Simpson Manufacturing Co Inc (SSD) 2011 Q1 法說會逐字稿

Please stand by for realtime transcript. Good day. Welcome to the Simpson Manufacturing Company first quarter 2011 earnings conference call. I would like to turn the meeting over to your Chairman, Mr Barclay Simpson.

Thank you. Good morning, everybody and thanks for joining our CFO, Karen Colonias and myself. We are not too happy about some of our first quarter results. Although, we did increase our European sales substantially and the US was up slightly, and that is despite a continuing lack of turnaround in housing starts here in the US.

A disappointment was Asia, and China, in particular, where sales were down. Especially in China, it's going to take longer to build a solid market position than we anticipated. China's expanding economy and job markets that it creates are making it difficult for companies just getting started there, like us, to attract and keep first-class people. We will get a solid position there, but it's going to take longer and it is going to cost more than when we first anticipated.

We are making real progress in Europe with sales up 22% and the loss in the first quarter, somewhat less. We really expect to make good money in Europe this year. The Socom adhesives acquired last year, combined with Liebig fasteners and Metric mechanical products will allow us to enter the European market this year with Anchor Systems products. Yes, it is hard to believe, but Liebig possibly might start to make money for us.

Eastern Europe as yet is not significant in sales, but we are making progress. We have had operations in Western Europe for now well over 10 years. Because of the variety of cultures and languages, it has taken most of those years to build the Simpson brand-name and to become the leading structural connector manufacturer in Western Europe, which we are now. We learned a lot in the process and some of that knowledge should be a real help in China and Asia.

Home center sales in the quarter were up 2% and we have a new software program called Dream Tools developed by our DeckTools acquisition. Dream Tools is an innovative e-commerce technology that should be the future of online shopping. It's an entirely new product for us and we are excited about the prospects.

Acquisitions, where are we? As you have heard me say before, we are looking hard around the world. Right now, there are one or two prospects that are exciting and close to agreement. But you've heard me say that before and it hasn't happened, so I'm not going to bother you with details until one or more are signed. Okay. Questions?

(Operator Instructions) We will go first to the side of Trey Grooms with Stephens Incorporated.

My first question is for Karen, the 43% gross margin came in a little bit ahead of where you thought it would on the last call. Can you talk about what was behind that number and what was behind the out performance there relative to what you were looking for? And also, is that 43% number sustainable, looking out, given the fact that steel is on the rise and some other things?

Yes. From a gross margin standpoint we are pretty happy with our Q1 performance. As you know, it is always a balancing act to work on our overhead absorption and how much inventory we need to build to be able to maintain and service our customers. Certainly, I think our overhead was a little bit underutilized and I would anticipate that it might get a little bit better as we get into the busier part of the season, but your point about steel is a very good one and we are very concerned about steel costs rising and the impact that would have on our gross margin. I would anticipate that we will try to maintain very similar gross margins, but it will definitely be difficult based on where things go on material costs.

So, if I heard you right, maybe it's maintaining that 43% is may be a best case scenario at this point, just in the short run? Is that fair or should we be looking for something closer to the 40 range given what is going on?

I think maintaining that low 40 range will be the target.

Also, this one is for Karen as well, operating expenses, it seems like they were pretty high for 1Q, what you guys typically do in 1Q. You did a good job of breaking out what was going on there, but from where we stand today was there any unusual costs that won't be occurring as we go through the year or should we expect a typical seasonal pattern with operating expenses up in 2Q and 3Q and down in 4Q?

I think the operating expenses, there are some things there, we had some salary increases which we did not have in Q1 of last year. There is the stock options, we met our goals in 2010 so you're seeing some impact on the charge of the stock option goals, and there are a few things in the SG&A which would be expenses in Q1 that you will not see in Q2.

So, maybe a flattish kind of -- you typically see that move up, pretty dramatic step up, at least by a couple million bucks from 1Q to 2Q. We might not see that this go around is what you are saying?

I think you will see a little bit, again, a little less of the expenses in Q2 that we see in Q1.

On a headcount reduction that you had back in 1Q '09, as we are looking into 2011 and we are seeing hopefully some demand pick up maybe later in the year, at least into 2012, hopefully, can you give us what your thoughts on that headcount reduction? How much do you expect you're going to have to bring on, back on as demand comes back and have you started bringing those folks back yet at this point?

I think there's a couple of things we have done there. As we have discussed, we have been working on our lean manufacturing process to help us to be able to be very efficient in our manufacturing with a little bit less headcount. So, from a production side, I am not envisioning that we might need to bring all the production employees back, but we are already in process of increasing our headcount from a sales and engineering standpoint. So, we are actively pursuing different markets and focusing on our entire line of products, fasteners, connectors, Anchor Systems, so we are expanding our sales force. It's not anticipating that we have to get back to the entire headcount that we had in '09, but again, we are increasing now really on that sales and engineering aspect.

That is helpful. Thanks guys.

We will take our next question from Garik Shmois with Longbow Research.

Good morning. The first question is on Europe, strong growth there obviously in the quarter. I was wondering if you could help us understand a little bit where that growth is coming from and how much was perhaps new product introductions versus organic growth, versus understanding a year ago there was some bad weather in Europe and how much you think was easy comparisons?

Well I think that we have made some acquisitions there in the past three years and Aginco in particular and Ahorn and they were costing us for a while, but now they are making money for us and it's a question of just getting everything together there and we have excellent management in Europe and it was only a question of time until these acquisitions and other products were integrated and started to really go, and I think we are there. I expect that this year we are going to make real money in Europe.

It sounds like Europe is on a pretty sustainable run rate going forward. What we have seen in 1Q is something that we should expect going forward out of the European operations?

Yes, with one exception, we still had a loss in the first quarter and we do not expect, for the year, that we are going to lose money, we are going to make money there.

Would that suggest that consolidated, I know you touched upon some of your margin expectations with some of Trey's questions, but assuming that Europe does improve profitability? Also going towards my second questions, you do have, I believe, some price increases announced for the second quarter. Assuming Europe continues to improve, assuming that you get some pricing traction, could we maybe see in the back half of the year, some margin expansion going forward?

I doubt it. I doubt it because we are everywhere in the world. We are spending money. As Karen said earlier, we have added to engineering and sales personnel, and that is really for the future. We are doing all kinds of things to become more international and to do a better job here in the states. And we are not concerned, as you have heard me say many times, short run profits are not to goals of ours. Long run profits definitely are and we are spending for them and we are not going to lessen that.

Fair enough. Lastly, could you provide the break out as a percentage of total sales US versus international?

Yes. Where is that thing? We've got too many papers. We show 71% in domestic. Just one second, let me look at that. Yes, that is correct.

Okay, great. Thank you very much.

We will go next to Arnie Ursaner with CJS Securities.

Simple one first. I know you don't want to say too much more about possible acquisitions, but looking at the two year considering would either require any external financing to give us some sense of the size of candidates?

No. We have, as you know, about $300 million plus in cash.

My other question really relates to your margin and I've got a couple of different ways to look at your margin. You clearly identified between $2 million and $2.5 million of one-time costs. If I were to add those one-time costs alone back in, your operating margin would have been 200 basis points better, but I think even that is very misleading relative to some one-time startup costs. You opened your facility in Brea April 1, but were incurring probably duplicate costs all through the first quarter as you moved equipment and probably maintained double personal prior to the start date. Is there any way, Karen, you can quantify the dollar impact of the move to Brea and what we should think of as one-time costs the harmed your gross margin this quarter?

We did have the moving expenses the Brea facility and, as a matter of fact, we completely moved out of Brea and everybody is now in the Riverside building and there is a little bit of moving expenses still left. I think we have a couple of pieces of equipment that are still moving.

What was the impact in the quarter of one-time moving and other duplicate expenses? How much did it hold back margin is the same question really?

About 1.5 million for the Brea move.

And those are clearly, for most people, viewed as one-time expenses?

Yes. The amenities are still a slight bit of the expenses there on the second quarter for it to wrap up the Brea move. Most of those you would not see in the second quarter.

In your previous remark I think you indicated you thought margins may not improve from current levels, but that is almost illogical given the magnitude of one-time expenses, given the fact that you normally would have a seasonal pickup in your business and you have between a 90 and 100 day lag on your price of steel. What am I missing that is holding back expansion of markets in the next few quarters?

Again, I think the main piece is going to be how much sales do we get, right. The projections on where our factory and tooling would be and the projections, again, on those steel costs, I think we would have some impact from the increased steel pricing fairly soon and it depends on where our sales goes, to whether we are going to keep all those factories moving.

One of the things that we have seen in this slowdown is a shift in the products that are sold, and as you know, we are typically manufacturing connectors in our manufacturing facilities, but we have had an increase in fasteners and Anchor Systems, a lot of those are items which don't cover our factory overhead absorption rates. So, it has really been a little bit of a shift and it really depends on what we see from the sales to the customers are willing to take.

One more for you Karen, you had about a $45 million swing in working capital in the quarter, can you comment on some of the drivers of that and how that may reverse on a go forward basis, particularly if you can improve your turns and need less working capital in your business?

Just hang on, one second. We are doing little bits of inventory, as we mentioned, we have gotten to the point we always want to keep our service levels up, so we are doing a little bit of build in our inventory. That is the main impact on that change.

Thank you very much.

We will take our next question from Barry Vogel with Barry Vogel and Associates.

Barclay, can you give us, first of all, the percentage change in sales in California, West Coast excluding California, the south southeast, Midwest and Northeast?

California sales were up 7.5%, the West was down 6%, the Midwest up 7% and the south, southeast up 7% and the Northeast up 9%. Total domestic was 5% up.

Okay domestic. And can you tell us -- I know you told us the home centers were up 2%, can you tell us what the change was for the largest customer?

For Home Depot? Home Depot was down just hair, what 2%.

Do you sense that the inventory is -- that the home centers are using -- are still very cautious? Because they're certainly now a very important part of your business.

Yes, they are very cautious. It has been an advantage for us with the home centers with all customers, but particularly with home centers, when we reduce the time that it took to set up an automated product in a press, the hours it used to take for most of them, quite a few hours, therefore, we could not get the product. The customer runs out of a particular product and we could not get it there as fast as we would like to or as we can now because we have cut that time down substantially.

All right. Does that means that if they want to increase their purchases you can do it pretty rapidly.

Yes.

That allows them to have leaner inventories?

Say that again.

It allows them to hold leaner inventories?

Right, yes, because our efficiencies, yes. They are not needing to stock quite as much inventory because we are more efficient at delivering it to them.

That is correct.

Can you give us a percentage change in Strong-Wall sales, and Anchoring Systems sales versus last year's first quarter?

Yes. Anchor products were down 1%, is that correct? That is not right.

Total anchor --

They actually were up 12%.

And Strong-Wall?

The Strong-Wall was up 3%.

Okay. And Karen, can you give us your current fix on capital expenditures this year?

We spent just under $10 million for the first quarter. Our budget for 2011 was $24 million and we had a $10 million carryover from 2010 that was mainly the Riverside building.

You're looking at $24 million this year?

Yes.

Depreciation and amortization this year?

$21 million.

You still have assets for sale, am I correct?

Yes, San Leandro is still held for sale and we just sold the Aginco building, which was the location in France.

What were your proceeds from the sale of the Aginco building?

There was no gain on that.

Proceeds?

We sold $1 million.

What is the offering price of San Leandro right now?

Just under $8 million.

As far as Liebig is concerned, Barclay, you mentioned in passing in the last conference call that there was a chance you would have write-offs this year, where are you now in terms of that happening?

Where are we, Karen?

Could be repeat that question?

In last year's -- in the last conference call, Barclay made a comment that there might be some write-offs in Liebig, aka Ireland, in 2011 and I did not see any write-offs of anything in the press release, so I am assuming you didn't have any in the first quarter. So, is it still -- do you still you'll have write-offs at Liebig in 2011?

We're still looking at evaluating what our opportunities are in that manufacturing facility. So, I don't believe we are going to have write-off issues. We are still evaluating that.

Last question is, you've talked, Barclay, about China before and you have given us some estimates of profitability or losses, and things were encouraging the last time you mentioned this on the conference call. And there was a chance that -- a slight chance that maybe you would have broken even this year, but your comments earlier suggested that is not going to happen.

Yes, there is no chance at all now.

Could you give us an idea of what some range of operating losses might occur in China this year?

As yet, I really can't and I attempted to get some numbers that made sense. But they don't. What has happened there is that the turnover of people is really amazing and it is perhaps like the US economy was in the 50s and 60s, booming and jobs become available in good companies and young people are switching around. They really are in China.

We are having trouble getting management teams together and sales teams together. And it will take us longer than we figured it would, which means it will cost us. We are not going to cut back, it is way too important for the future of the Company.

One last question. When you gave us these sales gains by segments, domestically, they weren't really terrible. I think you said you had a 5% increase in domestic and the terrible situation in the first quarter of the United States, in terms of the housing statistics, should we be encouraged that maybe the business has bottomed in the United States and you are looking for increases in revenue for the full year domestically?

No, I would not. We have not seen a change and until it actually does, I think it's a mistake to estimate that they are going to go up in the near future. I don't see it.

So far, you have been right.

If it does, that is great and we will be ready for, but we are not going to hold our breath.

Thank you very much. Appreciate it.

Okay, Barry.

We'll take our next question from Steve Chercover with DA Davidson.

Good morning everyone. I was wondering, could you please give us a relative weighting of your input steel, silicon, epoxy, what ever you are using in your various products?

We don't go into that.

Okay.

Sorry, Steve.

No problem, it's still my job to try.

Of course.

Do you feel like you have decent pricing power to pass through the higher steel prices this year?

No comment.

Wow, I am striking out. And my final question really was evidently you have lost key people in China. Would it be possible to bring ex pat, so Chinese guys who have completed their schooling in the United States and have them represent you there? It just seems -- clearly it is a frothy economy, but have you really lost the key leaders there?

Yes. To some extent, we have.

And what is your action plan to try and retain people going forward?

Dealing with different cultures is not something new to us. As I mentioned, we have done that for over 10 years in Europe and there you have a whole bunch of different languages, different cultures. They used to kill each other and we have established now, a brand name in Europe and we are number one in structural connectors. Now, it's going to take us a while in China and we have the methodology to do it, but if you are in an economic situation that is in effect, booming, you have these jobs become available and it takes you a while to make somebody feel that they really did join the right company and it's going to take us a while to do it there. We have done it in Europe, we have done it here and we don't lose people, but it will take a while.

Okay.

I would love to give you an exact estimate, but I can't do that and have them make any sense.

No, we certainly don't want you to guess. I was just wondering if there was a strategy in place -- as opposed to just throwing out more pictures and hoping that one of the guys sticks. You have to have a plan for retention. Okay. Thank you both.

Okay.

(Operator Instructions) We will go next to Peter Lisnic with Robert Baird.

First question on the spending front, is there a way that you could break that down for us or give us a little bit of color as to whether that is in the US or internationally, or just across the board?

What do you think, Karen?

[The 15] are mostly in the US.

Okay. Mostly US and if you look at the actual expense is that really headcount addition or is it more incentive comp or variable cost versus something that would be considered more fixed?

A combination of headcount and comp.

What the difference, not the difference, but how you would allocate between the two. I'm trying to figure out fixed versus variable. In other words, did you add more bodies or do those bodies make more money?

Again, to mention the compensation piece, would really be options that were granted for making the 2010 goal. It has been probably three years since we have granted options, so a large piece that you are seeing there is that 1.5 million options there were granted for making the 2010 goals. And then, from a people standpoint, we have added salespeople in both the US and in Europe, and also engineers in both locations.

Okay. Perfect. And then the Brea expenses, where exactly would those be in the income statement, the $1.5 million that you identify? Would that be in the G&A line?

It would be on the gross margin line.

In the gross margin line, okay. And then, Barc, in terms of China, understand what the difficulties in attracting the right people, can you give us a sense as to how far you are away from a volume perspective from reaching the breakeven point there, how long the path might be?

Anything that I estimated now would not be based on a fact. I would not have estimated that our sales in China would be down in the first quarter for instance, so I don't want to make estimates unless they are based on enough fact and we are not there yet. We have to get teams together and they are not yet.

Trust me.

I think you have to figure that it is going to take several years to make money in China, but we will spend the money necessary to get there because it is too important for the future

On that front, is there a way that we can talk about or think about what sort of absolute dollars you need to spend incrementally from where we are at today through this year or next to get you on that path?

I just can't give you a number that it is based on enough yet.

That's fine. I understand.

Really sorry, but I can't and to give you numbers that you base some kind of projections on, if the numbers aren't based on enough fact, it is no good.

Trust me, I totally understand and appreciate the color and the effort. Those are my questions. Thank you very much for your time and best of luck

Peter, thank you. And we are going to create the luck.

We will go next to the side of Howard Smith, he is a private investor.

I just had a couple quick questions about China if you don't mind and it is a factual question, so it should be an easy one. At least the first one. What utilization rate is it running at now, plant capacity versus plant capacity, versus what do you think it would be running at based on demand, if you did have the staffing there?

Again, Howard, that is a question where there aren't enough facts behind it yet. We are still now putting our force together there, our management, our sales, and we are not at a point where any estimates make any sense.

What is it exactly running at now, is it running at 50% capacity or 10% capacity or not at all?

The plant is roughly 50%.

Okay, thanks. The other question was, I understand what you said staffing up there and turnover, but you also mentioned the difficulty in management teams and I was following up on what somebody else asked, were you planning on bringing current managers from other plants in the States or in Europe and temporarily or permanently moving them there to staff up the management teams?

No, I think we need to establish the management teams, vast majority, with Chinese, mainland Chinese.

Okay. That is all I have. I appreciate it. Thank you.

You're welcome.

We will go next to Keith Johnson with Morgan Keegan.

Just a couple questions. Maybe first off, a lot of questions about China, can you give us an idea of what China -- how much it affected the bottom line in the first quarter?

Not much. I haven't got an exact number, but --

Under a penny a share probably?

Yes.

Okay. And I guess, if we go back a year ago, as China was ramping up, it seemed like, if I remember correctly, it was a one to two penny drag per quarter is what you guys were experiencing about a year ago as you were trying to get things established there?

I think that is right.

Is there a way you could maybe put some color around steel prices, maybe how much the market has increased year over year in the first quarter of '11 versus the first quarter of '10?

Keith, I don't go into steel prices. Except in broad generality.

I didn't know if there was a broad market indicator you could point us to that would give us some color.

It looks like they are going up.

You're still seeing price increases through the first quarter?

Yes.

If we look at operating rates I guess, operating rates were up in the first quarter versus the fourth quarter, do you think you can increase them again going into the second quarter on a sequential basis?

Our factory absorption was actually down Q1 versus last year Q1. We are going into what, historically, has been a busy season, but lately, in history, maybe has not been as busy as we would like, but historically, we would see a little more absorption in the second quarter.

That kind of leads into the next question. I was trying to get an idea if we looked at the second quarter of last year, how the tax credit situation on housing in the US affected operating rates and revenue trends as we kind of think about the second quarter of 2011? It seems like it may be difficult comparison, but I was going to see if you guys had a little bit more color.

It's a very good question, Keith. And some of fact, we think that it will not be significant though.

Okay. Is it because of the other steps you have made internationally or what are some of the offsetting factors?

Just progress we have made, both internally and externally.

Those are my questions. Thanks a lot. Good luck.

We will go next to Robert Kelly with Sidoti.

You might have covered this already. The release talked about inventories creeping up and your expectation that steel prices move higher in '11. Do you plan to increase price to cover some of the raw material increase?

We're anticipating and we probably will have to raise prices.

Nothing on the boards at this point though?

Generally, we have let the customer world know that probably we will have to put them up in June.

Okay. Late second quarter?

Yes.

Great. You talked about some fairly healthy growth in the European arena. But if I recall, during 4Q, you talked some integration issues were going to be a drag in 2011. Can you reconcile what is going on there, healthy growth, but are you still dealing with the integration issues that you called out late in 2010?

No, it's pretty well done now. For instance, Aginco, that was the number one competitor in France and we purchased them and we paid a pretty high price for it, but it's really paid off. They have integrated nicely. We have been able to make a better margin there and it's just working out, and Ahorn has also integrated well. It takes a little while to get those things done. We are still working on Liebig.

Right. Is the integration there on schedule, ahead of schedule, any color on that one?

On Liebig?

Yes.

I have given up trying to guess. The products generally are, as I mentioned in the call, in my comments there, their mechanical anchors, their metric products fit with Socom's adhesives, so that we, this year, are going to get going in Europe with Anchor Systems products for the first time. So, I would hope Liebig may even help us.

Okay. Thank you.

Okay.

I show we have no further questions in queue at this time.

Okay. Thank you.

This concludes today's conference call. You may disconnect at this time. Thank you. Have a wonderful day.