Simpson Manufacturing Co Inc (SSD) 2011 Q2 法說會逐字稿

Good day, and welcome to the Simpson Manufacturing Company second quarter 2011 earnings conference call.

I would like to turn the meeting over to your Chairman, Mr. Barclay Simpson. Please go ahead, sir.

Thank you. Good morning, everybody, and thanks for joining Karen Colonias, our CFO, and myself.

The quarter was an interesting time at Simpson. The US housing market, while down around 70% from 2006, still is our number-one market. But, we are making a lot of progress in reducing its importance. Sales outside the US in the first half of this year were 29.7% of total sales, as opposed to 28.2% last year. We still have a long ways to go, but we are making progress. In Europe, we are making progress especially where sales were up over 20%.

Whenever US housing starts turnaround, we'll be ready, but we are not going to wait for it. An example is our scattered and inefficient operation in Brea, California , which we have consolidated and moved to a new plant and location. We expensed around $2,400,000 this year to get that done. It's an example of how we are constantly working to improve manufacturing efficiency. One measure of that is sales per employee. That number is especially high, despite our doing a bit of hiring of technical people, who have become more and more essential in these days when so many systems are more and more sophisticated. However, regardless, you are still going to have to use the phone to talk to me.

We are also putting an increasing effort on new product development, both internally and by acquisitions. Unfortunately, I have no finalities to report on acquisitions, but we are close on a couple. Or, have a bunch of you heard me say that before? Also, we now are pushing hard over a great deal of the world. Many areas, where we are relative newcomers, unlike Europe, where we now have a strong position and a brand name. China is a prime example.

Every year that goes by, more and more economic and political prognosticators see China as a wave of the future. We now have sales offices there in Beijing, Shanghai, and Hong Kong, plus 175,000 square-foot plant, 50 miles northwest of Shanghai. We are working on developing products and a first-class team, just as our manager, Laurent, has developed in Europe. In all probability, it will take several years and a lot of investment before the China statement shows a profit. But, it is too important for our future not to be willing to take a hit for several years.

Elsewhere in the world, Australian sales are up 21%. Eastern Europe, though, is taking time to develop significant sales. But now, we have a good team working on that large potential market. Last year was a booming year in Canada, so sales this quarter are down 5%, but profits are up 5%. Home center sales were up over 20% in the second quarter. Anchor System products sales were up 15% in the second quarter. And setting up the manufacturing of mechanical anchors In China should help to lead to a decent profit.

To sum it up, this quarter was a bit of a mixed bag, but we did make progress toward future success.

(Operator Instructions)

Our first question comes from the site of Josh Borstein with Longbow Research. Please go ahead. Please go ahead.

Thanks for taking my questions.

You mentioned that Anchor Systems were up, it looks like 15%, in the quarter. Presumably that's related to an increase in non-residential construction. Do expect Anchor Systems to drive sales into 3Q as well?

I would think so.

Okay.

Can you tell us the percentage of sales that's derived from Anchor Systems?

No, I can't right now. Okay. Fair enough.

And then, this next question is for Karen. In the last conference call, you had mentioned that margins would likely come in in the low 40s. Obviously, things came in much better than expected this quarter around. Can you discuss your thoughts about gross margins here in the third quarter, and going forward?

Yes.

What a surprise.

Our effective utilization for the second quarter was very similar to what we would anticipate for third quarter. As you are aware, second and third quarter are typically our higher volumes, where we are really trying to make sure we service our customers. So I would anticipate that our effective utilization would be very similar in third quarter as it was in Q2.

But we definitely are seeing some price increases from a material standpoint, and so I would anticipate that our gross margins will be slightly down from our Q2 gross margins.

Thanks.

And then just one final question on Europe. Did you record an operating profit during the quarter?

Yes.

Okay.

And, you know, some of the stronger markets out there, could you discuss, are you seeing, when you look at sales, is more attributable to product introduction, organic growth? Or I know there were some price increases in Europe as well.

So, in Europe, we had a $2.6 million operating profit for the quarter. They had some price increases which went in earlier in the year, really sort of the latter -- last half of 2010, early into 2011. And in Europe, really, they finally got some great weather that's helping their construction to have a bigger influence on what we're seeing there.

We are also doing a great job, as Barclay mentioned, we're introducing some new product into the European market. And we have an initiative to get our Anchor Systems line into that. But that will take a little bit of time. But we are certainly seeing that as an opportunity to expand our product offering in the European market. I think the main reason that you're seeing that Europe is up is just that they've managed to get out of a pretty tough winter.

Okay. Great. I appreciate your time. Thanks.

Our next question comes from the site of Arnie Ursaner with CJS Securities. Please go ahead.

Hello, Arnie

Barc, good morning to you.

My first question relates to the leverage, or actually the negative leverage you're showing in SG&A and corporate expense. Most companies that have the kind of revenue growth, your expenses are growing even faster than your revenue growth. But, embedded in that you have a number of one times, things such as Brea. Can you comment, within the SG&A, what are the expenses you view as sort of one-time, and how we should think about that on a go forward basis?

What you think, Karen?

Well, we've got definitely the Brea moving expenses, about $800,000 this quarter for Brea's moving expenses. And there's a little bit, a couple hundred thousand dollars still left that we might see into third quarter. Certainly, we had the write-down on the San Leandro facility. That was the $1.1 million write-down on that San Leandro facility.

And some of the other reasons you're seeing would be the stock option plan. As we mentioned last quarter, in 2010 we met our goals, so we were able to work with employees on earning 1.4 million options, which we had not seen the past three years. So you're seeing that expense for the stock option goals that you would not have seen over the past couple years.

Okay. And obviously, some of those should be viewed as nonrecurring. One I was going to ask about more particularly is professional fees. Sometimes if you have deals that don't move forward, you have to incur the deal expense in the quarter that it doesn't move forward. Was that part of the issue there?

We're having that continually, because we are looking very hard for acquisitions pretty much all over the world, and we are hiring experienced firms to help us do that. And last year, all it was was cost.

Okay. Thank you very much.

Thank you, our next question comes from the site of Steve Chercover with D.A. Davidson. Please go ahead. Please go ahead.

Good morning, Steve.

Good morning. How are you?

Good. Thanks.

Great. Glad to hear it.

Two quick questions, please. I just was wondering, how are business trends so far in the third quarter?

Well, it looks pretty good.

Accelerating from the Q2 levels, or just sustaining the momentum?

Well, we're just seeing -- sales look pretty good. Now, I have learned, though, not to make projections, that so often they don't mean anything. You don't have, until you have at least two-thirds of the quarter done. But it looks pretty good.

Okay. That's great. That's encouraging.

And this is a question I always loathe asking, but I think you brought it up a couple calls ago, Barc, and you indicated that you and Tom Fitzmyers would both be diminishing your day-to-day activity. Is that still how you see things going, and can you give us any indication how you're looking at succession?

Well, that's a very good question and we are not ready to answer it yet. Although, we are probably going to be able to answer that before the meeting, the analyst meeting in New York on September 28. But right now, I can't answer it.

Okay. That's great. Thank you.

Okay, Steve.

(Operator Instructions)

Our next question comes from the site of Barry Vogel with Barry Vogel and Associates. Please go ahead.

How are you. Barry?

Good. Good morning, Barclay and Karen.

Good morning.

I've got a couple of questions, Barclay, for you first, and then a couple for Karen.

Could you give us the percentage changes in sales from the five markets we talk about? The first being California.

Okay. I should've had that right in front of me. I knew you would ask that. Okay. Let's see, in the quarter, California was up 4.1%.

West Coast, excluding California?

4.5%.

South, Southeast?

South, Southeast, up 11.9%.

Midwest?

6%.

And Northeast was down how much?

Northeast was down 3.3%.

Okay. And you told us about the home center business being up 20%. Is that 20% on the dot, or is it over 20%?

It's over 20%.

Can you give us a better number?

I haven't got the exact number, but isn't that pretty significant, Barry?

Yes.

So what are they doing? They're getting more confident? They're rebuilding inventories? Is that what --

No, I think that -- no. As yet, we aren't confident about short-term housing starts in the US. And we are not waiting for them. However, our plants are ready when it happens. But, we are putting tremendous effort overseas, and therefore, you see our earnings hit by costs that we're going to incur them if they are good for the long-range future of the Company. We are incurring a lot of costs in China that are that very thing, because we think that is a very important part of the long-range future of the Company. Just as, around the world, we do not want to happen again what happened to us in 2007 and 2008 and 2009 and 2010, and this year. We got too dependent on US housing starts. And we are reducing --

I understand that.

-- that dependence.

Can you give us the sales gain for your largest customer in the quarter?

I beg your pardon?

Largest customer sales gain?

Sales gain was good. We have to announce that, because it's over 10%. That's Home Depot.

How much is it?

What was it?

10.9%.

Okay. Can you give us, again, it's a minor thing, Strong-Wall sales versus last year?

Strong-Wall? Not good.

Strong-Wall was down 12.7%.

Of course, that's because of housing starts.

I know. I know.

Let me --sorry, Home Depot was up over quarter, 20.5%.

Home Depot was up 20.5%?

That's the quarter.

In the quarter. That's the best you've seen a long, long, long time.

Yes. I think, and this is just a guess, that it's because more and more do-it-yourself.

Right. Could you, Barclay, elaborate on what's going on in Ireland. Because at the end of last year, you implied there was a possibility of a write-down on the book value of those assets. And this is beyond the write-down last year. So can you tell us what's going on there?

Karen, how about that?

We're still evaluating the Irish facility. As you know, it makes our Liebig products, and before we make any decisions, we want to be sure we have the capacity to be able to meet our customers' needs that are requesting those products. So we are still evaluating what we are going to do on the Liebig facility.

Now, is the Liebig operations -- have the losses come down?

> The losses are being reduced, yes, because we are putting some cost saving measures in place. The employees are actually only on a three-day workweek. So we are seeing the losses go down. We also had a couple large jobs that the UK sold at the Liebig anchor earlier in the year.

Okay. And Karen, while you are on the subject, as far as the San Leandro sale, you took a write-down in anticipation of the plant being sold, even though, I guess it's not in your numbers yet, because it hasn't been sold yet. Can you give us some idea of the net proceeds that you would expect, based on what you did, took in terms of write-down?

It will be around $7 million, I think.

7 million?

Right.

As far as going forward with the consolidation of Brea being completed and some of these moves that you've made, Karen, do you have any idea, all things being equal, what kind of cost savings from these consolidations you expect in, let's say, next year?

I think is too early to look at that. I really think we need to look at what's happening from the sales standpoint. Certainly, we consolidated the Brea facility because we were in six different buildings and it was very inefficient, from a manufacturing process.

I do believe we will certainly see some efficiencies in our manufacturing process, but at this point, it's really to early to tell. We just opened that facility a couple weeks ago. We have a better feel about those efficiencies, but we'll see most of those happening next year.

Okay. And as far as CapEx for this year, what's your best guess?

$35 million.

And your D&A for this year?

$23 million.

$23 million, did you say?

Yes.

Okay. And as far as gross margins, Barclay, I looked back at my numbers going back to 2003, and, of course included in that period was a veritable housing boom. And, the first half of 2010, and the first half of 2011, were the best first half gross margins during that entire period. What, in simple terms, would account for this, in your opinion?

I think it's efficiency. We have improved our efficiency immensely.

Okay. That's obvious by these numbers, under these circumstances. That's outstanding.

And as far as the stock buyback, I was surprised that you stepped up and bought $50 million worth of stock, now. So the question is, why now?

Why are we using it now?

No. Why did you buy $50 million of shares now, considering you haven't done that --

Because, we had -- I've been having pressure for years, because we have so much cash and we are having difficulty finding acquisitions, which has really surprised me. These kind of economies around the world and we are having trouble finding them. Because we have learned, you look very, very carefully. And, so often, you find something at the last minute that you didn't anticipate, and it's always negative. So, we can keep, and we have, still, couple of hundred million dollars for acquisitions. And to let the rest of that money just sit around doesn't seem to make sense.

It makes sense to me what you're doing. Thank you very much. I will go back in the queue.

Okay, Barry.

Thank you. (Operator Instructions)

We have a question from the site of Robert Kelly with Sidoti. Please go ahead.

Good morning, Robert.

Hello, Barc. Good morning.

I had a question on gross margin. A question I've asked before. I'm going to try again. 47% in the quarter, higher than we've seen for the past couple of years, despite cyclically weak demand. Have changes internally, have mix changes, has something changed here structurally, fundamentally, where we should be thinking higher gross margins long-term for Simpson?

Well, what you think, Karen? I will stick the problem on her.

As Barc mentioned, I think we have done a lot of things in our factories to help us become much more efficient. So that's helped us from the labor standpoint. And it's really helped us keep less inventories and still be able to meet our customers' needs.

The gross margin is going to be, as steel prices fluctuate, we will see our gross margin fluctuate, because we cannot control that. So, I think, as I mentioned, you will see our gross margins drop slightly in Q3. But I think we've put ourselves in a pretty good position, that if we can keep sales somewhat trending up, that our operations are looking very well and continues in the mid-40 gross margins.

You know, you mentioned the volatility of steel costs. Steel costs have been fairly against you in the first half of this year. Yet, the margin is still improving. What explains your ability to continue to improve gross margin in what seems to be a detrimental raw material environment? Is it all efficiency in productivity?

I think the major factor is plant efficiency. And we are continually working on that. We've made a huge bunch of improvements, but you never sit back and say, that is it.

Okay. Wonderful. That's all I had. Thanks, Barc.

Okay, Robert.

Our last question comes from the site of Keith Johnson with Morgan Keegan. Please go ahead.

How are you, Keith?

Good. How are you guys doing this morning?

Good.

Good morning, Karen. How are you?

Good morning, Keith.

Just had a couple questions. Maybe first off, just trying to get an idea, you guys mentioned a couple times, steel prices moving, trending upward, probably continuing into 3Q. I know you don't like talking specifics about a specific price increase. But could you give us an idea, maybe how you're thinking about selling prices or the ability to make additional changes to your selling price, as we look into the second half of the year?

Keith, we really don't want to go into detail on that.

All right. Fair enough.

Just as point of clarification, the moving expenses associated with Brea, about $700,000 or $800,000 in the second quarter, which line item on the income statement did that hit, Karen?

(Inaudible)

So that would've been in the cost of sales?

Yes.

And it was $1.5 million in the first quarter, if I remember right?

That's correct.

Okay. And then, going from the first quarter this year into the second quarter, how much -- can you give us an idea of how much your factory utilizations improved sequentially?

Well, again, second quarter is typically going to be a busier quarter. We had some better factory utilization. You can see we built a little inventory. And one the main reasons, besides it's typically a busier type of season for us, is we needed to be sure that we could cover our customers' needs as we were moving the Brea facility to Riverside. So there was some better utilization of our other three major facilities in second quarter.

And then with Brea online, does that adjust out a little bit as we go forward?

We will see some adjustments of that at third quarter, again, as Brea comes up online and they're not 100% online, but you'll start to see those adjustment through third and fourth quarter.

Okay. And then just, maybe circling back up on the SG&A accounts. When you guys break out the differences, year-over-year, of course, the personnel piece, where you've continued to invest in the business. As we look into the second half of the year, or going into 2012, do we look at those expenses continuing to show similar year-over-year increases, at lease for the foreseeable future? In the SG&A accounts?

I think, as we mentioned, that we've added some people certainly from the engineering standpoint and the sales standpoint. And we want to be sure, as Barclay has mentioned, our plants are getting extremely efficient and that's something from our gross margin, but we still need sales and engineers out there as we are going into different parts of the world, as well as different product lines throughout the world. So I think you'll probably see them be somewhat consistent throughout the rest of the year.

Okay. And I guess final question, on Anchor Systems sales being up year-over-year. What was the -- can you point to any one driver there?

Well, one driver, and this is going to continue in Europe, we finally got going with Anchor Systems in Europe. Here we've been there for a dozen years, but buying Socom last year, tiny little company, but, they had a product that fitted with our metric mechanical anchors so that we could get started in Europe with Anchor Systems products, and we are. And of course, that's what we are selling right now in China.

Okay. All right. Thanks a lot.

Okay.

And we have no further questions at this time.

Okay. Thank you all. Bye.

This concludes today's conference. You may now disconnect, and have a wonderful day.