Simpson Manufacturing Co Inc (SSD) 2010 Q4 法說會逐字稿

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

Good morning, all, and thank you for joining our CFO, Karen Colonias, and myself. As far as net earnings go, the fourth quarter was some of the worst of times. We had substantial goodwill charges relating to Liebig, and it will take the rest of this year to get that operation cleaned up. Without that charge, Europe showed considerable progress and was profitable for the year, with sales up 8%.

Asia, mainly China, showed a sales increase of 30% in the quarter and 74% for the year. The loss for the year still was substantial, $1.1 million, but down from $3.7 million in 2009. Our Chinese plant's manufacturing space is roughly 50% in use now, producing imperial and metric mechanical anchors. Our Australian operation continues to do well, with sales in the quarter up 52%, and profits also up substantially. For the year, sales were up 61% and 2009s loss became a profit.

Our Canadian operation made considerable sales and profit increases in the first three quarters, establishing a strong market position, but the economy caught up with them in the fourth quarter. However, sales for the year were up 26%, and profits went from a loss to a good return.

Getting our Anchor Systems' products established around the world has been a very expensive process, but one of considerable importance for our long-range future. Substantial costs will continue this year, but our Socom acquisition should enable us to expand our business in Europe.

Speaking of acquisitions, we're not happy. In fact, we're unhappy about the lack of any, except for Socom last year. We have several potential ones of substance that are close to the negotiating point, but none that is a sure thing. However, we continue to look hard around the world, and we have the resources, cash, that is, to buy them.

Speaking of cash, it may be time to consider buying some of our stock. I want to ask you a favor. When you ask a question, please start with yes, no or maybe, about the stock buy. Just that one word will do it. And I'll appreciate that.

Okay. Questions?

(Operator Instructions) We'll take our first question from Trey Grooms with Stephens, Inc. Your line is open.

How are you, Trey?

Hey Barc and Karen, how are you all doing?

Good.

Wonderful, thank you.

Good, okay. First you mentioned considering buying back some of the stock. Have you thought about how much -- what kind of size you're talking about here?

Well, I have an okay from the Board to spend $100 million. However, that doesn't mean I'm going to do that. I have not decided yet.

Okay.

What's your opinion?

Well, I don't know. I mean, you guys have always been, have always had this thought of using cash for growth and acquisitions, which makes a lot of sense, but if you can't find acquisitions, I mean -- and there's -- you're already spending on expansions and so forth and you're funding those without problem and there's no acquisitions to be had, I mean, it kind of makes sense to me that, that would be an option to look at seriously.

Okay. We are, yes, we haven't been lucky last year. We were not lucky in finding acquisitions, and a major reason is that we've learned to really look them over. Liebig has cost us a lot of money, and I think at least partially it's because we didn't look carefully enough. Now we are, but we do have two or three that at least one or two are likely.

And those that are likely, are they of any size?

Yes.

So if either one of those or both of those happen, would that have any -- I guess would that cause any issues with the buy back or potential buy back?

Well if all three happen, yes, it probably would. However, we've got, what, $330 million and that's an awful lot.

Right. Okay. Have you thought about time frame of a potential buy back, would that be something if it happened, would it be something that happened this year?

Well, some of it, yes.

Okay. And that would just be something that would take place over time? It wouldn't be like a tender or anything like that?

No.

Okay. And I guess Karen, this question is for you, looking at, kind of where steel costs are currently, and looking at kind of where your thoughts are on utilization rates, because I would think that your inventories look pretty good and your thoughts on utilization rates kind of going into the first quarter, along with kind of, where steel is currently, do you have any thoughts on where you think gross margins might shake out for the quarter?

Well, I think you guys have all heard that steel prices are still going up. I think there's been at least six increases over the last 60 to 75 days and certainly that impacts our gross margins. Our October -- or excuse me, our fourth quarter typically is a little bit slower time so our utilization was slightly down. I would anticipate a little bit better utilization in first quarter, but certainly the fluctuation on what may be happening in the steel market could have some impact on us. So overall I think we'll see some fairly consistent gross margins.

Consistent sequentially or year over year?

I think, fairly consistent for Q1 to Q4.

Okay. Okay. That's very helpful. Okay, I'll jump back in queue. Thanks, guys.

Okay.

And we'll take our next question from Arnie Ursaner with CJS Securities. Your line is open.

That's Ursaner. How are you Arnie?

It's actually Torin Eastburn filling in for Arnie. Sorry, Arnie's enjoying the weather in the Dominican right now.

Oh, okay.

My first question is about price increases and volumes. Your growth year over year in this quarter was about 4%. I would have thought that steel price increases alone would have been more than that. Does that mean your volumes were down year over year?

Well, we're not ready to talk about that yet.

Okay. How about the level of requests you're seeing from customers right now and going into the spring?

Well, we're -- you mean as to whether we're getting more interest in -- you think the housing starts are going up?

Oh, I personally I'm not optimistic about that, no, but your customers may feel differently.

No, they don't.

Okay. The sequential margin decline in Q4, can you provide any color on how much of that is related to lower utilization and how much is related to inventory costs?

Most of that, as I mentioned, Q4 is typically a slower time for our factories, so the majority would be back to utilization.

Okay. Also can you provide any color on how you think you did with market share in the US this quarter?

Market share in the US? Well, I think that our market share, if anything, probably went up a little. We are, I think, well, I know, we're spending money on merchandising and on sales, and not cutting back on those particular costs, because we have the money and it's very important for the future, and I think we have gained a bit of market share.

Okay. And my only other question, Barc you transferred a portion of your shares I think to some of your family members.

Right.

Are you willing to comment on the rationale behind that?

Sure. I didn't want my -- I have seven kids. I didn't want them to be holding their breaths until I died, so I gave them each 200,000 shares of stock, and now, now I don't want to sell any stock and I've told them, except for a couple of them who had to sell a little for debts, I'm going to have to make a very large loan based on stock rather than sell the stock because I haven't changed my feeling about the long range future of this Company and its stock.

Understood. Thank you.

And, we'll take our next question from Garik Shmois with Longbow Research. Your line is open.

Good morning.

Hi, good morning and it would be a yes for me to your initial question.

Thank you.

For many of the same reasons that Trey outlined. But, I guess my first question is it possible to quantify how much costs you still have remaining with respect to Liebig and how you expect that to flow through this year as you work to clean up that operation?

Well, Liebig, we're going to be closing the plant there in Ireland, and when you close a plant, you have some real costs with people. You can't just throw them out in the street broke, so we'll have some substantial costs and just what they're going to be right now, I don't know. You got a crazy guess, Karen?

We have taken the full good will impairment for Liebig so there's nothing remaining there, but certainly we'll take a little while when we're looking at some things with those operations and I don't have an exact dollar figure for you, but we will certainly be looking at not only improvements in the sales of the Liebig product but we will be looking at some of the things that we're going to do from the factory standpoint.

Okay. I guess a little bit backward looking for -- into 2010, is it possible to make a stab at how much of a margin impact Liebig was on your operations?

Well it was big time. If you take Liebig and Anchor Systems, Anchor Systems are the products that we're selling in Asia for the most part. And because of the distance in getting the products there while we were getting our plant set up, costly. Cost us a lot of money. Took our earnings and really bashed them good. However, this year we'll still have some of those costs, but we're getting things integrated. We're getting -- we're making the products, a bunch of them in our Chinese plant now and that makes a big difference. Really a big difference.

But, you'd expect clearly, margin expansion once utilizations improve and once the operations become more streamlined, you'd expect pretty -- some substantial gross margin expansion from this point forward?

I think it will enable us to keep a very good gross margin.

Fair enough. Just switching gears on the home centers, a couple questions there that I didn't see answered in the release. What was the percent of sales to home centers during the quarter and secondly, after an inventory build I believe a quarter or two ago, there was some destocking at the home centers. Do you get the sense that that's largely completed?

Karen, you got a good answer to that?

One second.

We have got some numbers. Just take us a second.

I'm sorry, yes. So home centers was 12% of sales, and I'm sorry, your second question was about the destocking of home centers?

Yes, and I guess the question is pointing towards where -- where do you think home center inventories are right now and, if you think that they're going to resume a bit more normal buying activity going forward?

Yes, I think we've seen the home centers be very similar to our distributors in that they're carefully watching their inventory. We haven't seen that there is going to be some big increases. I would anticipate that their methods for next year will be very similar to what their 2010 purchase history was.

Okay.

Very, again, concerned about inventories.

Okay. Great. Then just lastly, what was the percent of international sales as a percent of the total?

For the quarter, international is 30% and 29% year to date.

Great. Thank you very much.

And that's a record as it has been every year for the last few.

Yes. Okay. Thanks a lot.

And we'll take our next question from Peter Lisnic with Robert W. Baird. Your line is open.

Good morning, Peter.

Hi, good morning, this is actually Josh Chan filling in for Pete. It's encouraging to see that some acquisitions could be close. I was just wondering if they all happen, do you expect to have to incur debt to make those acquisitions?

No.

Okay.

No debt.

Okay. Then my second question --

As you know, we have $330 million in cash.

Right, so you can definitely do a lot with that. I understand.

We can take a big one.

Right. And then my second question is for your G&A expenses, I mean you mentioned some items in a press release like stock option expense and IT costs. Can you help us understand whether those costs are one-time this quarter or will they be sort of continuing on in to 2011?

Most of those -- so the stock option would be one-time for the quarter. The computer expenses were some hardware, so that would also be just the Q4 expense. A lot of the SG&A was the CPS increase, that's been fairly consistent throughout the year as the increase in -- as our operating income and net income has done better, you've seen that increase in the cash profit sharing piece, so that still has been a piece of that SG&A increase. But the computer expenses that you mentioned are one-time.

Okay. It sounds like most of it is one-time in nature. Okay And then finally Karen --

But a lot is a lot of expenses like that will continue. You know this -- our direction is never to worry about short term profits, if we can spend some money that will really pay off in the long-term. So we have expenses that reflect that.

Do you have an idea what those expenses would be in the next coming year?

No. No. They're just over time we found that these opportunities show up and we jump at them. Any guess would just be that, a wild guess.

Okay. I understand. And then, final question is, Karen, do you have the cash flow from operations number for the year?

Cash flow was $77 million.

Okay. Thank you very much.

You are welcome.

And we'll take our next question from Steven Chercover with DA Davidson. Your line is open.

Good morning, Steven.

Good morning Barc. Good morning Karen. First of all, my answer is yes.

Thank you.

If you can't buy companies, buy the one company that you know best where there's no integration risk, and that's your stock.

Thank you.

So my questions are I guess are fairly simple. First of all, can you provide us with guidance for your 2011 tax rate? It's been moving around a bit, I believe.

Yes. Based on 2011 budget, we would think that the tax rate for the year will be around the mid-40s.

Probably the same for 2012?

I have not looked out to 2012.

Okay. And then with steel prices going up, someone might have touched on this, what are your intentions for price increases?

We're not ready to go into that yet.

Okay.

It's just, generally, when steel prices go up, everybody's costs go up, and so you have the opportunity for a price increase. And we have not always done that because we keep increasing our efficiency in our plants. But just generally, steel prices go up. Everybody has to raise their prices. Steel prices go down and you drop them. It's really that simple.

Okay. And on the topic that I never like talking about, but succession, Barc, I thought you indicated you were going to become a little less day to day. Is that still the case? And any indications on, I think Thomas Fitzmyers was also in the same boat.

Well I think maybe at the end of this year there will be some changes. But I don't want to go into any more detail right now than that. There are no sure things, but I think it's likely.

But presumably you'll be just looking at your own internal bench strength and it will be someone from within the Company?

Say that again.

Whoever takes over as CEO is probably going to come from within the Company?

Oh, yes, absolutely. Yes. We attract and keep the best people, and we don't have to go outside. In fact, it would be a loss.

Understood. Final question, since you're having difficulties consummating transactions, have you been discussing any adjacent businesses that you can get into organically?

Well, we're always trying to grow our lines and expand them into different countries, but we certainly are looking at many, many opportunities in building materials, obviously, we want to stay within our core competence and so we're open to looking at most anything we can find out there, but to grow organically, I think we're just really focused more on our existing product lines on expanding those.

Of course, if it isn't wood residential construction, it gets extra points.

Understood. Okay. Good luck in the year ahead. Thanks.

Okay.

We'll take our next question from Barry Vogel with Barry Vogel & Associates. Your line is open.

Hello, Barry.

Good morning, Barclay and Karen.

How are you?

I'm okay. How about yourself?

Good.

Good. Alright. First of all, as far as that question about stock buy backs.

Yes.

I think you should be positively inclined, however, very sensitive to price because, the confidence in your Company on a turnaround going forward is in the price of the stock to a degree and your financial strength is in the price of the stock to a degree, and so you should do it, but do it judiciously, and I think one of the other persons who commented on this about -- it's better to buy your own Company than buy someone else, it's clear as a bell based on your experiences in the last five, six or seven years, so I'm a yes on that but subject to price.

Now, I wanted to ask you a couple questions about, first of all, the change in sales by region of the country in the quarter starting with California.

Oh, let's see here. Have you got that handy? Okay. Let's see. For the year, California was down -- oh, for the quarter.

Yes.

For the quarter, California was down 4.5%. The west was down 5.1%. The midwest was up 18% and the south-southeast was up 3.5% -- or rather, 8.7% and the northeast, 3.5%. So the total domestic was up 2.7%.

Okay. And home centers in total for the year, what was that up and do you have a change in the quarter?

Yes. Home centers were up 12% for the year and -- hold on one second for the quarter. They were up 12% for the year, but down 10% for the quarter.

Okay. And can you make a comment on your largest customer?

Home Depot sales were down 10% for the quarter, down 5% for the year.

Okay. And as far as the change in sales for Strong-Wall this quarter versus last year?

Strong-Walls were up 2%.

And Anchoring Systems?

Up 8%.

And Europe was up 8%?

Europe was up 8%.

Yes, I think that's right.

And these are for the quarters?

Those are quarter numbers, yes.

And Karen, can you give us the final capital expenditure number for 2010 and your estimate for 2011?

2010 was $28 million and the estimate cap for 2011 will be $35 million. Some of that will be a carryover from the Riverside building that we're doing in southern California.

D&A for 2010 and your estimate for 2011?

$23 million for 2010 and around the same for 2011.

Now, as far as utilization rates, can you give us some idea what the utilization rate was for your domestic plants only in the fourth quarter and the year?

Holy smoke, that's a tough question. I'll give you my crazy guess.

Okay.

I'd say that probably about 50% US plants.

For the year?

What do you think, Karen?

Yes, that's a tough -- tough question. As I mentioned to you, our utilization certainly wasn't as high in fourth quarter and it typically is not as high in first quarter. Second and third quarter are obviously our best from the factory utilization. But we really don't take a look at it from the standpoint of the full year, and so I don't have a good answer for you.

Well, would it be significantly lower than 100%?

Oh sure.

Definitely not 100%.

That's right. And we're -- if and when it really turns around here, we're ready.

Now, Karen, the gross margin, can you -- I'm not sure about my numbers so I figured I'd ask you, what was the gross margin for the year for 2010?

One second. 44%.

Do you think that's sustainable based on the way you're structured today and based upon potential increases in output?

Yes, I think that's going to be difficult to say again based on things that are going on with the steel prices and depending on where our utilization, our overhead goes. It's kind of tough to call what's happening from the standpoint of sales. We're not seeing a big uptick from our customers. I mentioned the home centers, we're seeing everybody still very, very conservative about bringing a lot of inventory in. So I'm not anticipating -- could be difficult to stay at that point.

I think, if I were making an estimate, I'd use 40%.

Now, I think you mentioned a mid-40s tax rate. That sounds like it's a high rate. Is there any particular items in there that make it a 45% tax rate for the year?

Not in particular, no.

Okay. Thank you very much. And good luck to you.

Thank you.

Thank you, Barry. We're going to need more than luck, though.

I know.

And we've got it.

And we'll take our next question from Robert Kelly with Sidoti. Your line is open.

Good morning, Robert.

Barc, you're a guy who makes his own luck. Don't sweat that part. To your first initial question, yes to the buy backs. See that longer term your most attractive return on capital option for all that cash right now.

Thank you.

Quick question, you had given us cash flow from operations, $77 million for 2010. What was CapEx?

CapEx for 2010 was $28 million.

Okay. Thank you. As of 3Q, you guys -- your price was up about 2.5%. Would that be greater by the time we hit the end of 2010?

Slightly. We had a price increase that was in effect July 1 and as we've mentioned, it takes a while for those price increases to actually get into our customer's systems, so it would have been a little bit better in Q4.

Okay. You say in the release the steel prices you expect to be at least flat in 2011 on average, slightly -- potentially higher. If steel prices move up, do you need to go again to your customers with a price increase?

Well, projecting steel prices is very difficult. It's not as tough as the market. They really work hard on keeping demand up in relation to supply and just how that will work out, we don't know, but once again, though, prices go up, everybody's costs go up. Prices go down, everybody's costs go down.

Assuming steel prices are flat, do you need another price increase to keep margins intact?

Well if steel prices stay flat, I can't imagine that we would put in a price increase.

Okay, great. If you could, the Chinese utilization you said was 50% for 4Q. What did that number look like as we progressed throughout the year?

Well, it just kept going up. I think when we opened up that plant in 2009, I think we were using at the start about 20%.

And the increase from 20% to 50%, is that all organic growth within Asia or are you still shipping product from Asia to other parts of the world?

We're doing some shipping to other parts of the world.

Is it --

And we'll continue to do that.

Okay, so that's the plan for the Chinese facility? Great.

Yes. Although a lot of it will go for construction in China.

Right. One final one, despite what was an impressive print on your gross margin in 2010, it sounds like there is still quite a bit of drag in there from Liebig and the Chinese ramp-up. I will ask it, I don't think I'll be successful, if you could give us the total of the cost drag from those two issues and then going forward, are those expected to decline materially in 2011, or would they be similar to the drag you saw in 2010?

Probably not -- well, I think they might be a little bit better. What do you think, Karen?

I think we might see a small increase as we mentioned, it will take some time this year to put those improvements in place on those two, at least on the Liebig standpoint and I think the utilization for China might increase slightly.

So if there were some increases on the Liebig front, would they be felt more in the first half of 2011?

No. I think there's a lot of steps that we need to take care of first to work on that process.

Maybe just one quick last one, does Liebig -- if demand doesn't improve, is there more take downs or impairments coming for Liebig? Was the impairment in 4Q driven by lack of demand or just the acquisition price was too high?

No, it hasn't been lack of demand. It's just we're going into new markets all over the world, and it just takes a little while to really get a position there. And we have to build a brand name in Asia as we have done here, and we also did in Europe. But it takes time and we're willing to spend the cost in the short run.

Okay. Thank you. Have a good day.

You're welcome, Robert.

And we'll take our next question from Keith Johnson with Morgan Keegan. Your line is open.

How are you, Keith?

Good Barc, how are you?

Good.

Good morning, Karen.

Good morning.

Just a couple of quick questions. A lot of mine have been answered.

Is your answer yes, no, or maybe?

I would say that -- mixed, I guess, honestly. I mean, I do understand what the other guys have said and agree with them on the value of your business.

Okay, you're a maybe.

I'm a maybe. The other side of me says --

I've got you, Keith.

You got some opportunities ahead of you particularly looking at where construction markets are on a global basis at very low levels, so there may be some potential opportunities for to you step out there. Quick question, Socom, I guess how much revenue did you get out of that in the fourth quarter?

Very, very small.

Okay, all right. Next question, I guess, just thinking about I think there have been some questions around G&A spending. What about on the R&D side? You guys I guess stepped up the spending a little bit in 2010 versus 2009. You guys continue to invest there. Should we continue to think that trend would go forward into 2011 and beyond or are you guys kind of sized where you need to be in R&D?

I think R&D is obviously a very large focus for our Company and want to continue to expand those product lines. We've hired some more engineers to help with that arena. That's typically what you've seen on that expense on the R&D standpoint. And it's certainly a high focus for us, so I think you'll continue to see us put whatever efforts are necessary to promote that area.

In the fourth quarter, were there any markets, and I may have this incorrect but I was looking back at my notes and it sounded like on our last conference call you guys suggested the fourth quarter was starting out a little slow. Were there any markets that picked up a little bit ahead of your expectations or some trends that were a little bit more positive than what you guys were looking for?

Not really. Things like where we're new relatively like China and Asia, Australia, they all picked up. But the larger markets like the US, no.

And then I guess a final question, just trying to again revisiting the margin line, last year you guys in the first quarter did almost a 41.5% gross margin. I was just trying to get in my mind how to think about utilization rates this year in the first quarter of 2011. If I think of it on a year-over-year basis, last year, would you guys have gotten some benefit from the tax credit rolling through the new construction markets and maybe a little more optimism at your customer level around that? So should we think of utilization in the first quarter of 2011 as being down on a year-over-year basis?

Well, the month of January, actually we're up some.

Okay.

Around the world.

Okay.

I think that -- we spend money and we're doing a lot of things that are long-range stuff, and some come in sooner than others. And we're getting some of that now.

Okay. Great. Thanks a lot.

Okay.

(Operator Instructions) We have a follow-up from Steven Chercover with DA Davidson. Your line is open.

Yes, hello Steve.

Hi, yes thanks. One quick follow-up for our table. Can you give us the earnings just for the connecter segment? It is your only segment now.

Right.

Let's see.

There's no separate segment, so loss of $1.8 million for the quarter, that's the continued operations which is the connecter segment.

Loss of $1.8 million. Okay, so clearly you lumped in a lot of the corporate elements back to the segment level?

Correct. Again, the good will impairment is in there.

Okay. Thanks.

Okay.

(Operator Instructions) We have a follow-up from Trey Grooms with Stephens, Inc. Your line is open.

Hello again, Trey.

Hey, Barc. Just a couple more that I came up with here during the call. I just wanted to make sure that I heard Karen correctly on -- when we were talking about one-time costs earlier. The stock-based compensation, that will likely continue at a similar level in 2011?

I think it might be a slightly lower level because we have not had stock options for a three year time frame, and so the options this year were a little bit higher than certainly we would be listing out for things next year, so I would think that would be a little bit lower. But obviously we're in hopes that we're going to meet our goals and therefore still have stock options issued.

Right.

Then what I mentioned was again, the Liebig goodwill.

Right. Okay. And then looking into the first couple of quarters here of 2011, Karen, you mentioned that customers were still being pretty cautious with their inventory I think is what you said. That's understandable and looking at the year over year -- in 2010, the first half I think really benefited some from the, at least demand from the tax credit that was going on at the time and so forth. And looking and taking your commentary of, still kind of a cautious stance by some of your customers, would you -- keeping in mind also, though, that you put in those price increases, could you take a stab or would you mind making a comment on your thoughts on where you think, if sales could possibly be up year over year in a scenario that I just kind of laid out?

They certainly could be up year over year.

In the first and second quarter there?

I think that's more than possible. I'd say it's likely.

Okay.

Now, that's just a crazy guess at this point.

Okay. Well, that's all very helpful. Thank you.

Okay.

And it appears we have no further questions in queue.

Is that it? Guess so. Okay.

This concludes today's teleconference. You may now disconnect and enjoy the rest of your day.