Simpson Manufacturing Co Inc (SSD) 2013 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the fourth-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 might 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 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, and welcome to Simpson Manufacturing Company, Inc.'s fourth quarter 2013 earnings call. Our press release was issued yesterday, and 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 in Pleasanton for today's call are Karen Colonias, Simpson's CEO; and Brian Magstadt, Simpson's CFO. I will start, followed by Karen and Brian, and then we will be delighted to take your questions.

Housing starts are up compared to last year, and we are continuing 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 or wind events, and are subject to sequential construction processes like the foundation first, and then the floors, the walls and the roof systems. We speculate that only 55% to 65% of our total Company wood product sales are dependent on starts.

Sales were up 13% in North America for the quarter, due to increased home building activity. In Q4, the Home Centers were down 2% for the quarter. The Home Depot was flat. Revenues in Europe were up 5.2%, excluding the heavy-duty mechanical anchors which contributed approximately $1.8 million in sales last Q4.

North America operating profits were up $6.3 million due to higher gross profits, primarily from increased sales volumes offset by slightly lower prices and by increases in operating expenses. Also included in the North American operating profit was a gain on the sale of CarbonWrap assets.

Europe's operating loss of $484,000 in Q4 2013 was significant reduction from a last year's loss of nearly $9 million due to increased gross profits, reduced operating expenses and goodwill impairment that occurred in 2012. The majority of that increase was a result of not having the heavy-duty anchor business this year. The Asia Pac operating loss narrowed, as a result of higher gross profits and reduced operating expenses there.

We continue to have a very strong financial position with over $250 million in cash at the end of the year. We have very little debt and a $300 million unused line of credit, which gives us lots of flexibility and the capability of continuing to invest in our long-run strategic plan.

I will turn the call over to Karen now.

Thank you, John. We are benefiting from increased housing starts in North America, and at the same time we are also continuing to invest in current initiatives to strengthen our market positions in both the wood products and concrete products portions of our business. We continue to see a substantial opportunity in our truss business, and we have accelerated our software development efforts to meet our customer needs, and to create software enhancements for the wood products segment.

Europe nearly broke even this quarter, and we are positioning ourselves in the region for additional improvement. Our Asia market segment is seeing increased revenue, with recent introduction of our repair and strengthening products used in concrete construction.

We continue to look for strategic acquisitions, whether to expand our product offering or to strengthen our position in different geographic regions. At the same time, we are looking to invest in our operations in order to grow our business both here at home and abroad. Our people are our most important assets, and we need to ensure they have the tools and resources necessary to support our customers. We will continue to monitor operations around the world to strive for long-run returns that are satisfactory to us and our shareholders.

As we have mentioned, we manage our business from a geographic segment perspective, and you have seen this in our 10-Qs and 10-Ks. Within those regions, we have two product broad product categories, wood construction products and concrete construction products. As always we are dedicated to our entire product line, and we work very hard every day to ensure that we continue to meet our customers' 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.

As noted in the earnings release, Q4 2013 gross margin was nearly 44%, compared to 38% in Q4 of last year. Sales of concrete products as a percent of the total was slightly down from last year, but the margin on those products were up, benefiting the total Company gross margin. The concrete products relative to the total was 16% this quarter versus last Q4 of 17%, while the wood products was 84% of the total versus 83% last Q4. The margin differential of wood to concrete products is nearly 16% this quarter, compared to 22% last Q4. Of course, the shutdown of the heavy-duty mechanical anchor business in Europe contributed to the large spread last year.

The gross margin for 2013 ended at 44.5%, just above the top end of the range we provided last quarter, which was 43% to 44%. As noted in the press release, we believe the estimated gross margin will be in the 44% to 45% range for 2014. Operating expenses as a percent of sales was down in the quarter compared to last year, although certain compensation expenses that are based on performance such as commissions, cash profit sharing and stock compensation increased $2.8 million in the quarter or 1.8% of net revenues.

As noted in the press release under the disposal of assets section, we had a $2.8 million charge, which moved that from the cumulative translation adjustment in our balance sheet to the P&L. It was a non-cash charge, which was a reclass from the equity section, primarily -- or not primarily -- on the liquidation of the Irish operation. That was recorded in the admin and all others segment.

Taxes, we had a -- we had better foreign operations this quarter, and that beneficially affected the tax rate. The annual effective tax rate of 37.5% came in just under the range we had been estimating for 2013, which was -- we had been estimating 38% to 40%.

2013 CapEx was about $17 million compared to our last estimate of the year of around $22 million to $24 million. So there were some capital projects that will roll over to 2014. Q4 2013 CapEx spending was $3.9 million, primarily for manufacturing equipment in the US. We are estimating total 2014 CapEx to be in the $22 million to $25 million range.

For 2014, depreciation and amortization expense is expected to be $29 million to $30 million, of which $23 million is depreciation. Intangible amortization in Q4 decreased by $0.3 million compared to the prior year, all in admin expense, due primarily to the purchase price adjustments of recent acquisitions.

Before we turn it over the 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. Also look for our Annual Report on Form 10-K to be filed at the end of February. We would like to now open it up to your questions.

(Operator Instructions)

And we will take our first question from Arnie Ursaner from CJS Securities. Please go ahead, your line is open.

Brian, I want to try to go back on the item you mentioned in the disposal of assets. If I am understanding this piece right, you had $2.8 million of a loss that would have been included in administrative and all other expense. And yet, that line item is only $1.4 million?

Well, the -- that line item is -- let's see. Oh, it's $1.4 million, because we took a gain on the sale of the CarbonWrap assets.

So the net of these is $1.4 million negative?

Correct.

Okay. And that is that $1.408 million?

$1.404 million.

$1.404 million. But again, wouldn't you also have some normal course of business administrative and other expenses that would be in that line?

Well, maybe we are not talking about the right -- the $1.404 million is the net loss on disposal of assets --

Right.

On the P&L. The $1.408 million, that is the income from operations on the admin and all other, in the segment disclosures. So that is net -- that $1.408 million is net of the $2.8 million.

Okay.

Which would make it fairly comparable to the Q4 of 2012 number -- there you see a $3.9 million?

Okay. I think my other question relates to the gross margin guidance, or outlook you have for the upcoming year, of $44 million to $45 million. You were at that level this year. To the extent volume improves, and some of the price issues that impacted you in 2013 normalized, wouldn't that -- wouldn't you be able to get some operating leverage and a higher gross margin? What would offset that?

Well, we would certainly expect some improved overhead absorption with increased volumes, over and above what we are expecting. Oh, Karen, do you have any other thoughts on --?

Well, we would also -- Arnie, as our volumes increase, we would have to -- we would have an increase in the labor factor that is in that gross margin. And so as Brian mentioned, we would -- assume we would get some increased absorption; however, that would probably be offset by that increased labor component.

Okay. One more quick one, can you just update us on the performance of S&P Clever?

They made money in 2013, and they -- the comparables number to -- I think -- I don't have their 2012 number in front of me, but I believe they were up a little bit over 2012.

Okay. Thanks. I will jump back in queue.

And we will take our next question from Robert Kelly from Sidoti. Please go ahead, your line is open.

A question on the price competition. In your most recent releases, you made many references to price declines, intensifying competition, less references to that headwind in this release. Are we starting to see pricing stabilize a little bit? Are you just lapping the price declines from a year ago? Can you just talk about the outlook for the competitive pricing?

Yes. This is Karen. I think we are starting to see a little bit less focus on the pricing, a little bit of stabilization there, and more focus on product availability and delivery of, not only standard products but custom specials.

Okay. That's good to hear. One question I had with Europe, in the release, you noted many of the regions had above average sales increases in the region. When the reference point for above average -- was that the 5% gain ex Liebig, or was that the minus 1% all-in for Europe?

That was the all-in number.

So when you say that Europe, the rest of the region had gains above average, that they did better than minus 1%?

Well, yes. They were up -- I don't have the specifics on each country, relative to the 5% though.

Oh, so you are referencing the 5%? Okay. Got it. And then just as far as the outlook on Europe. You have had a tough go there. You made the right steps with your cost structure to bring the unit back to profitability in 2013. Any reason that we -- even if volumes don't increase materially, why that segment wouldn't stay in the black in 2014 and beyond?

Yes. This is Karen again. I think we have done, and the director there in Europe has done a great job, of really looking at what is going on from the economic conditions in Europe, and doing a little bit of restructuring from our cost standpoint, and you are certainly seeing that. We have a very aggressive sales force that is certainly looking at every opportunity possible. And I think we will see Europe perform in 2014, just as well as they did in 2013.

Great. Thanks for your help.

(Operator Instructions)

We will go next to Josh Chan from Baird. Please go ahead, your line is open.

Just wondering what was the rationale behind the sale of CarbonWrap, considering it was acquired just not too long ago?

Yes. So we are still heavily invested in the FRP business. CarbonWrap was an acquisition that we made in the fiber reinforced polymer business. We are still very, very active in that business, and we have got some products that we will be introducing this year. The elements that -- or the assets that came with CarbonWrap just wasn't really something that was fitting in our model, on how we wanted to go to the market. And so, that is why we divested of that.

Okay. Can you -- I guess, update us on the strategic direction then, with respect to looking at different acquisitions, and where those initiatives are heading?

Sure. We are looking certainly in Europe, very actively for acquisitions that can increase our footprint there, mainly in both the connectors and the fastener side, so on the wood products side. We are very specifically looking in those areas. From the US standpoint, we would really like to be able to grow a little faster in our concrete area. So we are actively looking for anything that we can add, from the standpoint of being able to increase our market footprint on the concrete products.

Okay, that makes sense. And last question, you have a substantial amount of cash on the balance sheet, and I guess historically acquisitions made by Simpson have not been above $50 million, at least from what I can remember. So is it reasonable to think that you may be considering something larger, by keeping that amount of cash on the balance sheet, or how should we think about the size of potential acquisitions?

Hi. This is Tom. We look at all sizes of acquisitions, and of course, the bigger the acquisition, the greater our concern would be to be make sure that we do it right.

And we probably have a threshold in a $100 million range, where we would be a little less comfortable beyond that. But if it was the right acquisition, and everything fit together for us, then we would definitely look at it. As you can tell from our cash position and our unused line of credit, we have a lot of capacity. Most of the things that we are looking at, though, are less than $100 million. Not necessarily by design, but just because of the way they fit together with what our objectives are.

Okay. Great. Thank you for your time.

(Operator Instructions)

We will have next Evan Wingren from D.A. Davidson. Please go ahead, your line is open.

Thanks for taking my questions. I was wondering if you could just update us on any potential impacts of the weather that we have been seeing across the US here, is having on either your demand for your wood connectors, or on any of your input costs?

So the weather, at least on the Western states has been extremely mild in the first few months here, and certainly winter has raised its head, as we look at the East Coast. Basically anytime we have got snow on the ground, it pretty well stops most construction that is going on. So we have seen some above average sales in our Western areas, and that is really for this time of the year -- that is really just a function of that weather, where we are seeing more normalized sales, as we get further East where they have got some snow conditions.

In Europe, they are also having a light winter in many parts. So we are seeing a little bit better revenue, from that standpoint of just being able to get to those job sites.

Okay. And then, on the input cost side, I mean, anything?

No. Nothing really affected there.

Okay. Thanks. Could you just talk a little bit maybe about what you are hearing from your Home Center buyers?

Sure.

In terms of their demand and whatnot?

Yes. So we have a couple people who work very closely with all of our Home Center customers. We work on putting new products in those sets, ensuring that they have got products that they're going to sell in their market space. We have put in a new point-of-purchase in many of our Home Centers, so that the customers are really comfortable in looking at the products that they want to purchase, and the applications of those products. And we also work very closely with the Home Centers on their inventory level, so that they don't lose that opportunity for a sale.

It is something we do every single day, and we continue that. And the person who heads up that group is very active with those major Home Centers, and ensuring that we have got our products in the shelves, and certainly a great point-of-purchase so the customers can really be comfortable with the products they are purchasing. So again, those are conversations -- nothing unusual. Those are conversations and work that we do every single day.

Do you have a sense about where you think their inventories are now? I mean, is there anything that would be, I guess, different this time of year than last year?

No. I think it is normal time for our Home Centers, where we looked to be sure that they have inventory when they start their -- when spring hits. And it is again, something we work with them, just to -- on a daily basis, looking where their inventory levels are at various regions. So a similar process that we do every single year with them.

Well, thanks for that. And then, on Asia-Pacific, sales were up about 45%. Across what product lines are you seeing the growth there?

So in Asia Pac, that is really a concrete type of market, and most of that growth in that area has been that they are selling our repair and strengthening products. So some of our CarbonWrap material, as well as some of the material from the acquisition that we made in Baltimore, so really a concrete products market.

So with the sale of that, we should expect that to trend down then -- the sale of CarbonWrap I am referring to?

No. Again, so we still sell carbon fiber material. And if you think of the S&P acquisition in Europe, they have a carbon cloth material, as well as a carbon laminate material. We supply most of Asia Pac out of the S&P in Europe, so we still have production of those carbon fiber materials.

Okay. Thank you. And then, just a couple housekeeping. Do you have any outlook on tax rate, and then I guess, maybe how SG&A might look a little bit next year?

Evan, it is Brian. Yes. On tax rate, as we noted in the press release, we are -- 2014 effective rate for the year, we are estimating 37% to 39%. And operating expenses, as Karen noted in her comments and we also noted in the release, that we are looking to ensure that our folks have the resources they need and such. So as a percent of sales, I don't think it would change much. It may be up a little bit as a percent of sales.

Okay. Well, thanks for that, and thanks for taking my questions.

Sure.

And we will take a follow up question from Arnie Ursaner from CJS Securities. Please go ahead, your line is open.

When you take a step back, clearly the acquisitions you have made, you have made sizable investments in them in the course of 2013, severely harming your earnings per share. As we look to 2014, maybe first, you could sum up what you believe the total of the expenses were for investments last year? And maybe give us a sense of how we ought to expect the outlook for this year for those same type of expenses?

Hi, Arnie. It is Brian. I don't have the specific breakdown for the investments in each. I would say that, since we have got a comparable year under our belt with our increased software development efforts as Karen noted earlier, for specifically for the truss, that that run rate on it ought to continue in a similar fashion.

Well, for example, your R&D jumped sharply in Q4. Should we expect it to be maintained at that level, or were there some accelerations that caused that to jump?

Well, R&D could have -- it was up a little bit due to some of the incentive-based compensation issues. I think that the annual run rate on that I think is a pretty good indicator of where we are looking, as a percent of sales.

Okay. And maybe I am harping on your -- the leverage you should get from volume improvement, but what -- broadly, where are we in plant utilization at this point?

So we are probably right around 65%; 65% to 70% on plant utilization.

Okay. And what do you believe is your optimal level?

That is a tough -- obviously not 100%, but I think probably we would be very efficient still at being somewhere around between 85% and 90% of utilization.

Okay. And when you take a step back, obviously no one expects housing starts back to 1.5 million, and you have reduced some of your exposure to housing through some of the acquisitions you have made. But when you look out over two or three years, where do you see your margin trends shifting to over the next, let's call it two years?

I would say -- Arnie, this is Brian again. The -- as we continue to look at increasing our concrete product sales relative to the total, as we add in additional I think higher-margin concrete sales that we have seen from the likes of S&P, and some of our specialty chemicals, I think we will -- we should see some improvement there, if we are successful on implementing our strategy of adding more there.

Of course, wood product margins are already higher than concrete product margins. And as starts increase or as other building occurs in the wood product area, the additional volume there, over the two to three year period ought to also help too.

Okay. Thank you.

Thank you.

(Operator Instructions)

And there appears to be no more questions.

Great.

Okay. Thank you very much.

Thank you, everybody.

And this does conclude today's conference call. You may now disconnect, and have a wonderful day.