Simpson Manufacturing Co Inc (SSD) 2013 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the second-quarter 2013 Simpson Manufacturing Company Incorporated 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 may differ materially from these 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. Please note today's call is being recorded. Now I would like to turn the conference over to Tom Fitzmyers, the Company's Chairman. Please proceed.

Thanks, everyone. Good morning, and welcome to the Simpson Manufacturing Company, the second-quarter 2013 earnings call. Our earnings press release was issued yesterday. It is available on our website at SimpsonMfg.com. Today's call is also being webcast, and a replay of that webcast will be available on our website. As usual, joining me and presenting 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 delighted to take your questions.

As you see in the press release, we have again included information about segment sales and profits, which we have previously discussed in the base of the earnings call, and they are now part of our quarterly or annual report filings that follow. Although housing starts dipped this month, they are up compared to last year and we're starting to benefit from that increase. But, unlike lumber or other products that have a more direct correlation to starts, our products are used to a greater extent in code-based areas subject to natural forces, such as seismic and high wind events. And they are also subject to sequential construction processes, like the foundation first, the walls, and then the roof systems.

Sales were up nearly 11% in North America for the quarter, due to increased homebuilding activity, despite price reductions we took in the latter half of 2012 and the loss of Lowes in May of 2012. Lowes accounted for $5.3 million in sales in the second quarter of last year, although we believe we picked up some of that business through our other customers. As we have mentioned in the past, only 50% to 60% of our wood product sales are dependent on new residential housing starts. In Q2, the home centers, excluding Lowes, are up 6% for the quarter, and Home Depot was up 10%. The financial uncertainty in Europe, along with an extended winter in some parts of that region, also seems to be affecting our revenue there.

Exiting the heavy-duty mechanical anchor business contributed approximately half the sales decrease in Europe. North America's operating profits were up $2.1 million due to higher gross profit, primarily from increased revenue volume, offset to some extent by price decreases and increases in operating expenses. Europe's operating profit increased slightly due to lower operating expenses, partially offset by gross profits. In Ireland, we have moved out the remaining assets and we are evaluating whether to rent or sell the facility depending on the best return to us. The Asia/Pac operating loss narrowed as a result of higher gross profits, offset by increased R&D, engineering, and selling expenses. We continue to have a very strong financial position, which gives us lots of flexibility.

I will turn the meeting over to Karen. Karen?

Thank you, Tom. It's nice to see that we are benefiting from increased housing starts in North America, as we are also continuing to invest in new initiatives to strengthen our market position in both the wood products and concrete product segments of our business. For example, we have accelerated our software spend in anticipation of our new release at the BCMC show in October to meet our customers' software needs in the wood product segment. In Europe, operating profits are up slightly this quarter, and we are positioning ourselves in the region for additional improvements.

We are continuing to monitor our operations around the world to strive for long-run returns that are satisfactory to us as well as our shareholders. The Company continues to focus on its core business, with programs such as our Genuine campaign. The Genuine Simpson Strong-Tie Connector campaign is a way to remind our customers about all the benefits they get from doing business with Simpson Strong-Tie, such as code-listed and thoroughly tested products that are widely available.

As part of this recent campaign, in the last 90 days our sales reps performed over 1,500 store resets, providing our customers with new signage, new point-of-purchase materials, and new products to help drive sales and to support our customer success. To repeat from prior calls, we manage our business from a geographic segment perspective. You have seen this in our 10-Qs and 10-Ks. Within those regions we have two broad categories -- wood construction products; concrete construction products.

Wood products are comprised of connectors, fasteners, shearwalls, and truss plates. Concrete products include our adhesive line, mechanical anchors, specialty chemicals, and other repair and strengthening materials. As always, we are dedicated to our core products and we work very hard to ensure that we continue to meet our customer needs for service, support, and product availability. I would now like to turn the call over to Brian, who will share some additional financial information.

Good morning, all. As noted in the earnings release, Q2 2013 gross margin was 45.7%, compared to 45.8% in Q2 of last year. The relative sales mix of the two product groups did not affect gross margins. Also, as in recent past, the lower margin concrete products relative to the total was 15% this quarter versus last Q2, while the wood products was 85% of the total. The margin differential of wood to concrete products is 9% this quarter, compared to 13% last Q2. The wood product margin was affected more by the price decrease than was concrete products.

We have also seen some improvements in the concrete construction product cost. The estimated gross margin for 2013 we believe will continue to be in the 42% to 43% range. Operating expenses as a percent of sales was down slightly in the quarter compared to last year, although certain compensation expenses, such as commissions, gas profit sharing, and stock compensation, increased $2.3 million in the quarter, or 1.2% of net revenues.

With taxes, we had lower nondeductible foreign losses affecting the tax rate this quarter. This quarter it was a little less than $1 million that we did not take a tax benefit on. And we believe our annual estimate for 2013 to be in the 42 to -- I'm sorry, the 40% to 42% range for annual effective tax rate.

2013 CapEx is looking to be around $29 million to $30 million, and that is somewhat consistent with what we mentioned last quarter. Q2 2013 CapEx spending was $8 million, primarily from manufacturing equipment in the US. For 2013 depreciation and amortization expense is expected to be $27 million to $28 million, of which $20 million to $21 million is depreciation. Intangible amortization expense in the quarter increased $0.2 million compared to the prior year, all in admin expense, due primarily to the acquisitions of the Weyerhaeuser assets and the software development team in Boulder.

Before we turn it over to questions, I'd like to remind you that 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 the next couple of weeks. We would like to now open it up to your questions.

(Operator instructions)

Arnie Ursaner, CJS Securities.

Hi, good morning.

In the last call you commented that embedded products had been improving very nicely and that is a leading indicator, as you think about the process of moving from permit to final demand for wood related products. Can you comment on the trends you saw in the quarter and how the outlook for Q3 is relative to wood products?

Good morning, Arnie, this is Karen.

As we mentioned in the last quarter, we do track very closely our concrete embedded products. As Tom mentioned, in our phase of construction the first element that we see from our product line would be concrete. Certainly then the walls and the roof. We are seeing continued similar tracking of those concrete products as we look into what we had last quarter and what we see in July.

And you mentioned you incurred, you redid 1500 or so -- your sales reps went on 1500 units or calls resetting things. You mentioned $600,000 of promotional expense in your prepared remarks. Does that include that? Is that where it would be or maybe you could separate out, perhaps, the one-time expense of doing this program.

Hi, Arnie, it's Brian.

The expense would have been incurred probably over Q1 and Q2, as we go and develop those materials and such. And I don't have the number, the expense amount that was related to that particular campaign. But it would not have just been in the quarter, because there is a lot of work in getting those materials ready. That would have been, though, probably starting around the first of the year.

Maybe, Arnie, I could just add one point. This will be a continuing campaign as we are going throughout the year. We have several elements as we roll this campaign out.

Final question or comment.

Congratulations, Karen, on being elected to the Board. Do you or Tom care to comment on how if it may change your role or the future? How it might impact Simpson with you being added to the board?

Well, first of all I appreciate that. Tom, go ahead.

Karen has been doing a marvelous job for a long time and being a Board member really doesn't change that at all. And Karen has participated ever since she has been the Chief Financial Officer in all of our board activity except, of course, for some of the specialized board meetings which are just outside directors. But personally from my stand point, congratulations are highly deserved, but I don't think it changes too much what Karen does, except maybe the way she signs a couple of things.

Thank you and, again, congratulations, Karen.

Thanks, Arnie.

Trey Grooms, Stephens Inc.

Good morning, guys, and Karen.

So, you noted lower selling prices again in the quarter. Is that -- obviously, a big year-over-year, but did pricing continue to slip in the second quarter there? And then also, you noted pricing pressure in Europe. Is that something new there? I cannot recall hearing you mention Europe before. Maybe I am forgetting.

Trey, it's Brian.

On the selling prices, no, I don't think we have seen any further erosion in that category or in that classification. In Europe, their pricing may be on a slightly different cycle. So, I don't think it was significant. Although, when you look at Europe together it had a little bit of an impact, but it was not much.

Okay. That's good to hear on the pricing here.

And just kind of looking at the Lowe's business there that you have lost. You gave us some color on 2Q. Could you give us an idea of what the annual impact could be as we look back a trailing 12 months or something like that where we can get a sense of what that impact could be for the home centers business as we look forward for as that anniversaries?

Again, it is Brian.

As we mentioned the Lowe's business we lost back in May of last year. So, for the year of 2012 it was $11 million. So, annualized if you were to look at trailing 12 months, $20 million to $23 million in that range.

Okay, that's helpful.

And then on R&D, bringing a portion of that in-house, I guess, can you give us a sense of how that will change that? Going forward I would assume there would be some cost savings there over time as you did that. Could you just give us a sense of run rate on R&D, please?

Well, I think as we mentioned in the press release, we accelerated some software development costs and we would be -- based on current information today we would expect that that pace would continue as we saw in Q2.

Okay. Thank you very much.

You're welcome.

Robert Kelly, Sidoti.

Hi, good morning, everyone.

Good morning.

A question on the amount of the price decrease you saw in North America. I am not sure if you quantified it and could you tell us what it was year-over-year?

Yes, as we've mentioned, we certainly need to make some adjustments as we are working to service our customers. And, again, to really help us improve and maintain some market share we have had to have some small price decreases.

So, as we look at North America, the 11% sales growth, what was volume? I'm just trying to get a sense of what the drag from lower prices or mix was.

Well, volumes were up, but due to competitive reasons we would really like to not talk much about the specific drag on revenues, but volumes were up.

Okay. Let me try this.

Steel prices are lower year-over-year, but your margins are feeling compression, the way you stated in the release, owing to lower selling prices. So, how do we reconcile the fact that your raw material costs are moving down, but your margins are getting squeezed by lower prices?

Certainly the gross margin is directly affected by the lower price decrease, but I don't have the number that price affected margin to give you.

Okay.

How about in Europe? What were the 2Q '13 savings from the closure of LeBec?

About $700,000 on the operating line.

Is that a good run rate to use for the entire year, 700 a quarter?

If we exclude the one-time -- the severance and some of those write-down activities that we had in Q4, Q3 and Q4 of last year, I think that would be a good run rate number, yes. So, $200 million in cost, cash cost savings from closing LeBec? I would say $2 million to $3 million.

Okay, great. That's all I had, thank you.

(Operator instructions)

Barry Vogel, Barry Vogel and Associates.

Good morning, ladies and gentlemen.

Good morning.

Karen, how would you explain in your own words the competitive conditions for connectors of North America?

Well, Barry, I think one of the things that you see on our campaign and one of the things we have always done is to really relate to our customers all the services and, basically, features and benefits that are behind the Simpson Strong-Tie brand. It is a very competitive market. As things pick up a little bit in the housing market, certainly that means we need to have a key element which is product availability and that has always been one of the service levels that Simpson has prided itself on.

I mentioned the campaign because that was a means of really helping our customers in this market area be able to support their product sales and help them with their product turns. So, I would say it is definitely a competitive market. I would say that as we look at all of the things that Simpson provides behind just price, that our customers certainly are appreciating it and that is what is helping us maintain a large portion of our market share.

Could you give us an idea of what connector utilization rates were in the second quarter in North America?

Yes. We are running our factories, as you have seen. We've got some increase in our -- as we increase volume we have got some increased labor costs and some reduction of our factory because we have a little bit better absorption. We still have room to be able to produce whatever our customers needs. And so, we are fine from a standpoint of manufacturing and being able to meet as we get back into some better looking housing starts.

But if we wanted to pick an approximate range of utilization rates, there is a big difference between 80% and 88%. And I know you had a major expansion near the peak of the last cycle and, obviously, you have room to reduce more product if housing and the steps you are taking to improve your sales continue. So, can you give me just a little bit out of a range of utilization rates for the second quarter?

Yes. I guess a range standpoint I would say our utilization rate is probably somewhere between maybe 60% to 70%.

So, you have a lot of room to grow in terms of output?

We have room to grow and I think as I've mentioned in the past conversations, we have initiated several lean initiatives that have helped us be very nimble from a production standpoint and really be able to do those things to meet those customer needs.

Now, could you tell us where the best end user demand is in the United States currently for your connectors?

Well, we are certainly seeing -- you are seeing from a geographic standpoint?

Yes.

Yes, we are certainly seeing some improved areas in the Southeast. Some areas improving in the California, both Northern and Southern California markets. So, those are probably the best specific areas.

What about Texas?

I was going to say in Texas, yes, part of that southern market area. A lot of the demand is definitely in the areas that are stronger on the code enforcement on the coasts and certain parts of the country.

I have a question for you, Brian.

In the past you have given us some idea of the set on your P&L or your operating profits. And you made that flurry of acquisitions in late '11 and early '12. And so can you give us an idea if we looked at the first quarter of '13 and the second quarter of '13. If we took those specific acquisitions that you made at that time, what the impact would have been in the first quarter of '13 on overall operating profits from those acquisitions? And the same of the second quarter of '13.

As I mentioned that we were providing that comparative or that information for comparative purposes, but now they're in both quarters and we would let you know. There was nothing significant or materially different. And we basically want to try to identify and point out in the press release if there are any material changes in any particular spend category. Other than what we mentioned in the R&D line with software development, there was nothing materially changing from quarter to quarter.

Right. But I was getting at, if you remember when you first told us that there were negative impacts, obviously, from amortization of intangibles. A lot of them were startup companies where you paid a lot of money for. So, if that impact can go to not only to zero, the net negative impact could also go into the black, that would be very helpful for earnings growth for the Company. That's what I'm getting at.

Exactly. I guess what I'm saying is they're not materially different than what we have disclosed in the past.

So, their negative affect is still negative affect?

Correct. And we really should see the benefit of those on the revenue line when they start contributing there. And, again, if they are material changes, we are going to put them in the press release.

Right. So, they really have not happened yet?

Correct.

Thank you very much.

You're welcome.

Steve Chercover, DA Davidson.

Thank you and good morning, everyone.

First of all, Karen, you were just talking about customers, but can you define it a little more? Do you view your customer to be Home Depot or the engineer or the installer? Who are you getting closer to?

I think you hit on the majority of our customers there and I would also add that our customers are the specifiers. And in some cases even the homeowner. Our sales force worked very closely with all of those entities. We, of course, start with products that can meet a specifier's needs and can build the structure stronger. And we work with them to get those specification on the plans. We carry that through with our distributors, making sure they're aware of the differences on our products and that they have got the product availability. Work closely with them on job sites.

We certainly work with building officials, they're also a customer. Large builders and the home centers. The particular campaign that I mentioned was specifically focused on our lumberyard customers, which we have 1,000s of throughout the United States. And so, that program was first focused on those customers. But as I mentioned, our Genuine -- since the Strong-Tie Genuine connector campaign is just -- that is one of the phases. We will be continuing to work specifically with our other customers, those being the specifiers and some of our distributors.

But does this ever trickle down to like literally the retail level? And I don't mean the guys in Home Depot with the orange smocks, but the Sunday carpenter who is trying to build a fence and he knows that he has got to get strong ties. Are you trying to get right down to that level?

Ideally, we would like to get to the final person that is installing our product and we are able to do that from a larger contractor base. It is much more difficult for us to touch that closely with the smaller contractors. But that would be ideal. We would like to get everybody that is touching our product or specifying our product to really understand everything that stands behind that brand and that is how we need to be able to differentiate it.

And as we have talked about in the past, from the manufacturing support, marketing, engineering services, the quality of our product, our salespeople there to be able to answer questions. And, certainly, again, I will mention the availability. It is there when they need it. Those are all key factors that stand behind our brand and really help us really deserve and differentiate from a pricing standpoint

Okay, thanks.

And just switching gears, it seems to me that still one of the bigger opportunities for you guys is truss plates and I think that is what your new in-house engineering team is focused on. Can you give us some time benchmarks that you expect this to be truly in the marketplace commercial?

Tom, do want to follow up with that?

Yes. I have a couple of comments on that and also just to add one thing to Karen's comments about how far down we go. We have lots of seminars across the country all the time, end product knowledge programs, too, to try to get to that end user. And deck seminars, for example, product knowledge seminars in various customers. So, there's a huge amount of activity going on there all the time. When we started out with the truss plate business, we had to acquire the capability to do the software part of it as well as the manufacturing part.

And I think that on the manufacturing side of it we have always felt very comfortable with that opportunity. The software side we had a lot to do and we still have a lot to do. And I think the framework that we have used for trying to put that in perspective is to look at it over a two-year period of time. So, we are a one half of a year into that two-year period of time. There is a show that is an industry-wide show in October that we're going to participate in.

We're going to demonstrate the progress that we're making with our software. We have continuous releases now with the software side of it and as you have been able to tell from press releases, we have acquired a lot more capability from a development standpoint with the substantial acquisition of the people and processes at Keymark. And that was kind of a [soos] age process that we went through there, but we think we are making a lot of progress and we're focusing on customers that are smaller right now because we want to do a really good job for them as we go along.

And we have a software release approximately every six weeks. Some of those a very small and some of them are pretty substantial. So, the possibility for us to increase our market share is growing. And I think, as we have said in the past, we think that this market from our standpoint is, with today's starts, is north of $300 million and we don't have very much business there.

However, most of the prospects for that business are already our customers, because we are selling them our standard connector products for the wall systems, the floor systems and the roof systems as far as hooking trusses to plate lines. So, we are pretty familiar with that market and we are interested. However, our software get to the point where they're really comfortable with using it and we've looked at that as a two year process.

That's the reason why I think it is such an opportunity is because they are already using your stuff, they're familiar with your brand. So, is the endgame and this is my last question. Is the endgame that you could provide the entire kind of steel connector package within a house just the way Weyerhaeuser says we've got the lumber, the panels and the engineered wood, so anything that is wood in this house is ours?

(laughter) I'm not sure of anything that is wood, but we are disconnected. And we also have fasteners, too. So, for example with some of the siding products, we can provide fasteners to help with that. But anything where the wood is connected and with the concrete and roof systems, that is, we think, a major opportunity for us. And as time goes on there is more and more engineering that integrates all of that. And part of the reason for that is to have an extremely well-designed house to withstand the natural events that we get confronted with all the time.

And part of it really is finding ways to be more efficient in the actual construction of the house. And, so, those opportunities exist for us and we work on them all the time. And we think we made some progress here on the software side recently, but we also work on product development to try to integrate the wood group, if you will, all the wood product's and also as they relate to concrete in the foundations primarily.

So, lots of interesting things for us to work on.

Okay. Thank you very much.

Arnie Ursaner, CJS Securities.

A couple of quick follow-ups.

In trying to respond or follow-up my friend Mr. Vogel's questions. When do you see the inflection point of when the expenses turn neutral? What is the timing of when you think that will occur?

I think that it is a probably a two to three-year process.

So, as we think about 2014 we should not assume we hit that inflection point in that short a timeframe?

Correct.

Okay.

I noticed a tiny drop in your share count. Was there any -- were there any share repurchases in the quarter?

There was. Prior to the end of the quarter, mid-June, we announced a share repurchase. So, that was put out. It was, if you give me just a second, $9.8 million, about 340,000 shares.

Okay.

And you spoke about Europe. You mentioned a couple of things about it that half of it was exiting heavy-duty mechanical anchors and you also highlighted weather, the extended winter conditions. So, two questions related to that. Maybe give us a sense of how trends developed in the quarter, between April, May, and June? And also, more specifically, if you could comment on trends you are seeing in the S&P Clever?

I think that with Europe, S&P Clever is definitely tracking with the remainder of the business. I think they're pretty similar cycles. So, some of the bigger economies over there, Germany for example, extended winters into early Q2 really affected some projects that were going on there. But definitely, as the quarter thaws out, so to speak, that their activity was picking up.

Okay, thank you.

You're welcome.

Barry Vogel, Barry Vogel and Associates.

Yes, I have a question for Brian.

When we look at the areas where you have had difficulties in terms of actual losses, we know all about your attempt in Asia Pacific and, obviously, Europe has had a lot of difficulties economically. Brian, do think it is plausible that you could breakeven in Asia Pacific this year and breakeven or better in Europe this year given what you know?

Based on current information, I would say Europe would breakeven or better. I think Asia Pac, and when we talk Asia Pac I am lumping in Australia and New Zealand, I don't think they're going to breakeven this year.

And as far as the stock buyback. All of a sudden we saw this press release, what triggered the buyback? You have had that authorization for quite a while.

Tom, you want to maybe address that one?

Right. Well, we look at capital allocations all the time. And they range from CapEx expenses, which by the way, we look at very closely, because many of the opportunities that we have to improve the margins in the Company come from things that we do with those capital expenditures. But we just looked at the opportunities that we had before us. We thought it was a good way to spend the Company's money and it is kind of a reflection of the confidence that we have in the future.

Would that be tied into improvement in overall conditions for the Company's end-user markets?

I think, Barry, we are pretty opportunistic and we just continuously evaluate it. So, it could change quite a bit from quarter to quarter or year to year.

Thank you very much.

Kevin Leary, Spitfire capital.

Hi, everyone.

Hello.

First just to confirm, did I hear correctly that gross margin for the year is expected to come in around 42% to 43%?

Correct.

Okay.

So, if I look at the first half, gross margin was just over 44%, which was down 70 bps year-over-year. And if I look at the second half, it looks like if I use the 42% to 43% for the year, the second half looks like it is expected to get worse year-over-year than the first half. Is the pricing environment expected to get worse? Is that some type of seasonality that I'm not thinking off? Could you just spend a minute talking about that? Thanks.

Sure, Kevin, this is Brian.

I don't believe it is pricing related, I think it is more seasonality. Gross margins in Q2 and Q3 are a bit better than gross margins we see in Q1 and Q4. So, baking in some expectations for the latter part of the year, that is where we are coming in at that 42%, 43% range, because Q4 really does drop off business-wise in certain parts of the world.

Got it.

So, you would generally characterize the pricing environment as stable?

Based on current information, it is so hard to say, but I believe we would confirm that. Karen, do you have any thoughts on that?

Yes, I would agree. I think we would see a little bit more stability in that.

Got it, thanks.

You're welcome.

It appears we have no further questions at this time.

Thank you.

Thanks very much.

This concludes today's program, you may disconnect at this time. Thank you and have a great day.