Simpson Manufacturing Co Inc (SSD) 2011 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the fourth-quarter 2011 Simpson Manufacturing Company Inc. earnings conference call.

In this conference call, the Company may discuss forward-looking statements such as future plans and events. Forward-looking statements, like any prediction of future events, are subject to factors which may vary and actual results might well differ materially from the forward-looking statements. Some of such factors and cautionary statements are discussed in the Company's public filings and reports. Those reports are available on the SEC's or Company's website.

Now I would like to turn the conference over to Tom Fitzmyers, the Company's Chairman.

Thanks very much. Good morning, everyone, and welcome to Simpson Manufacturing Company, Inc.'s fourth-quarter 2011 earnings call. Our press release was issued yesterday. It is available on our website at simpsongmfg.com. Today's call is also being webcast and that webcast will be available on our website, as will a replay of this call.

Our format is a little bit different today. I want you to know that our Chairman Emeritus, Barclay Simpson, is listening and he wanted me to be sure and tell you that even though we aren't blessed with his initials, he wants you to know that we are not going to give you any.

Joining me in Pleasanton for today are Karen Colonias, our new Chief Executive Officer, and Brian Magstadt, Simpson's new Chief Financial Officer. I will lead off, followed by Karen and Brian, and then we will be happy to take your questions.

Revenue for the quarter was up in most areas where the Company operates. I think we may have benefited from some relatively nice weather in many parts of our operations, but mostly from the outstanding efforts of our people. Fourth-quarter sales increased 9.3% with sales increases throughout the US. California was up 16%. The West, including California, was up 15%. Midwest was up 8%. The South, Southwest was up 10%, the Northeast of 10%. International sales were up 7% with Canada up 3%, Europe up 8%, and Asia-Pacific up 9%.

As a percent of sales, Q4 international sales were 28% versus 29% last year but in actual dollars, international sales increased. But because the US increased more, the relative international amount decreased.

Q4 home center sales were up 13% and our largest customer was up about 8.5% for the quarter. Q4 anchor product sales were up 4% while shearwalls were down 3% compared to last year.

Net income from continuing operations for the quarter was $4.9 million compared to a net loss of $4.5 million last year.

Operating income by segment for the fourth quarter was as follows. North America, which includes the US and Canada, up $3.3 million -- $3.3 million flat, which was compared to last year. Europe was $3.2 million loss compared to a $7.8 million loss last year. The European segment had a goodwill impairment related to its UK operations of $1.3 million for this quarter compared to $6.3 million related to the Liebig operations last year. Asia-Pacific showed a slight profit of $100,000 but was down from the prior year of $200,000.

The operating environment we are in continues to be challenging but our branches are excited about the prospects we see in front of us. We continue to work every day to earn our customers business with our products and our excellent service and we look forward to showing them some of the new offerings that we are very excited about.

With that, I will turn the call over to Karen, who will discuss some of these new opportunities including our long-term strategy, the substantial new markets that we were after, and the prospects for them with good margins in the future. Karen?

Thanks, Tom. We have recently completed three acquisitions which we believe are key to our long-term strategy. Two of those companies are in the concrete repair and strengthening categories for infrastructure, commercial, and industrial markets.

Fox Industries was acquired for its chemical formulation and manufactured fiberglass jackets which are used in a variety of applications. Fox's unaudited revenue for 2011 was approximately $8 million and the company was profitable.

S&P has a line of fiber reinforced polymer products, asphalt reinforcement, and other products to repair, protect, and strengthen concrete structures and roadways. S&P's unaudited revenues for 2011 were approximately $20 million and the company was profitable. These two acquisitions fit our long-term strategy being less dependent on US housing starts.

In addition, these products are highly specified and in the case of S&P, have operations in several European countries. We plan to take both companies' products in other parts of the world where there is the need for concrete repair and strengthening.

The other acquisition was Automatic Stamping. They are a highly efficient manufacturer of truss plates and we are very excited about the prospects for the truss plate sales as we currently sell our core products to this customer base. They have a new facility which we acquired in our deal and the seller has a long history and experience in the truss business.

We estimate the truss market for both truss plates and software to be around $300 million per year and that is based at the current year's housing starts. Automatic Stamping had $6 million of sales in 2011 and was a profitable company.

All three of these acquisitions include the management team and we are very excited that they are on board for Simpson.

We have recently launched a cold form steel product line which was designed by our in-house research and development team and it recently received a new code acceptance. These products are primarily used in commercial business in the US market.

I'd now like to turn the call over to Brian, who will give you some of the financial information.

All right, first, let me start with the fourth-quarter tax rate in some explanation as to why it was 14%. A few items contributed to the low tax rate. We released a valuation allowance related to net operating losses for our plant in China, had a tax loss carry back in Canada, and some other items which were all nonrecurring and we recorded an R&D tax credit in France related to our Socom facility.

Without these items, the effective tax rate for the quarter would have been about 36% and for the year it would've been about 37% versus the 35.4%. So going forward into 2012, we expect the annual effective tax rate to be about 40%.

2012 CapEx spending is expected to be about $27 million and depreciation and amortization expense for the year is expected to be $22 million, of which $18 million is depreciation.

Our gross margins is not expected to be as good in 2012. Q4 2011 was 42% compared to about 40% last year and the full year of 2011 was 44.9%. Q1 2012 should be similar or slightly less than Q4 2011.

We had a significant amount of acquisition-related professional fees in 2011 that hit the general and administrative line, as you see in the press release; $2.8 million in the quarter and $7.8 million for the year. We do not know if these will repeat or not. That depends on our acquisition activity but we will have costs in integrating these new acquisitions.

Speaking of acquisitions, I thought I would provide a bit of information on a few of our recent past ones. Aginco, which we acquired in April of 2009 and which has been fully integrated into our operations in France, saw sales increase in 2011 as compared to 2010. Socom, our European chemical anchor manufacturing acquisition from November 2010 has taken a little longer for us to roll out their chemical anchor products throughout our European and Asian branches, but we are making progress. We have converted their product line to Strong-Tie brand.

Our Asia sales operations did not do as well as we were hoping for going into 2011 but from what we are hearing we are not alone. We continue to be committed to that region and with more of the right products we feel we will be successful. Although likely to not have an immediate effect on sales, we feel that some of the Fox and S&P products will do well there.

Before we turn it over to questions, I would like to remind you that if you would like further information, please contact Tom at the phone number listed on the press release. We would like to now open it up to your questions.

(Operator Instructions). Arnie Ursaner, CJS Securities.

Good morning. Welcome to your First Call there and the team. You gave us the revenue on the three acquisitions but these are in fairly high growth markets and in the case of Automation Stamping, you basically have distribution which they didn't have. How should we think about the growth rates on these three acquisitions in the upcoming year?

I will answer that, Arnie. Right now we are in the process of integrating all three of the acquisitions. We certainly think that there are very good market opportunities. As we discuss at the Automatic Stamping, we do have customers that we call on daily that are in that market space and we are really looking at the opportunities to be able to work with those customers on a truss program. That includes both a software program as well as the plates themselves.

We believe probably around the start of second quarter, we will have our plan in place. We are currently working on getting our sales force in place. So it will take a little bit more time through 2012 before we start to see some revenues from that but we do anticipate that we will have those starting to get in place around second quarter.

The other two acquisitions, S&P in Europe, that's almost working as a stand-alone entity. So we do have a Simpson employee who will be there full-time but we are not doing a lot of changes in their process right now. The main thing on their integration is putting their accounting systems in place. So their sales force will continue with their strategy plan just as they had for 2012.

And on Fox, which is the US company out of Baltimore, chemical company, again from an integration standpoint, we are working on where the customer base is and how we take and train our sales force. We would anticipate that on Fox that we should be ready again around second quarter.

So when we look at market size, the S&P products are in the FRP market, which for US and North America is about a $175 million market. The Fox products are more in the specialty chemical area and worldwide, that's about a $2 billion market. Of course it will take quite a while to be able to capture that. But it is a very, very large market opportunity.

From the plated truss side, as I mentioned, we believe based on today's housing starts that that's about a $300 million market size and that is in North America only.

My final question is you have obviously highlighted the price of steel has gone up. You built your inventories in anticipation of that. Given the cost increases you have and the relationships you have with your customers, what type of price increases would you need just to maintain margin and do you have current plans to put those in place to hold your margin up?

Arnie, the price of steel of course fluctuates a lot and it really depends on the actual use of that steel by product category. At the present time, we are -- we evaluate that all the time, as you know -- but at the present time, we are not looking at price increases. It's a pretty competitive marketplace and we are pretty comfortable with our inventory levels relative to our forecasted demand for at least I'd say through the third quarter of the year. But we evaluate that all the time and take into consideration our customers' needs and most of the time I think that we work out a plan that is mutually supportive of their profitability and ours too.

If I can just add one quick follow-up, then, in putting the two pieces together, the fact that you are not going to put in steel price increases for your customers despite higher steel and you've got quite a bit of integration expense on the three acquisitions, maybe Brian could speak to the weighting of both of those on the margin impact you are discussing for the first part of the year.

I think of the acquisitions I am not sure it's going to have a significant impact on the overall gross margin due to the relative size of their sales versus the rest of the company.

Great, thank you very much.

Garik Shmois, Longbow Research.

Thank you, I just wanted to dive in a little bit on Europe, the sales growth in the quarter. I was just wondering if you could break it down how much of that was market growth or how much of it was related to new product introductions and share wins on your part?

This is Brian. I will answer that one. So I think it's a combination of both. I don't know how much market share we gained. I would say it's a -- but it is combination of both of those factors. Our sales folks are out working hard every day trying to find every bit of business they can and we see that.

I think we have seen the benefit of some nice weather even in that region Q4 of this year -- Q4 of 2011 versus the prior Q4, so that may have had something to do with it as well.

Given that you've narrowed the losses in Europe by about half from 2010 to 2011, do you think that Europe could be profitable in 2012 given the improvements that you are seeing in that business?

We would think so. One of the things that you have seen there of course is the goodwill impairments in the region and of course those are big numbers in both quarters. Even taking those out they still weren't profitable but we would hope that they would start to turn that corner.

Okay, great. And then just one more question.

For the year.

Yes. As you shift towards more nonresidential focused end markets, is it possible to provide an estimate right now of your end market mix between residential and nonresidential infrastructure?

This is Karen. Today it is definitely not possible to do that. Again, we have just acquired these companies and you can see from the strategy that we're going it will take us a little while to integrate. Certainly again our goal is to be less tied to US housing starts and I think we've got some great acquisitions and some great people in place to help us get to that point. But it's a little early to be able to give you that detailed of information.

Okay, fair enough. Thank you very much.

Robert Kelly, Sidoti.

Good morning, everyone. I just had a question on the acquisitions. Just wanted to check the numbers. You said Fox had 2011 revenue of $8 million.

Yes.

S&P was revenue of $20 million?

Yes.

And the Automatic Stamping was $6 million?

Correct.

All three of those businesses were profitable. The margins were good. How did those margins compare to the Simpson corporate margin? If you can't give an exact number, higher, lower?

It's very difficult to do that just because of the way the accounting actually works and what we -- I guess what we are really comfortable saying is we have a lot of confidence in those businesses. Those businesses demonstrate an ability to make money and we think we will be able to do really well with them -- in the long run. It takes us awhile to get things integrated and there are different aspects of acquiring a business that we might need to look at changing right away.

For example in some cases, we want to expand the sales force. In another case, we want to expand some product lines and in another case, maybe we've got to change some manufacturing. So all of that we crank into short-run issues but look at it from a long-run standpoint very favorably.

So once they are integrated, will they be at Simpson Corporate margins, above --?

We don't know. We're hoping they will be. We think the markets are great. We have done some analysis and I think some of you have attended one or two of our presentations and seen what we think the end markets might hold But we have a ways to go to get there. We do have high hopes, though, that they will be real contributors.

Right, I just -- the markets that they play in, the question was asked earlier -- I guess you don't want to give a forward look for the growth metrics. Could you at least tell us how much they grew in 2011 versus 2010?

I don't think that we really want to get into that because there are different elements associated with that. But again, I would say that we are comfortable with the quality of these businesses and the capability of their management team and we now have the integration issues associated with that. But we wouldn't have bought them if we weren't really comfortable with the prospects even though they are long-term.

No, I understand that. Even if you get to the corporate average margin on these businesses, you paid a pretty penny. I'm just wondering have your return profile or characteristics changed? What's your timeframe to get a return on this investment?

Well it just depends on how good we are at integrating them. We think that the markets would demonstrate to us that there is potential for good margins. We just don't know how long it's going to take us. As you know, we have spent years and years and years developing both product lines and countries and it's just not possible for us to say how fast we can go. But we are going to be doing our best to go as fast as we can.

Great, thanks a lot.

Barry Vogel, Barry Vogel & Associates.

Good morning, ladies and gentlemen. A couple of questions. Let me just see here. Liebig, have they -- where are they in terms of their facilities? Have they been closed and consolidated with your other facilities in Europe? And what's the plan for Liebig's operations in Ireland right now?

Barry, I will take that one. We're still making sure from the Liebig standpoint the plant is still open. We are concerned that we want to be sure we can meet our customers' needs and so we are certainly taking slow steps to ensure that we are making the correct decision here and not having issues without being able to supply the customer product. So we are still looking at various sourcing solutions and possibilities from the Liebig standpoint. And as we look at those, we certainly need to be able to look at the standard cost to make sure that we're getting the most cost-effective products to our customers.

So we are still reviewing the best way and the best opportunity to work with Liebig and resolve any customer issues that we may have.

If you close the facilities, where would you produce the product?

It is possible we would still produce parts of the products at the Liebig facility and buy out other parts of the products and either do complete buyout or potential assemblage but those are some of the options that we're looking at.

Did you have in 2011 any goodwill impairments or write-offs at Liebig?

No.

We did not.

And did you lose money at Liebig?

Yes, we did.

Can you give us some idea of the losses?

We can, but we are not going to.

Where's your transparency? Liebig has been a difficult acquisition and if they are losing money, that would affect the profitability of the Company and I think that's a reasonable question.

Yes, I would agree that Liebig has been a difficult acquisition and that's exactly why we're looking at things we can do from not only the operational standpoint, I think we've done a lot of improvements there. We can tell you that we lost less money in 2011 with Liebig than we did in 2012 and that was really based on -- sorry -- less money in 2011 than we did in 2010. And that was based on a lot of work from the people there of trying to look at their costs and get the most efficient improvements possible.

In many cases it comes down to being able to have enough sales to cover that and certainly in the downturn of the market we have had some struggle getting enough sales to cover the Liebig product. But we did buy that company because they have a very high quality product and so we don't want to -- we want to take a slow process and make sure again that we have the capabilities of providing that product to our customers as they need it.

So we are looking at buyout opportunities. We are looking at different sourcing opportunities and that's pretty much the stage that we are at. Again, continually looking to make sure that we can make the correct decision when we do finally make that decision.

Okay, I have a couple of questions for Brian. Could you tell us what CapEx was in 2011 and what D&A was in 2011?

Sure, D&A was $21 million. CapEx, $27 million.

Could you give us an idea of what the goodwill is on Fox, S&P, and Auto Stamping?

You know, we haven't done the purchase price allocations on those yet, so there will be a significant amount of goodwill for each of those but we do not have the final numbers on those.

Okay. And, Brian, could you tell us approximately what your Asian including China revenues were and what the losses were this year?

Sure, give me just a minute. Asia revenues, so we consider Asia-Pacific to be Asia and Australia. I could break them out for you, but --

That's separate from China?

China is included in the Asia-Pacific region, so -- I'm sorry -- was it for the quarter or for the year?

For the year.

Okay. So about for the year, $9.5 million in 2011 versus about $9.2 million in 2010. And operating -- they had an operating loss of about $1.5 million in 2011 versus about $100,000 loss in 2010.

And what's your estimate -- what do you think is going to happen in 2012?

You know I don't have that number right in front of me. I'm sorry.

Okay, I will move on and I will be back in the queue. Thank you.

Steve Chercover, D. A. Davidson.

Two quick questions, please. First of all, the $3 million in stock compensation expense in the quarter, is that put in the SG&A bucket and since it's up year-over-year, is this a new run rate?

So it is in the SG&A. It's actually in all of the lines, so wherever the employee works is where we record that expense. And one thing we are seeing there is that for our 2010 year was the first year in a number of years that we had issued equity compensation and we expensed that out over a four-year time period. And in 2011 we have also issued equity compensation. So just the nature of layering in another year's worth of expense is showing the increase in the comparable because we again, expense those out over four years.

So in 2010, we basically had one year's worth. In 2011, now we're looking at two year's worth.

And do you anticipate that you will continue to incent or compensate your employees with equity going forward?

Yes, and if we meet our goals in 2012 and issue stock compensation, then we would add in the third grant so then relative to the others, you would now have three year's worth versus two.

Ultimately if you do it year in year out, we're going to get to a run rates?

Ultimately after four years if we continue to issue equity compensation, we ought to be then flat compared to the prior year. But right now we are basically layering in new year's worth of equity compensation and that's why we are seeing the increase.

Got it, that's fine, so we could see a couple more years of that. Then secondly, do you use the same channels to go to market with the concrete reinforcement and repair products as you do for your legacy products?

This is Karen. That's one of the things we are looking at as we work on our integration is what are the channels to take these products to market? In the European, some of the products are taken and sold direct and many also go through distribution. And I think we have a similar process with how Fox currently takes their product to market.

And so that is one of our key elements that we're looking at as we walk through our integration is the customer base and how to take these products to market and certainly how to expand that customer base.

Great, okay, thank you.

Peter Lisnic, Robert W. Baird.

Good morning, everyone. First question, any inventory step up charges related to the acquisitions in the fourth quarter or should there be any in the first quarter that you could quantify for us?

There were but they were very small.

Okay, and any in the first quarter or still small?

We have not done that yet. So when we do the purchase price allocations typically we would step up inventory but we need to engage our valuation firms to go out and do that work and that work is just beginning. I wouldn't expect it to be material, though.

Okay, all right, that's fine. And then on the Asia profitability outlook, can you give us a sense as to what the cost structure trends there are like and particularly interested in labor inflation and what you are seeing there?

We're seeing higher costs than we probably expected going into Asia but I think it would be fairly similar to the experience we have had here in 2011.

Meaning in '12 you expect to see comparable inflation or --?

I would say comparable costs on a relative level based on sales.

Okay, all right. So is there a plan to -- obviously you should get some volume leverage hopefully if the market continues to grow for you. But are there any sort of leaning opportunities in those particular regions where you can take costs out to help offset some of that?

That's a great question and we're looking at that every day to figure out how we can source those products in that region as competitively as possible for the rest of the Company. So we are looking at it and trying to find every opportunity to do that.

Okay, all right. Last question, Karen, on these three acquisitions that you made, can you maybe give us a sense as to -- thank you for all the end market opportunity color but I'm just wondering how material are these in terms of your ability to capture the significant markets that are out there?

In other words, do you think that these are adequate enough platforms or do you need to add to them in some sort of material way to kind of penetrate these market opportunities?

We will continue looking at acquisitions in 2012 especially in the chemical standpoint. I think we have a very, very good platform with the Fox and S&P acquisition, but we will continue to see if there are bolt-on acquisitions that will help us get a larger footprint in this market.

Obviously it's a very large market opportunity and these are two fairly small companies but our real interest is in that they provide high quality, highly specified products and as we have mentioned before, that's what we're looking for. We're not really looking for commodity type products. We want to be sure we have something that our salespeople can talk to specifiers and really differentiate.

So we are very, very encouraged about that and certainly there's a lot of -- being the small player, there is some definite growth opportunities there.

On the plated truss side, I think we have a very, very good platform with both our software company and our plated truss provider to be able to really go after the business in the North America market and that's what we are positioning ourselves to do right now really just trying to get all the pieces together so that we can provide a great customer service and a great customer experience in that market space.

Okay, got it. That is very helpful. Thank you all for your time.

(Operator Instructions). Keith Johnson, Morgan Keegan.

Good morning. I had a couple of questions maybe circling back up on the early comments and your prepared remarks on margins to make sure I understood right. Looking at the first quarter 2012 either flat to slightly down on a sequential basis, is that I think what the opening remarks were suggesting?

Correct.

When you look at the performance, gross margin performance in 2011 as you look ahead to 2012, you put up some pretty strong numbers around 47% a couple times. When you look ahead to 2012, is that doable or were there some items that we need to think about when we try to model forward?

I think if you're modeling forward, I think it would be down slightly for the year.

Okay, when we look at maybe switching down to the operating income and operating margin line, I know you guys made -- highlighted some of the professional fees that occurred in some of the G&A accounts. But you also made some investments in personnel and selling and R&D. So those categories all showed substantial year-over-year increases relative to 2010.

Do you think you will be able to begin to leverage some of those investments in R&D and selling as we move into 2012 or potential areas you would need to continue to invest in?

Let me add a little too that. So some of the costs that we are seeing in there are -- there are actual people cost increases because we are adding folks. But we are also seeing costs such as the stock compensation or the cash profit sharing costs that as we meet our goals on an operating profit level on a quarterly basis or on an annual basis, those costs are built into those lines as well.

And if we see similar operating profit levels, we would probably continue to see those costs there too. I don't know, Karen, if you wanted to add anything on the R&D specifically on maybe new products or the work that they're doing?

Yes, we have added some key people in areas R&D and certainly selling. I mentioned to you the project launch that we had on our cold form steel and we see that as a great market opportunity. It's not residential related and so that was a project that our R&D team released last year. They are continuing to work now with some of these new chemical opportunities.

And so we have added some resources to both R&D and sales not only to help continue what we are doing in our core product line but certainly look and expand what we're doing in both the truss area and the chemical front.

Okay, so when we start thinking about these accounts I guess going into 2012, would you expect some continued I guess double-digit type -- high single-digit type growth rates in R&D spending, SG&A, or those type of things?

I don't know that it would be double-digit but I would expect it to be up. We have done all those acquisitions at the end of 2011 so going into 2012, we are going to have a lot of folks on a lot of different P&L lines for the year where they weren't there last year.

Okay, great. Thanks a lot.

Barry Vogel, Barry Vogel & Associates.

Karen, no one has asked a question about recent business conditions and I mean recent meaning over the last month, let's say in US connector business because the bottom line is that the guts of the Company's profitability. So I was wondering if you can tell us that and also what your outlook for the US connector market is for 2012?

Sure, we have been blessed country wide with some amazing weather and our January sales were slightly up over what we saw last January in 2010. I think if we remember last year, I believe almost 48 states had received snow at that time. And so the fact in the construction from the core standpoint as we well know, weather affects a lot of that.

So we have seen our January sales up and really after talking to the branch managers, that's really a function of what's going on with the weather and jobs that were currently under process -- or currently under construction were able to continue.

In 2012, we are looking at things, not seeing a great uptick in housing starts. Certainly we track that very closely. We will continue to have our sales force look at various opportunities to grow and get every piece of business that we can. Certainly our fastener line, we have seen some opportunities as we expanded our fastener line.

We will be looking at the truss line but I think our sales force has done an excellent job in 2011 and we will continue in 2012 to find every source of sales that they can get with our product line. And they are very excited about the opportunities with some of the new acquisitions and the new products. But from the standpoint of residential housing, we are not seeing any big uptick in that business.

Now when you talk about residential housing, are you including the home centers?

Yes.

Also one other question. I know that you have restructured your Company quite dramatically with the crash of the market and because of that, you have been able to have reasonable profitability despite the fact that your main business has been -- has not been growing and has had difficult times. Can you give us some idea of an estimated incremental margin opportunity for the US connector business based upon your cost structure right now?

I think that would be a little bit difficult to estimate the incremental again. I think Barry, as you mentioned, we have done quite a bit of restructuring that was necessary as we hit the downturn. We had to do some layoffs which was unfortunate for us.

I think what has happened in this time is that we have again from a sales standpoint, beefed up what we could do with fasteners and things that -- the anchor systems product and other products to try and get that revenue. It would be a little bit difficult right now to get a number for what we think that incremental might be.

Okay, thank you very much. Good luck.

It appears that there are no further questions at this time.

Great. Thank you.

This does conclude today's teleconference. Thank you for your participation. You may now disconnect.