanks for taking my question.

Right.

Just a quick follow-up on the state of inventory through the channels. Sounds as if in the first quarter this year you enjoyed some benefit from restocking with the channel anticipating perhaps a brighter outlook in housing than they're actually going to experience this year. As those expectations come down, do you expect a destocking process or do you expect some kind of stability out there? I realize that's a hard question to answer.

I think our experience in the first quarter was that our customers were much more optimistic. I don't think there was an overstocking of their inventories. There was a little bit more because they were certainly seeing their customers have more requirements. So I don't believe we would see a de-stocking. I think we're kind of at status quo where they're more ordering as the jobs are coming in.

The further demand is dependent on pull through from end customers as opposed to inventory adjustments in the channel.

Yes. I believe our distributors are really watching our inventories very closely and looking for that customer. Correct.

Thank you. My last question, with respect to gross margins and their relationship with capacity utilization, it seems as if you're achieving now north of 40% at the capacity utilization's that are certainly well below 100%. Can you give us a directional sense or even a subjective sense that were capacity utilization to increase from here, at some period of time, are there any reasons why that benefit would not continue to accrue to your gross margin line? Pushing aside other issues like raw materials?

Well, if our capacity utilization would be increased, our labor would be impacted because we would be hiring more people who have more utilization. So it would be somewhat of a balancing act.

And looking back over time, could you tell us what were your not necessarily peak, but within, we've had this question of trying to separate Dura-Vent from Strong-Tie gross margins. But, at a 10% net margin target, what would your gross margins look like at that level?

We're looking at each other, trying to think of who can answer.

Yes. Not sure where we would estimate those at this time.

Thanks very much. Thank you

Okay.

Thank you. We have one final question in queue. Comes from Martin Mario with M.S.W Properties. Go ahead, please

Good morning, Martin

Thanks for taking my call. My question relates to the sale of Dura-Vent. As you know, a second European manufacturer voiced an interest in acquiring the assets of Simpson Dura-Vent but was not given the opportunity to participate. Do you think you have optimized the proceeds that you could get from the sale of that company?

Oh, I think so. And also, you have to know that was not our number one objective. Our number one objective was to sell the Company to a company that would really need their people. And we've got some very good people there. The industry just changed drastically. And despite having excellent people and management there, they just couldn't adjust. Well, this Dutch company, we like them because every indication was that they needed this operation to get them going in the United States. And, of course, if you need the operation, you not only need the facilities, you need the people. That's number one. So that was a major reason that we sold the Dutch company.

As you know, the plan when product was purchased by Simpson Dura-Vent, the plan was to bring in central tech into the game so that there would be Synergy between Simpson Dura-Vent and the new products that come in from Europe. And so I'm just somewhat surprised at the turn of events that took place. So my curiosity is that, the original strategic plan was eventually executed, except Dura-Vent lost a lot of money in the process. That's just my fine comment. Thank you.

Right.

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

Okay. Well thank you all for listening, whoever is still on, and I can assure you, anybody who is still on the call, this is a long range company and we are determined to have a long-range future. And a successful one. Okay? All done.