Simpson Manufacturing Co Inc (SSD) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the second quarter 2012 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 differ materially from these statements.

Some of these factors and cautionary statements are discussed in the Company's public filings and reports. Those reports are available on the SEC's or the Company's website. Please note today's call may be recorded. Now, I would like to turn the conference over to Tom Fitzmyers, the Company's Chairman. Please proceed.

Thanks, everyone. Good morning. Welcome to Simpson Manufacturing Company,Inc second quarter 2012 earnings call. Our earnings press released was issued yesterday, is available on our website at simpsonmanufacturing.com. Today's call is also being webcast, and that webcast will be available on our website as will a replay of the call.

Joining me in Pleasanton for today's call are Karen Colonias, Simpson's CEO, Brian Magstadt, Simpson's CFO. I will lead off followed by Karen and Brian, and then we will be happy to take your questions. We had a good quarter considering the state of the world's economy and our continued investment in our newly acquired operations that support our strategy of being less dependent on UShousing and more diversified geographically.

As we have mentioned, the past several quarters we have expanded our operations and product footprints. Sales increased slightly due primarily to new acquisitions. They contributed $9.7 million in sales for the quarter.

We are a long-range company and are committed to investing in our businesses. We are devoted to supporting our customers, our employees, shareholders and a very strong financial position. Our net income for the quarter was good, but we are working diligently to improve it.

As you see in the press release, total Company sales increased 2.2%. Sales for the quarter are up nearly 4% in North America. Europe was down 4% and Asia Pacific was down 3%..

Within the north American region, the USwas up 4% while Canada was up slightly. Sales in most countries in the European region are down, particularly France which was down 21%. That was offset by S&P sales . Most of the European sales declined which was nearly $6 million an incremental increase in sales.

We believe that some sales were pulled into the first quarter which benefited from a relatively mild winter in many parts of our operations. As a percentage of sales, Q2 International sales were 28% versus last year 29%. Our Q2 home-center sales were down 6%.

However, our largest customer was up 12% for the quarter. Net income for the quarter was $15.9 million compared to $19.5 million last year.

Sales in operating income by segment for the second quarter. North American sales were $144.5 million up 4%.

Profits on those sales, USand Canada, $26.6 million.

That was a decrease of 14% compared to the same quarter last year. European sales in Q2 were $34.1 million, down 4%.

That compared to a profit of $2.1 million this quarter versus $2.7 million last year.

Asia Pacific sales for the quarter were $2.7 million, and they were down 3%. Asia Pacific had a $200,000 operating loss, but that was an improvement of $400,000 compared to the prior year.

The operating environment continues to be very challenging. We lost some business to the competition in North America due to aggressive pricing. We continue to face increased pricing pressure, but remain committed to our long-term strategy. This is costing us profits today but will payoff down the road.

And with that, I will turn the call over to Karen who will discuss some of our investments and the progress we have made out of our latest acquisitions. All of these are focused on our long-term strategy. Karen?

Thanks, Tom. Over the past couple quarters, we have discussed our long-term strategy. I would like to reiterate that. We would like to strengthen our core products. We would like to expand globally with our footprint to be less dependent on US housing.

We are excited that we are on that path with our recent acquisitions. We manage our business from a geographic segment perspective that you have seen in our 10-Q's and 10-K's. Within those regions we have two broad product categories. Wood construction products and concrete construction products. Wood products are comprised of connectors, fasteners, sheer walls and truss points.

Concrete products include adhesives, mechanical anchors, specialty chemicals and other repair and strengthening products such as FRP. The automatic stamping business falls under our wood construction. Fox, carbon wrap and S&P are categorized as concrete construction.

For Simpson, these new concrete products are essential to help us diversify away from residential construction. The new acquisitions bring us products that are highly specified and have worldwide applications and will increase our margins in concrete construction products. As we said before, these acquisitions include their management teams, and we are excited about the market knowledge and product expertise they bring to Simpson. As always, we are dedicated to our core products, and we work very hard to ensure that we continue to meet our customer's needs for service, support and product availability.

We continue to invest in truss software development adding features and improvements requested by the industry. We are increasing our truss plate manufacturing capacity, and have just added warehouse space to our North Carolina facility. We remain very excited about the prospects for the plated truss industry, and while impacting us for awhile, we will continue to devote resources to this opportunity.

As with any newly acquired business, we are spending considerable time and resources to integrate these operations. This process is never easy, but we have a strong belief that these additions will add long-term value for the Company and help us meet our strategic objectives. We are six months into multiple integration efforts that are expected to take 12 to 18 months, and we feel we are on track with our integration plans.

As Tom mentioned earlier, the recent acquisitions contributed $9.7 million in sales for the quarter, but generated an operating loss of $2.6 million. I would now like to turn the call over to Brian who will share some of the financials.

For Q2, 2012 our gross margin was 45.6% compared to 47% in Q2 of last year. Our variable production costs, labor and material primarily, were higher, but were partly offset by lower factory spending. Our product mix also affected gross margins.

The relative sales mix of the two product groups, the wood and concrete, affected gross margins in that we sold more lower margin concrete products relative to the total of 14.5% this quarter compared to last Q2 which was about 10% of the total. Those are compared to the higher margin wood construction products which went to 85% of the total this quarter as compared to 89% last Q2.

We are also seeing an increase in revenues and gross margins in our concrete products as we are adding highly specified and engineered products. There were no significant atypical charges in the quarter, although I wanted to point out as Karen mentioned, continue to invest in our new acquisitions, and that is evident in the R&D engineering spending with a million and a half, $1.5 million toward going toward developing the truss software offering.

That outsourced amount is expected to be the quarterly runrate going forward. Stock compensation which includes stock options and restricted stock was $2.1 million in Q2, 2012 versus $0.9 million last Q2.

The increase is due to having another year of grants expensed as the awards vest over multiple years. As we mentioned before, if the Company meets its operating targets then I would expect grants in the following years to have a similar effect to expense. Cash profit sharing is a function of operating income and return on assets, and it decreased $2.8 million in Q2 compared to last year Q2 aspirating income decreased 13%.

The amount of cash profit sharing decrease that are in the operating expenses was about $2.5 million in Q2, 2012. The tax rate of 41.7% this quarter compared to last year Q2 of 37.6% was primarily due to foreign losses with no tax benefit.

Continuing forward into 2012, we expect the annual effective tax rate for the year to be in the low to mid 40%. In Q2 we recorded evaluation allowance for losses related to our 2010 French acquisition. 2012 expected CapEx is in the range of $28 million to $30 million, and depreciation and amortization expenses expected to be $26 million to $27 million of which $19 million to $20 million is depreciation. I wanted to point out that we have spent about half a million year to date on CapEx on the new acquisitions.

As I mentioned last quarter, the amortization is up due to the recently acquired intangible assets related to those acquisitions which are included in other noncurrent assets on the balance sheet presented in the press release. An amortization expense in the quarter increased by nearly $750,000 compared to the prior year. All in admin expense again due primarily to the recent acquisitions.

As Karen mentioned previously, we manage our business from a geographic segment, but within those regions we have the two broad product categories, wood construction products and concrete construction products. We will continue to report our financials and operations in this manner.

Before we turn it over to questions, I would like to remind you if you would like further information, please contact Tom at the phone number listed on the press release. Also look for our form 10-Q to be filed in early August. We would like to now open it up to your questions.

(Operator Instructions). We will take our first question from Garik Shmois with Longbow Research. Your line is open.

Thank you. First question is now that you are providing a bit more visibility with respect to the wood and concrete products, I was just wondering if you could maybe give us some additional color with respect to the margins within those two businesses, either the percent margin, the two business segments are generating right now, or maybe give us an idea of what the margin spread is between wood and concrete so that theoretically this concrete margins start to expand we get a better expense of what the differential would be and what the spread narrowing would look like.

Sure, I will take that question. The spread in Q2 of last year was 17%, and in Q2 of 2012 it is 13%.

Okay. Thank you. And then just on demand trends in the second quarter, you mentioned that there was some price competition in 2Q, but I was wondering if you can discuss some of the unit volume trends you saw in the second quarter. That would be helpful.

Maybe we are not -- it is not clear to us exactly what you mean by the unit volume trends.

Let me ask a different way. Accepting aside maybe from unit volumesYou had sales of that declined into home centers in the second quarter and they were flat at distributors. Maybe you could provide some more color as to what you saw in the second quarter with respect to sales and into those two channels?

Yes, this is Karen. We definitely are seeing this sales fairly flat into those channels. As we mentioned earlier, we saw what we believe is some pull through of Q2 business into Q1, and we think that is also a function of what we are seeing in those sales channels.

Okay. And can you discuss maybe what your expectations are for the third quarter? Are you seeing some improved trends as a result and maybe some normalization downstream?

What we are seeing and everybody certainly has seen the home starts are starting to increase, at least from a publication standpoint. What we have to keep in mind is as we look at increase in home starts certainly our business lags that. I would say it lags by at least typically a six-month time frame. We are starting to see a little bit more of an increase in construction when we look at multi families , as we work with our branch managers and get their input. So around the regions we are seeing a little more construction in those multi families, but again I would say from the single-family residentials again we are probably about a six-month lag from some of those home -start numbers.

Thank you very much.

Welcome.

And we will take our next question from Arnold Ursaner with CJS Securities. Your line is open.

Good morning. I guess as a follow-up. If have done my math right, your organic sales, the ones excluding acquisitions were down about 3% in environment where housing is getting better and your pricing actually has gone up. And you also specifically mentioned home centers were down 6%, but your largest customer up 12%. Should we correlate those two in some form to explain some of the revenue shortfall you are seeing in this quarter?

I think That is -- yes. That would be correct. As we mentioned last quarter, we lost the Lowes business which is in that home center area, and that took affect mid quarter.

Were it not for Lowes would your organic sales have been up? I am trying to get some sense of the magnitude of the short fall specifically from the customer you have parted ways with.

Probably flat, maybe up or down just a little bit, but I would probably characterize it as flat.

And again to be clear given you did have price increases in a follow-up to the previous question, did you actually have volume improvement in Q2 in North America?

It is unclear to us Arnie about the price increase information. We are not sure. Is that something you got from us? Something we published or discussed?

Most of the industry trade presses have discussed price increases. You guys I think you put in the latter part in Q1.

I do not think so.

No, we did not put any price increases in. There have been no price increases in this year.

You mentioned you had a $2.6 million loss in the quarter from the acquisitions you have completed, and you indicated at least some of the runrate expenses for R&D will continue. Should we assume the losses from acquisitions should continue in a similar matter through you mentioned in your prepared remarks this is not a three-month process but more of a 12 to 18-month process. How should we think about the losses of acquisitions you have made?

I would anticipate those through the end of the year.

I will jump back in queue and, Tom, look forward to seeing you at our conference soon.

Thank you. Just to stress again what Karen has said before, we have a very detailed plan for our acquisitions, and we are on track. We feel good about the progress we are making.

We will take our next question from Peter Lisnik with Robert W. Baird. Your line is open.

Hi, good morning. This is Josh Chan filling in for Pete. When you talk about price pressure and losing some business in North America, were you explicitly referring to the Lowes business, or should we interpret that as more broad based than just that one customer?

Certainly as we mentioned we lost the Lowe's business, and we discussed that a little bit last quarter, but we are certainly seeing praising pressures broad based.

So would you characterize yourself as having lost other businesses outside of that customer?

We have lost one other customer outside of that, but I believe we have gotten a pretty good portion of that business back through setting up some other customers.

And we have also increased our business in our sectors too.

Right. That makes sense. And going to your comment about demand having pulled forward into the first quarter. Do you believe that with the second quarter being more moderate growth that the pull forward demand has sort of worked its way through the system and that third quarter can resume a higher rate of growth, if you will, or do you believe there will be some lingering impact?

No, we certainly saw that demand when Q2 pulled into Q1, and we are seeing what I would say is a more normalized Q3.

Okay, great. And the last question from me. In the anchor systems business, one of your competetors was recently acquired by a much larger company. Do you expect any changes to the competitive landscape or to the dynamics there?

Well, we are always analyzing what is going on in the industry and certainly what our competetors are doing. And so we will definitely need to be very diligent on as we look at that business and certainly service our customers. We certainly pride ourselves on all of the services that we offer which go well beyond pricing and that certainly is our engineering support and our sales support, our distribution and certainly having that code tested product available to our customers. But we will certainly be diligently looking at all of the actions of our competetors in our various markets.

Great, thank you for your time.

We will take our next question from Trey Grooms from Stephens. Your line is open.

Good morning.

Good morning.

I guess looking at R&D, Karen, is this -- it is a little bit inflated relative to last year. Is this a good run rate for the back half of the year as well, and kind of as we look forward? The first quarter had some kind of one-time items in there, but is this a good number that we should be expecting going forward kind of in this $9 million per quarter range?

Yes, I would say the Q2 runrate should be something very similar throughout the rest of the year.

Thank you. And kind of sticking on the operating expenses the same with kind of the selling expenses to first quarter maybe a little bit higher than on a year-over-year basis. Second quarter kind of levels out. Is this the way we should be thinking about your sales expenses there as well?

Yes. You see in the second quarter is obviously from a selling expense we acquired several sales people from these acquisitions, and you are seeing that group obviously incorporated in those expenses. I would anticipate that is a reasonable runrate throughout the rest of the year.

My last question is on the concrete, and thank you for forgiving a little more clarity on those two items, but the lower margin that you were talking about on the concrete business -- you have obviously made some headway on narrowing that spread. Is this a business that we can get up closer to the wood products, kind of margins, or is this just an inherently lower margin business kind of going on a long -- thinking about it more long-term?

Well, certainly the acquisitions that we are currently integrating are highly specified products, and there are things that we think we will really be able to contribute in and enhance in our margin in a concrete products area. As we have a bigger portfolio of products, again the acquisitions have basically tripled our portfolio of products. That really gives us more opportunities to go into the customers and the specifier and provide the full line. And so, yes, we are absolutely expecting the margin expectation for the concrete products to increase. It will certainly take some time as we have mentioned . It takes time to integrate these products and certainly to run our testing, get our code reports and provide our sales people all of the tools they need to work with the specifiers. I do not know if they will quite get to the wood construction products, but certainly they will be much closer to those numbers.

Thanks. That is all from me.

We will take our next question from Steve Chercover from D.A. Davidson. Your line is open.

Good morning. Two quick questions, first of all continuing on the R&D line of questioning, you are still doing -- are you doing a lot, and is that acquisition-related in order to -- some is to get the software going, but can we also expect to see your content per start rise and your legacy connectors?

Well, we have obviously a huge focus as I mentioned . We brokeup some things here in the concrete areas, and we are certainly not going to lose focus on the core business. When you look at certainly the R&D expenses we are continually working with getting code reports , expanding our line, development testing, new equipment to be able to expedite our development testing. And so we will continue to focus in that area, and that focus in R&D will not only help us again with these new concrete products and those acquisitions and developing that market, but they will continue to help us develop and improve products and services in our wood products market.

And with respect to the competitive pricing you have been encountering, I assume That is due to the my tech acquisition of your biggest competitor. And now you are focusing on truss plates which is a market that my tech truly dominates. Are they going to let you into the market?

They probably will not let us into the market, but we are going to try to make inroads into that market.

It certainly seems like a natural for you. You are pretty good at poking holes into pieces of steel.

That is a real good way of saying it.

And also our portfolio of customers that we sell to already is something we know a lot about , the customer relationships, and we think we have a substantial opportunity to in a way if you look at it broaden our product offering to these same customers.

Like I said, I wasn't trying to diminish the intellectual property you bring to what you do. You are very good at it. Last quick question, you had some significant managerial issues in China and broadening your geographic footprint is a key priority. How is that going now?

Yes, so that the -- we did have a little bit of a turnover of a few sales people in China. Our manager there Rob [ ] has done a fantastic job of organizing our sales team and certainly doing some training within the entire group so that we do not lose perspective as we are working on subway jobs versus tunnel jobs or bridges and that sort of thing. The group in China is now very active and looking at these products from the new acquisitions. They are in some training modes. We are certainly looking at opportunities for those products there.

How long do you think it might take for Asia to become profitable? It is not a 10-year process like Europe, right?

I am sorry, could you say that one more time?

I am wondering how long you anticipate it will take for China or Asia to be contributing to profitability?

We have shortened our time frame for them to be profitable with these new acquisitions. China is pretty much a concrete world. Not a lot of wood construction there. So the concrete acquisition products that we are currently working and integrating on, we are actively pursuing putting those products into the China market. And as they have a larger product offering that will help them get to that profitability. The other thing I would mention about China is our manufacturing plant is running very smoothly and has a very -- we have a great management team there, and those operations are certainly running quite nicely now and very similar to our other manufacturing facilities.

Are they shipping product back to the US?

Yes, our China manufacturing facility ships to both our North American, European and Asia pack operations.

Thank you very much.

Thank you.

(Operator Instructions). We will take our next question from Barry Vogel with Barry Vogel and associates. Your line is open.

Good morning, ladies and gentlemen.

Good morning.

Brian, I have a couple of little questions for you. Some transparency we are getting in the second quarter. I don't believe certain numbers we had before. So can you give me on the gross margins, you gave us in the released gross margins for North America and the second quarter of 2011 and second quarter of 2012, and you did the same for Europe. Can you give us the gross margin for North America in the first quarter of 2011 and the first quarter of 2012, and can you do the same for the European gross margins?

So, can I -- let us see here. Bear with me for a second. Barry, how about if I give you year -to-date?

That is not what I want. You had year-to -date in the press release. I want to look at the quarters.

I do not have Q1 broken out in front of me.

Okay, if you can get that maybe I can get it from Tom. My second question has to do with the tax rate. I think I heard 41% to 45%, was that correct?

I would probably think it is 42.5% to 44%.

And as far as these valuation allowances that you claim were responsible for the higher tax rate or most of the higher tax rate. When you talked about the French acquisition, was that Socom?

Correct.

I thought that had been fairly successful,. So why are you having to take an valuation allowance?

What we are doing there is as we are transitioning the Socom business from private label to Simpson Strong-tie label we have had some of the private label customers choose a different supplier a little quicker than we thought, and our sales have been pretty decent. The integration efforts have been good. I am not sure that in the past we have added a lot of clarity on their net income per say, but they have had some -- as we have integrated other businesses, they have had some losses, and what actually happened with those guys was we took the valuation allowance in Q2 and as an extra conservative measure.

Okay. And going back to your commentary in this quarter about the recent acquisitions counted to $ 9.7 million in revenue and had an operating loss of $2.6 million. Could you give us sales numbers for the first quarter of 2012?

So the first quarter of 2012 was $5 million in revenue and $5 million in operating loss.

Because I do not remember seeing that number before.

It may not have been on the press released, but I believe it was part of the Q&A on the Q1 call.

Yes, I was on the call, but I guess I missed that.

So again it was $5 million revenue, $5 million operating loss in Q1.

And I did hear correctly that you are expecting a $2.6 million operating loss to continue in the third and fourth quarters? For the acquisitions ?

Correct.

Thank you very much for the increased transparency.

You are welcome.

(Operator Instructions). We will take our next question from Robert Kelly with Sidoti. Your line is open.

Thanks for taking my questions. The acquisition and the characterization of the second half, why are the losses so big? You paid a pretty good amount for these businesses. It is something you are doing internationally that is depressing the contribution there? Were they businesses that needed fixing? I am just trying to understand why the losses are going to be so heavy in year one.

So we acquired four operate companies, and each acquisition is extremely different on the things they need from an integration standpoint. As we look at the truss business, of course, we have given you some information there on what is necessary to work on our software, and that is a key element to be able to provide service to our customers. So that is certainly a piece of it. Some of the other acquisitions we have added sales people, there are marketing expenses, there is QC on the current processes.

There are some environmental health and safety issues we need to take into place. When we go to take a look at these -- acquiring these companies and putting a product under our brand we spend a lot of time ensuring that we have put everything into them that we need just as we have establishing our brand with the connector side. So it comes from many applications. It could be manufacturing more equipment, R&D services, marketing, I.T. is another big piece and those are all what you are seeing those operating expenses.

Is there anything in that bucket of costs you laid out that are one time or like a noncash that starts to go away in the next calendar year? I understand that there are some direct cash costs that you are laying out to tie the business together and amp up the sales via marketing. Like software, is that like an amortization-type cost or is that an out right cash cost?

Cash cost. This is Brian. One of the other things that we are seeing there is as Karen mentioned, as we integrate these businesses into our North American branches, there is a fair amount of time that we spend training our people. So on our specialty chemicals acquisitions, that was Fox Industries. There is a fair amount of technical training that is going on. We are not turning on those product sales through our branches as heavy today as we expect in the future.

So one of the key components of an acquisition that we look at is how can we utilize our strengths in adding value to these? And some of those strengths are engineering, but also distribution. It takes a fair amount of effort to get the products rebranded, get the people trained. So what we are seeing this in sales is primarily sales in businesses, but we would expect that top line revenue from those to grow as we are able to move those through our branch network, but the spending is what we are doing to get those ready to run through that distribution network.

One final one on the acquisitions. Is the spending heavily front loaded in year one? Do the costs you are laying out and if you could quantify them, that would be great. Do they drop substantially in year two?

I am not sure they will drop substantially. They are heavier in year one, and they should tail off a bit, but there is ongoing costs as far as R&D testing, software development. So there will be a fair amount of things that were done initially to get the plants ready. I could not tell you what that dollar amount is.

Fair enough. Switching over to just market conditions, particularly in North America. The public builders are saying very positive things on the order front. If that were to hold and continue for the balance of 2012, when would you feel that revenue impact from a pick up in builder orders? Have you felt that already? Is there a preloading of the channel ahead of that, or do you start to feel it now?

Well, as I mentioned previously , certainly we see the numbers of the housing starts as they are published are increasing, and there is about a six-month lag from when you might see those housing permits to when we actually see jobs breaking ground. We are seeing some improvement with our customers from the standpoint of this year over what they have seen over the past couple years, but nothing from a standpoint that is forcing them or making them want to think that they are going to be stocking all of their shelves up. So we are not seeing much difference from the standpoint of where we are providing products to our customers.

I did mention to you we are starting to see some of these multi family jobs and maybe they are breaking a little sooner than some of the residential jobs . We should see some of that impact from those new housing s starting sometime this year, but again there is some lag time as permits go through the system, and then we get to the foundation and start using our products.

So roughly two quarters between permit and you feeling a sale?

About that time frame, yes.

Okay, thanks a lot.

(Operator Instructions). And it appear there's are no further questions at this time.

Thank you very much.

Thank you.

This concludes today's tele conference. You may disconnect and have a great day.