Simpson Manufacturing Co Inc (SSD) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the first-quarter 2014 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'd like to turn the conference over to Tom Fitzmyers. Please proceed, Sir.

Thanks, everyone. Good morning and welcome to Simpson Manufacturing's first-quarter 2014 earnings call. Our press release was issued yesterday. It's available on our website at www.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 Pleasonton 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.

We are pleased with the results for the quarter. Europe had a good sales quarter compared to last year due to mild winter conditions with little snow, allowing contractors to continue working. We are seeing improved economic conditions there, as well.

In the US, regions of the country experienced a dry winter, where other parts continue to see snow. Housing starts in the US are similar to last year. We are continuing to benefit from starts, 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, which are subject to natural forces, such as seismic or wind events, and follow sequential construction processes, like the foundation first, then the walls, and the roof systems. As we mentioned before, we estimate 55% to 65% of our total Company wood product sales are dependent on starts.

Sales were up 7% in North America for the quarter, due to increased homebuilding activity in many parts of the region. In Q1, Home Center sales were up 2% for the quarter, and sales to the Home Depot were flat. Revenues in Europe were up 16%. North American operating profits were up $7.3 million due to increased sales volumes, lower manufacturing costs, and that was reduced by a slight price increase in increased operating expenses.

Also included in the North American operating profits was a correction related to over-accrued workers compensation, which had a positive effect to operating income of $2.9 million. Europe's operating loss of $919,000 in Q1, is a substantial reduction from last year's loss of $4.2 million, and is due to increased gross profits, and reduced operating expenses.

We continue to have a very strong financial position with over $200 million in cash at the end of the quarter, very little debt, a $300 million unused line of credit. All of the this gives us lots of flexibility and capacity to continue to invest in our long-run strategic plan.

Before I turn the call over to Karen, I would also like to tell you that our Board of Directors just increased our quarterly dividend to $0.14 per share. That is an increase of 12%, and is payable in July. Karen?

Thanks, Tom.

We are benefiting from increased building activity in North America. And at the same time, we are also continuing to invest in current initiatives to strengthen our market position in both wood and concrete portions of our business. We continue to see substantial opportunity in our truss business, and we have continued software development efforts, to meet our customer needs, and to create software enhancement for the wood products segment.

Europe made substantial improvements in operating income based on milder winter, and also initiatives to reduce our SG&A expenses. Are Asia-Pac segment is seeing increased revenue with the recent introduction of our repair and strengthening products for the concrete construction segment.

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 supporting our operations in order to grow them in both home and abroad.

To support these strategies, we are hiring additional people, and we will see incremental spending throughout the year. Our people are our most important asset, and we need to ensure they have the tools and resources necessary to support our customers.

We will continue to monitor our operations around the world, to strive for long-run returns that are acceptable to us and our shareholders. As always, we are dedicated to our entire product line, and we work very hard everyday to ensure that we continue to meet our customers needs for service, support and 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, Q1 2014 gross margin was about 46%, compared to 42% in Q1 of last year. The workers comp adjustment Tom mentioned was primarily in cost of sales. And that one-time correction accounted for approximately 1.5% on that gross margin, and about $0.025 net income per share.

Sales of concrete products as percent of the total was the same as last year, but the margin on those products were up, benefiting the total Company gross margin. The concrete products sales relative to the total, was 14% this quarter and last, while the wood products were 86% for both periods. The margin differential of wood to concrete products is 15 percentage points for both quarters. As noted in the press release, we believe the estimated gross margin will be in the 44%, 45% for 2014, although, depending on the rest of the year, that may change.

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 and cash profit-sharing, increased $2.9 million in the quarter, or 1.6% in net revenue.

In taxes, we had better foreign operations this quarter and have beneficially affected the tax rate. The quarterly tax rate was 38.6%, and we still believe the annual effective tax rate for the year will be in the range we estimated in the annual report, which was between 37% and 39%.

Q1 2014 CapEx was about $4.2 million, primarily from manufacturing equipment in the US. We've estimated total 2014 CapEx to be in the $22 million to $25 million range for the year. For 2014, depreciation and amortization is expected to be $29 million to $30 million, of which $21 million to $22 million is depreciation.

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. Also, look for our quarterly report on Form 10-Q to be filed in May.

We'd like to now open it up to your questions.

(Operator Instructions)

We will take the first question from Tim Wojs with Baird. Your line is open.

Hi, guys. Nice job.

Thank you. Good morning.

I have a couple of questions. To start off with on gross margins, did you expect that Workers Comp adjustment In your original 44% to 45% guidance?

Yes.

You did. Okay.

Even excluding that, you were towards the top end. So as you look out over the course of the year, what are the puts and takes to maybe get towards --what could happen to get towards the bottom end versus the top end of that range?

This is Brian.

The sales volumes were up nicely in Q1, as we mentioned. Depending on sales and volumes through the rest of the year, obviously if volumes are on the lower side, then that's where that number could come in at that lower side.

Okay. So it's really just dependent on volumes.

You spoke about some SG&A investments in Europe. I guess I am just curious what exactly are those are and how much that helped SG&A year over year in Europe?

This is Karen.

I mentioned we have been working on reducing our SG&A in Europe. Our Managing Director has looked at some of our European operations, and we have done a little bit of re-shifting from the standpoint of our engineering group and some of our sales efforts there. We have looked at reducing SG&A, not --

I am sorry. I mixed it -- I can go back. I meant the reduction.

Actually, the other question I was going to ask is just what are some of the investments you're making across the rest of the business? How should we think of SG&A as a percentage of sales for the year?

Okay. SG&A across the rest of the business, as we mentioned, we have several initiatives in the North America market. And we are adding employees to help meet the needs from both the engineering side, the marketing side and the sales side.

And we estimate that to be about $5 million from an annual run rate.

Okay, okay. That is helpful.

The last question for me. You mentioned in the press release a few times just some pricing pressure. And I am curious how pricing pressure looks sequentially.

Are prices pretty stable with where you saw them in Q4? Or are you still seeing a little bit of compression there?

This is Karen again.

The pricing is fairly stable compared to what we saw in Q4.

Okay. Great. Thanks a lot, guys.

Thanks, Tim.

Next question Robert Kelly with Sidoti. Your line is open.

Hi, good morning, everyone.

Good morning.

The press release noted that average selling prices were lower year on year. But think Tom, in his prepared marks, mentioned the small price increase.

Could you just review where the price increase was?

Robert, this is Brian.

To clarify, it was --Tom's prepared remarks should have referenced a slight price decrease, not increase.

Okay, so average selling prices are lower because of the steel prices being down year over year. You kind of characterized that competitive pricing purchases have eased somewhat.

I think that was the answer to the most recent question. Is that right?

Yes, this is Karen.

That's correct. Pricing pressures have eased somewhat.

If pricing pressures don't change from here on out and volumes are in the high single-digit range, is that what gets you to the 45% gross margin guidance?

You talked about how you might get to the low end. What happens to get you to the higher end?

Up volumes.

So it's strictly dependent on volumes? You're saying pricing is pretty much similar for the balance of 2014?

Right, we are not estimating any change there.

Okay. Fair enough.

In that margin estimate.

You called out the mild weather in Europe. Is there any way to quantify how much weather helped you in this quarter or hurt you in the year-ago quarter?

This is Brian.

I don't know if we have a dollar amount we can quantify. Comparing Europe and their weather conditions this year to last year, there was just a pretty big effect due to mild winter this year compared to last year.

Okay, fair enough.

As far as the rest of the year for Europe, is mid-teen sales growth a reasonable assumption? Or should we see something a little bit slower than that for the balance of 2014?

Well, I think you might see something a little bit slower. Again, Europe's Q1 last year was absolutely on the opposite scale from the weather condition as it was this year. So I would estimate that would be a little bit slower.

We are seeing a little bit of improvement in the European economy. As I mentioned, our Director there has done an excellent job of really focusing our sales efforts and looking at our expenses. But I would estimate that that would be a little bit lower.

Okay. Thanks.

We will take the next question from Alex Rygiel with FBR Capital Markets. Please go ahead.

Thank you. Good morning, everyone.

Good morning.

Could you quantify the negative impact from weather at all? Is that possible?

No.

No. Alex, this is Brian.

In North America, it was really interesting on the West Coast -- very, very mild, dry winter. Certain parts of the Southeast, Midwest, Northeast, just had, obviously, very difficult weather conditions for building activity. But to quantify a dollar amount, no; I don't think we have that.

Fair enough.

Can you discuss what your internal target is for concrete product margins and how long it may take to get there?

This is Karen.

As we've mentioned, growing the concrete margin -- and we're certainly going in the correct direction-- will take a little bit longer. Volume is going to be a key element as we look at some of our cost of materials associated with that.

We are really just entering into this market. As we get our testing and our specifications together, that will help us from the revenue standpoint. And as that volume increases, that will certainly help us on that manufacturing cost.

I would estimate that it will get somewhere close to the same as the wood margins.

And lastly, the growth in the Asia Pacific market was excellent in the quarter.

Do you think you can continue at this pace with similar margin? Or do you feel the need to kind of ramp cost in advance of, i.e., sales and so on?

I am sorry --

Alex, can you repeat that question, please?

Yes, your growth in Asia and the Pacific was very impressive this quarter. First, do you think that can continue over the next handful of quarters?

Secondly, is there any reason to believe that you need to increase spending on sales or other costs that might change the margin profile of that business?

Okay, sorry, I missed the location.

The growth you're seeing in Asia is really a function of those product lines for repair and strengthening of concrete. The Managing Director in Asia has been very active at being able to target specific markets where those products are applicable.

I think the growth numbers will be something that they will be able to come close to in the following quarters. At this point, we are not really looking at adding additional operating expenses to grow that business.

Very helpful. Thank you.

Next question from Barry Vogel with Barry Vogel & Associates. Please go ahead.

Good morning, ladies and gentlemen.

Good morning, Barry.

My first question -- I have a couple of questions on numbers, so they'll be related to Brian.

It was very impressive, I thought, that your SG&A expenses went up 4.6% on a 9% increase in sales. That we haven't seen in a long time. Can you give us several reasons why that happened all of a sudden, number one?

And number two, looking forward, could you make a comment that you intended to continue to lower SG&A expenses where you go to is proper? Do you think we are going to see more of that which, of course, would raise your operating profit margins from that source? That's my first question.

All right, Barry, I think --take that in two parts.

The sales increase, obviously sales increased faster than operating expense increased. That has been our premise as far as we are entering these new businesses.

There is a certain amount of ramp-up costs and such to be able to support those businesses. It is our hope that those will not have to continue at that same rate of sales growth.

Now, in the quarter, sales were up nicely. And we believe that we are getting to a point where other than the incremental spending that Karen mentioned on some new folks and things to support our operations, that the pace of operating expenses we wouldn't expect to stay at the same increased rate as sales. So that's why we're seeing that. Although, spending was up, it just wasn't up at the same rate.

To the second part of that question, on SG&A being lower spending, I don't think that's the case. I think it's just going to be proportionally lower than the incremental sales growth. It will be up; it just won't be up as much as revenue growth.

All right, so basically that means that's going to help margins going forward?

We believe so, right.

Okay.

Now I have a question on the comment you made about the above-average sales increases to contract distributors and lumber dealers. I know you make those comments in your press releases.

But I don't remember ever seeing a comment like that about contract distributors and lumber dealers. Could you give us some color on that as to why that happened?

Sure. This is Brian again.

I believe that's primarily rated to increased building activity in certain parts of North America. Those channels were up relative to the others.

Now, on the other hand, I found it slightly disappointing that Home Depot sales were flat in an improving environment; and overall sales centers were up only 2%.

Could you comment on that? Give us some color?

Hi Barry, this is Karen.

Certainly as we look at Home Depot sales, we are very focused on working in partnership with them to increase some inventories. Again, you have to keep in mind from a weather conditions, a large portion of the Home Depot locations were also hit quite heavily by the winter conditions. ¶ But we are working with them so that their inventory levels will be in good shape when spring comes about. I think a portion of that flat was what you were seeing with weather, just as we saw with some of these other customers.

But you would expect that the progresses that the service center business would improve in terms of sales gains, versus the first quarter?

Yes, I would.

Thank you very much.

(Operator Instructions)

We will go next to Arnie Ursaner with CJS Securities. Please go ahead.

Hi, good morning.

Karen, just to clarify. You mentioned $5 million of annual incremental spend, if I heard you right? Is that on top of the $10 million or so that you've already been investing in your growth initiatives?

We have been mentioning that when we look at our truss business, that our truss business run-rate is between $6 million to $7 million.

A portion of this $5 million would certainly be employees based in that area. But also another portion would be based on what we are doing with our repair and restoration, and certainly what we are doing in all of our areas to support this business.

Okay. But from a modeling point of view, we should build that in incrementally? Where would that be? In the gross margin line?

Arnie, it's Brian.

Primarily in operating expenses.

Okay.

Going back to Europe, obviously you mentioned the improvement. But a key part of Europe also S&P Clever which has I know been somewhat disappointing in its performance since you acquired it.

How did it do in the quarter? And what is your outlook there for the rest of the year?

S&P was also able to take advantage of weather. As you know, many of their products work for asphalt repair. Because they were not under heavy snow, they were able to continue and do quite a bit of asphalt repair in the European operation.

Their numbers were better for first quarter, and I think we are starting to see some opportunities to take that product into different parts of Europe. I think S&P is tracking very well right now.

Arnie, we haven't been disappointed in their margins. It is the sales growth experience that's significantly affected by weather.

And then my final question is a broader one on the whole truss market.

You obviously now have a viable competitor, which you probably didn't have a while back. I know, Karen, you have been dealing or having a lot of dialogue with customers trying to impress upon them the value that Simpson brings.

It sounds like, at least, your competitor realized aggressive price reductions was not going to win them a lot of share versus the service component you provide. Maybe you could take a step back.

You had to build up your software capabilities, I know that is a little bit behind plan. Maybe sum up where we stand at this point in the truss market for you, and perhaps when you think we hit an inflection point.

I agree -- I wanted to say thank you for, again, realizing we put a lot of effort into everything behind Simpson other than the price. Many people have heard me speak about the service levels and the engineering support, and the product availability. I do think that is something that differentiates us from all of our competitors.

When I look at the truss side, we are putting, as we mentioned, some additional resources on that software development. We are growing a small amount of percentage of market share.

That is because we have a great sales group out. But, again, our truss software is really focused on a very small segment of market, just based on its capabilities.

We are having releases every couple of months, and that is helping us gain customers. I think we are still profitably a good 18 months to two years away from having a significant inflection point.

So to be clear, you had talked about your distributor who the software would weave itself into. You had talked about seasonality -- that if they did not put it in by spring, it would be much more likely that it wouldn't be installed until the fall, after the busy season.

Are we now targeting next spring or next fall with getting more of the software out there?

Each customer, -if you are switching them from a software, that is a very significant initiative. Typically, that is going to happen in their slow season. So you would be talking about to see anything significant with our current software offering in the fall, as far as a customer increase.

Thank you very much.

Thanks, Arnie.

(Operator Instructions)

We have one more question from Steve Chercover with D.A. Davidson.

Please go ahead. Your line is open.

Thanks. Most of my questions were already answered.

But I had a question on Asia, where it's great to see that sales were up 42%. But the profits --well, I guess the loss, is just diminished by 3%. Do you call Asia still a problem, and how long will it that take to get that up to a profitable level of business?

Yes. I would say that it is still certainly a very clear focus for us.

We are happy to see that the revenues are up, and obviously that's a start point to help us on that operating profit line. We have seen Asia for the last two quarters or three quarters do quite well on the revenue standpoint, and I think we are still looking at adjusting things from our SG&A so we can help that operating profit line. But it is a very clear focus for us.

If you are losing a little more than $1 million a quarter, is it as simple as saying that you've got to get your revenues up by another couple of million before it's satisfactory? Or is there cost control element?

I know you had some turnover years ago. And I know your a patient company. But how long do you tolerate it?

Yes, I think sales revenue will certainly help increase that bottom-line. And that's really what we have our group focused on.

As I mentioned, they have only in probably the last nine months had these new products available for them to sell. And we're certainly seeing that the introduction of those products is what had that sales increase. So it will take just a little more time to have even a larger penetration in that market with that product offering.

Okay. Maybe I could ask one on the software as well.

It is unfortunate you've missed the window for this year. But it seems critical that it's got to be installed within your clients networks this fall. Is there like a Manhattan project style urgency here?

Can you throw more resources at it? We see other software updates that come so frequently, I am just wondering why this has been such a problem?

I think when you look at our software, we are not just creating a software update. We are looking at really creating something that meets the specific customer's needs.

We have done quite a bit of research talking to the customers to really determine what are the factors they are looking for to make their roles and their jobs more efficient. Those are the things we are looking at putting into our software.

It is certainly not as simple as an update. We have put a new manager in place for that facility and that initiative, and he has an extensive amount of background in software development in this customer base.

We believe we are putting significant resources and a lot of effort to be able to meet the customers' needs and get that software release out.

Do you believe that your competition already has that software in place?

Yes, they do.

Okay. Thanks very much.

I'm sorry. They have a software in place.

Again, I think it has -- as far as something we are working on differently to meet the customer needs, that's a little bit different approach that we're taking. But they clearly do have the software, and then they have a very large market share right now with their current software.

Will your software be a me-too kind of software, or will your software be a step-function better in terms of functionality?

Yes. We are working on some things, again, that will meet the customers' needs for our software.

Okay. Thank you.

Thank you.

(Operator Instructions)

We have no further questions at this time. I will turn the program back over to our presenters for any closing remark.

Thank you very much, everyone.

Again, we were delighted with our progress this quarter and look forward to talking to you next quarter. Onward and upward.

This concludes today's program. Thank you for your participation. You may now disconnect at any time.