Simpson Manufacturing Co Inc (SSD) 2014 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the second-quarter 2014 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 different materially from these statements.

Some of such factors in 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. Please proceed.

Thanks, everyone. Good morning and welcome to the Simpson Manufacturing Company's second quarter 2014 earnings call.

Our earnings press release was issued yesterday. It is 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 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.

Europe had a good sales quarter compared to last year, as did North America, despite some winter-like conditions in some parts of the country that lasted into May. Housing starts in the US are up from this time last year and we are continuing to benefit from starts. But unlike lumber or other products that have a more direct correlation to start, our products are used to a greater extent in code-based areas, subjected to natural forces such as seismic or wind events and they're also subject to sequential construction processes like the foundation first, then the walls and the roof systems.

As we mentioned before, we estimate that about 55% to 65% of our total Company wood product sales are dependent on housing starts. Sales were up 6% in North America for the quarter due to increased home building activities in many parts of the region, partly offset by a slight price decrease. In Q2 the home center sales were down 10% for the quarter.

The home center sales decrease is also partly based on early Q2 weather conditions. We have recently seen increased volume in that channel. Sales in Europe were up about 9%. North America operating profits were up $0.5 million due to increased sales volumes and reduced manufacturing costs. These were offset by a slight price decrease and increased operating expenses.

Also included in the North American operating profits was the recording of a union pension withdrawal expense and liability of nearly $3 million. Europe's operating profits were $3.8 million, a $1.5 million increase over last Q2. This was due primarily to increased gross profits offset by price decreases and a slight increase in operating expense.

We continue to have a very strong financial position with over $220 million in cash at the end of the quarter, almost no debt and a $300 million unused line of credit, which gives us lots of flexibility and the capability of continuing to invest in long run strategic plan. I also wanted to tell you that our Board of Directors approved our quarterly dividends of $0.14 per share.

Karen?

Thanks, Tom.

Since 1956, Simpson Strong-Tie has designed, tested and manufactured safe, strong and innovative products for the construction industry. We believe in doing what's right for our people, customers and community. And as the trusted brand for the construction solutions, we are committed to adding value to our customers and exceeding their expectations with our promise of no equal performance. We are committed to this goal for all of our product lines and are developing software, products and people to provide our customer system solution approaches to their building needs in both the wood products and concrete product market.

We are very pleased with the Q2 financial results for Europe and are focused on continued improvement in this region. Our Asia-Pac market is seeing increased revenue with the recent introduction and sales focus on our concrete repair and strengthening products but they have a ways to go to be profitable. We continue to look for strategic acquisitions whether to expand our product offering or to strengthen our position in different geographic regions. To support our strategies, we are hiring additional people and we'll see incremental spending throughout the year.

As always, our people are our most important asset and we need to ensure they have the tools and resources necessary to support our customers. We are dedicated to our entire product line and we work hard everyday to ensure that we continue to meet our customers needs with service, support and product availability. We will continue to monitor our operations around the world to strive for long-run returns that are acceptable to both us and our shareholders.

I'd now like to turn it over to Brian for some additional financial information.

Thanks, Karen.

As noted in the earnings release, Q2 2014 gross margin was about 46%, up slightly from Q2 last year. The union pension withdrawal expense Tom noted was solely in cost of sales, which accounted for approximately 1.4% of that gross margin and $0.036 per share net after tax. Sales of concrete products as a percent of the total was the same as last year but the margin on those products was down, slightly hurting total Company gross margin.

The concrete product sales relative to the total was 15% this quarter and last, while the wood product sales were 85% for both periods. The margin differential of wood to concrete products is nearly 13 points this quarter compared to about 9% Q2 last year but improved from of 15% from Q1 of 2014, due primarily to the mix of concrete products sold. As noted in the press release, we believe the estimated gross margin will be in the 44% to 46% range for 2014, although depending on the rest of the year that may change.

Total operating expenses as a percent of sales were about the same in the quarter compared to last year with certain compensation expenses that are based on performance, such as commissions and cash profit sharing, increased $1 million in the quarter, or 0.5% of net revenue. For taxes we had better forward operations this quarter than last year and that beneficially affected the tax rate. The quarterly tax rate was 36.3% and we still believe the annual effective tax rate that will be in the range we estimated in the last annual report, which was between 37% and 39% but we add -- that could end on the lower end of that range.

Q2 2014 CapEx was about $5.1 million, primarily for manufacturing equipment in the US, and we estimate total 2014 CapEx to be in the $20 million to $23 million range. For 2014, depreciation and amortization is expected to total between $29 million and $30 million, of which $21 million to $22 million is depreciation only.

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 quarterly report on form 10-Q to be filed in August.

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

(Operator Instructions)

Arnie Ursaner with CJS Securities.

My first question relates -- I know you don't want to get into specific geographies and regional differences in any detail, and hopefully this won't lead to that, but could you broadly comment? I know Florida was one area that had particular weakness in home starts. So maybe if you could speak about geographic or regional differences in a bigger picture.

Also, you highlighted May weather a few times. Maybe talk about the monthly pattern of revenue trends, if you could.

Arnie, this is Tom. Let me not talk about the housing starts by geographic region but the weather. So the weather really did impact our sales substantial, particularly in the northeast. And the first two months was significant and the third month, less so. And now what we see is trends going the other way. So northeast is a pretty important part of the overall Company sales, particularly in the home center areas, and that certainly impacted us but it's changed now and moving in the other direction.

Tom, maybe you could be a little bit more specific. Your sales in North America were up 5.5% in the quarter. Were April and May flattish and then June double digit? That sort of color is what I am looking for.

No. (laughter) We're not going to tell you that, Arnie. (laughter) But on average, that's the way it works out for the quarter.

Okay. And then going back to your gross margin guidance, and I am sure you will spend more time on the one time item that impacted margin this quarter, but were it not for that you would have been a 49.5 margin this quarter and well above that year-to-date. What would cause the margin to decrease in the back half of the year other than just the seasonality in Q4?

Arnie, this is Brian. One of the things also to remember is that in Q1 we did have a correction that led to a bit of a pick up. And the -- so that the union pension charge in Q2 nearly offset that Q1 benefit. So looking at our estimation for the year, primarily we are looking at variations in factory utilization that could -- that would change that number but that's why we are thinking 44 to 46 for the entire year.

Okay. Then one more technical question if I could. In North America you used the word, slightly lower average selling price, and then in Europe, lower average selling price. Maybe give us a better feel for the difference between slightly and just lower.

There is really no difference. They were, as a percent, about the same.

Okay. Thank you.

[Min Cho] with FBR Capital Markets.

I was wondering, Karen, if I can get an update on the Trust software release and if you can talk a little bit about the competitive environment there right now?

Sure. I think, as you know, this is a new market that we're very excited to get into because it fits very well with our customer base and our product offering. And it certainly fits very well with how our sales people are currently positioned to be able to support those customers.

We have a group in Boulder that's working extremely diligently on our software release and at the BCMC show, which I believe is either late October or in September. I am not sure of the exact date. Anyway, that will be when we'll show our software update.

It still will be something that needs additional features and benefits to meet all our customer needs, but we are working on a software elements from the surveys that we've taken on the customers that are using the Trust software. What are the elements that they are really looking for that can make their job easier and make them more efficient? And we are really focusing on those requests from our particular customers.

So we are anxious to see and looking forward to that BCMC show, which is the building components manufacturers conference. That's an annual show where we really focus on that Trust industry and then the release will come a little bit later in the year.

Okay. And then I know, across the board, it sounds like you have definitely gained some -- well the volumes were up this quarter and mentioned that pricing was a little bit lower. Are you actually gaining share due to the lower price or were volumes up kind of in line with the industry?

I think as we look in North America, the volumes are up pretty consistent with what we see on housing starts. As we look at the European market, I think those volumes are based on -- maybe the economics are coming back a little bit better in Europe. But also our European director and our European managers have done an excellent job of being able to sell our connectors and the fasteners associated with that.

So a little bit different strategy on how we went to Europe previously. Strategy is pretty much everything you need for wood you can get from Simpson Strong-Tie. So I think we're seeing results of that strategy change in Europe that's helping us with that increased volume.

Okay. And then just two quick questions. The gross margin guidance, 44% to 46%, you mentioned in your press release that (inaudible) field prices to increase in the second half of this year. Is that included in your gross margin guidance?

No, not necessarily. So we don't know specifically what type of pricing we potentially might see. So, no, it's not.

Okay. And then can you give a head count and kind of on a year-over-year basis what the change was?

Do you have that, Brian?

Sure. So today we are about 2,400 employees. This time last year we were just under 2,300 employees.

Okay. Great. Thank you.

You're welcome.

Tim [Wiese] with Baird.

Just touching, again, on the steel prices -- how do you look at -- relative to the market, do you think if steel prices do increase that will you actually be able to go out in the market and offset those through pricing increase. How comfortable are you with that opportunity?

Hi, Tim. We obviously look very carefully at any time we've got increase from material cost and we have a very, very good purchasing person that helps us. And certainly there is a lot of information out in the industry about steel. So we certainly -- if we've got a significant price increase from the material standpoint, we would need to work with our customers and put that through our product line and our distribution. And again, it's what we -- it's not a very -- it's not a fast decision. We look at many, many elements because we want to give our customers plenty of time. But if in fact there is a significant price increase in material, we would need to work on passing that through.

Okay. And then I guess just looking at the home center channel, again, I think sales were down. I think you think you mentioned 10% in your prepared remarks. And things have gotten better. Has that channel turned positive as you have exited the quarter and gone into Q3 yet?

This is Brian. I think it's too early to tell that at this point.

Okay. Then just any update on just your M&A pipeline and the opportunity to maybe deploy your balance sheet a little bit towards M&A and possibly some sort of share buy back?

Let me take that from M&A first and I will turn it over to Tom on the share buy back question. From a M&A stand point, I think I mentioned we have some external M&A firms that are helping us with looking at some companies, both in North America as well as Europe. We have a couple people, Simpson employees, who are dedicated also in this space.

And for us, we want to be sure that as we look at companies that it is something that fits in our strategy. And again, that would be expanding this concrete area and working on our geographic footprint. So with those things in mind, we are very diligently looking but today we don't have anything coming to fruition at this point.

As far as the stock buy backs go, we -- as you probably know, over the years we're opportunistic about that. And we evaluate it all the time. In the past, some of the buy backs that we made have been to offset delusion. In the past it was primarily options.

Recently we have gone to a RSU structure, which is much less dilutive. But it is something that we look at all the time. And if the stock got to a level where we thought it would be a good buy for the Company, we would think about proceeding with that.

Last year I think we bought around $10 million worth of stock back. We have authorization from the Board to buy $50 million but, again, we are very opportunistic about that. And it doesn't look like that is something we would be doing right now.

Okay. Great. Well thanks for the time. Appreciate it.

Thanks, Tim.

Steve Chercover with D.A. Davidson.

First question. After the trust software and the product is actually ready for primetime, are there other adjacent markets that you can address? And can you talk a bit more about your strategy? Clearly you said it was concrete but --

Yes. So our strategy, obviously, is to be no so tied to North America housing starts. We are looking at products that are in the building industry that could be thing in the concrete repair and restoration, expanding in that market space. It could be looking more, as mentioned to you, in Europe. There's opportunities to grow from the connector standpoint. It could be something that we are looking at from a fastener solution.

So really looking to have things that are -- can be specified and are differentiated. And that's one of our criteria. We are really trying to find something that our sales people can hang their hat on as differentiated, whether it's from the testing capabilities or some corrosion resistant capabilities. And of course, being a manufacturer always searching for manufacturing companies because we like to be able to control, not only the development of products, but the quality of products.

So our strategy, again, is looking for things that are in the concrete repair, restoration space. We are looking to expand on a geographic footprint. The concrete products are really engaging because they are not size specific as wood is. So products in the North America market could be sold into Europe and Asia and, likewise, for example, a lot of our S&P products we're selling into Asia market now, which is why they're having some increased revenue there. So that's the advantage of those products.

Thanks. And given your expertise though with fasteners and with steel, have you ever investigated industrial markets?

I think from the -- as we have looked at products in the industrial market, it hasn't really been an attractive space for us to look at this point because we think there is more opportunities in this -- what we are calling residential and this light commercial market.

Okay. And with respect to residential, it appears that we might be seeing a bit of a transition towards more multi-family than the single-family or even McMansions. Are you well positioned to participate if that shift does transpire?

Yes. For us, multi-family is a great market. And the reason is, as we mention a lot of the residential houses and our products, which are put in residential houses, are a function of sort of seismic and wind events. When you go to multi-family, the codes are a little bit different. So we see more of our product that will go into multi family and that could happen in any specific region.

So we have -- again, we have a lot of -- we have a complete sales force that works on multi-family. We track those jobs. We are on the jobs with both the specifiers and the contractors and building officials and we have significant amount of our concrete anchoring, our fasteners and our connectors that go on multi-family jobs.

Okay. One quick question on steel prices. Why would they rise? Is it due to market clout of the producers or is it due to an improving economy?

A couple things. There's some concerns about some tariffs of steel that might be coming in outside of the US -- concerns from the market there. Certainly the automotive market has greatly picked up and the agricultural market. Those are some of the largest users of the similar type of steel that we use. So a couple of those factors would be what we would see as what the reason the market might do some steel price increasing.

Got it. Okay. And then just finally, without the pension hit, you would have been more like $0.45 than $0.43. I think Brian said $0.035.

I calculated it at -- where was that? I had $0.038 net after tax, applying a statutory tax rate.

Great. Okay. Thank you all.

Thanks, Steve.

(Operator Instructions)

Barry Vogel with Barry Vogel & Associates.

Okay. I have a question back on home centers, again. This 10% decline in the quarter -- I would assume that you've -- it's not including the changes because of Lowe's -- the Lowe's situation?

Right.

In other words, you have anniversaried that.

Yes.

Now excluding that comment, the home center business have been -- excluding Lowe's the situation for a moment, am I correct that the home center sales growth for you has not kept up to what it was in the past, excluding the Lowe's situation?

I guess I just --

In other words, excluding Lowe's, your home center don't seems to have not been participating in this recovery like it had in the past. Am I correct or incorrect?

Well we are not really -- the home center sales can swing a lot just based on the magnitude of the inventory adjustments that they make.

Right.

And so it's kind of hard to look at it from a quarter-to-quarter, I think. And they have different strategies about how they're going to manage that. So that's one of the things. Just as an overview comment, we think our market share is [san] Lowe's is similar to what it has been. So we don't think we have lost market share there. But there has been a number of different things going on, including significant weather issues in the northeast, which at this point in time I think we are saying that we think are trending the other way. So we'll just have to see how this next quarter turns out. But that's kind of our sense of it at this time.

And I have a question for Karen. Can you give us some color on your optimism in Europe for the balance of the year?

Sure. As I mentioned, I was very pleased with the results in Europe. They have done a great job of doing a little bit of restructuring to help reduce the operating expenses and I think we are now seeing the increase in sales with a little bit of a different focus on how they're going to market. And so I would estimate that Europe would certainly be profitable for the year.

Well that would be the minimum expectation. I know the weather affects different quarters but $3.8 million operating profit in the second quarter was a pretty good quarter.

Yes. It was a very good quarter.

So Europe might be an area of growth once again, once you've straighten out the problems that you had in some of those operations.

Yes. I think we see Europe as an area of growth, not only from the things we have put in place but also we are seeing, especially, for example, in the UK, we are seeing a pretty good upturn on the economic conditions there.

I have one last question about dividend increases. It's fine that you did it -- you added a small dividend increase, but if one looks at cash generation, your balance sheet, everything, is it unfair to assume that the Company would be looking at modest dividend increases every year if nothing [untoward] happened?

Barry, I -- we look at dividend increase that issue every quarter with our Board. So it really depends on a lot of different things, including where we are at from an acquisition stand point. But as you saw, we have recently increased our dividends. And as far as doing something on a programmatic basis or increasing on a very specific basis through time, we, again, evaluate that each quarter based on what we think the best use of our cash is, our capital allocation.

And we have a lot of different things going on. Brian talked about CapEx. We also spend a lot of money, which doesn't necessarily appear as CapEx. But it is not huge amounts of money but it is a lot for us and improving the capabilities of the Company in a variety of different ways.

So we are always looking at the capital allocation carefully. That's kind of a fuzzy answer. But it's not -- we maintain our dividend through a difficult period of time. And we were very pleased to be able do that. And we like this, you know, to have the flexibility and the resources to take advantage of opportunities that come our way. So I think that we will consider it but we have nothing in mind at this time.

Okay. And I have one last question for Karen. Could you update us on the progress in the Trust area?

Sure. As I mentioned, the main thing from the Trust standpoint is having software, which is meeting what the customers' needs are and is making them more efficient at their role. That's something that we're working on every single day in our Boulder operation. We are looking to have -- to show new features and benefits at the BCMC show. And we'll be having a new Trust release sometime before the -- close to the end of the year. I think from the standpoint of what we are -- the people we have brought in from a sales standpoint, from a support standpoint, are some of the tops in the industry. And they're very anxious to be able to service that customer base.

When do you think you will start to have an income stream from that business?

Well we certainly have opportunities. It's very -- fairly large. I think we mentioned about a $500 million market opportunity, approximately one million housing starts. Maybe that might be a little bit better than that. And we're seeing our revenue increase and I would say that we would continue to see that as we release more and more features that are meeting the specifics of the customer needs.

So the revenue is growing -- would you say the revenue is growing slowly?

Yes. And again, when we look at the Trust, it's not a matter of having the Trust plate, which we do have. And as a matter of fact, we just released a new product from a high strength Trust plate. So it's not a matter of having the plates. We have the highest load capacity plates in the industry and completely code approved in at least three different wood species. But it's really a matter of making sure that our software is complimenting that plate and really servicing our customers' needs.

Thank you very much. Keep up the good work in your recovery.

Thanks, Barry.

Arnie Ursaner with CJS Securities.

A couple of follow ups. You mentioned steel a few times. But typically in the past when you expect meaningful steel increases, you bought product ahead of time. Is that been the case this go around?

Yes. Arnie, we -- as I mentioned, our Vice President of Purchasing certainly takes great care of Simpson in making sure that we're buying steel at the best opportunities. We always have some steel supply in inventory because it takes a little while to get the steel specification and to be sure that's delivered. So it's definitely not something we would ever do in a just-in-time manner. So we certainly have steel in our manufacturing facilities to help us as our projections are out through the -- as we forecast throughout the year. But again, it would be something if there are some price increases that would definitely impact us. Most likely not this year, but could impact us going into next year.

Okay. And you -- Barry highlighted Europe where it seems to be a turn. You might remind people last year the weather in Europe was extraordinarily weak. So you had a very easy comparison in Europe, very difficult in North America but very easy in Europe.

That's correct, Arnie. This is Brian. Yes. A good point. Thank you.

Shifting gears a little bit, you obviously spend to enhance growth. You have been doing that for 50 years or more. You used to talk about a $10 million investment spend to make sure you are where you want to be. Is that annualized number going up? And more importantly, when do you see an inflexion point in that?

Barry, we are sitting here quizzically looking at each other. We don't know what you mean by the $10 million spend.

The incremental spend to develop the Trust software and other spending. You've talked about --

Oh, okay.

And it is Arnie. Not Barry. Please don't --

(laughter) I'm sorry, Arnie.

I'd almost view that as insulting, Tom. I'm sorry.

I think that number is about right, Arnie. I don't -- we don't see any significant variation from that.

Okay. And then shifting gears a little bit about margin profile. What is your current factory utilization? And maybe give us some feel for your view for incremental gross margin. And then more importantly, your expenses -- your operating expenses are growing even faster than revenues. How should we think about operating margin and when they get more in line with overall spend?

So, Arnie, I will take the factory utilization and then I'll turn the second half of your question over to Brian. So as I mentioned, our factories -- again, we are probably running around 60%, 65% utilization. We certainly have the flexibilities in our shifts to be able to produce and meet our customers' needs. And as you know, that's really what we -- one of the things -- elements we have built this Company on is to have that product available to our customers.

So from the factory utilization, again, we look at our forecast constantly. We are always trying to be sure that the product is at the right location for that customer and being produced at the right branch. But we have certainly room to take into account manufacturing when we, hopefully at some point, get back up to 1.2 or 1.5 -- not that we would need to increase any manufacturing facilities. We would certainly just take advantage of doing some additional shift changes and advantage of our press capabilities. Brian?

And on the operating income side, yes, the dollars were up, largely in line with the increase in revenue. But as we have mentioned, we are investing in initiatives such as the Trust software that we are not really getting incremental revenue yet today. So I wouldn't expect that spending to be increasing at the same incremental rate as revenue once we are further along in the development of some of the initiatives such as the Trust software.

Again, what I am trying to get a feel for is if your gross margin should be improving with better utilization. You have gotten negative leverage on operating expenses. At some point in the manufacturing business, you should be getting positive trends. Again, I know you don't give guidance but as you look to 2015 and 2016, shouldn't we be expecting 100 to 200 basis points of operating margin improvement once you get that leverage?

I don't know that I would be specific to those specific numbers. But in general, yes, we agree that the operating expenses should not be rising at the same level as sales or gross profits. Because we are largely investing in those initiatives today, that would not necessarily need to grow with those incremental sales.

Okay. And then --

So we generally, yes, we agree with that -- as you described it but not necessarily with those specific numbers.

Okay. And then on fiber reinforced polymers in S&P [clever], you -- in North America you incurred $800,000 in professional fees indicating mostly for patent development and product testing. My understanding is you almost have to be the defining entity for regulation in FRP. At what point do we actually see a meaningful change and a reduction in that spend?

I don't know that -- this is Brian. I don't know that that patent spending was necessarily related to FRP. We've got that in just in our business in general throughout all product lines. So that, I think, is more ongoing as it relates to the overall business.

Okay. And then going back to the atypical pension charge that you had the benefit of -- that impacted you this quarter. Are there offsetting expenses in the future related to that? Is there some --

No. What happened there was we withdrew from a multi-employer pension plan. And when we do that, we calculate the annual amount we need to pay to the pension trustee and then we present value that cash flow. So that's what contributed to that $2.9 million. So the -- we had always been contributing to the pension as a period cost. Here on the withdrawal, we basically had to present-value those future payments. But they're -- on an annual basis, they're not significant.

Thank you very much.

You're welcome.

Min Cho with FBR Capital Markets. Please go ahead.

Just one more question. I know Asia is obviously still a very small part of your business but can you provide update on that market? I know that revenues are up, which is good. Margins remain negative. At what point are you going to start taking out some of the SG&A and do you still expect 2015 to be profitable on an operating basis?

So the -- again, we are seeing some -- [might's] success from the revenue standpoint -- and really that's been a function of these new concrete repair restoration products that have been brought into that market. So just to reiterate, we don't sell wood products into the Asia market. That is really our concrete products.

Many of those products are coming from S&P. And the sales force there is now focused on avenues at which we can use those particular products.

We have really only been completely engaged in this probably in the last six months. And that was because we had to train the sales force. We had to be able to get the product. We have to get it in Chinese literature and we also had to adjust our software. There is software associated with that so that that was meeting the Chinese specifications. So there were several steps that had to be put in place before we could really go out and start pushing that.

We are looking at doing some things from a material cost standpoint to help some gross margins on those particular products. And I think we'll start to see those become more apparent within the next few months. But China is definitely a very, very tough market as far as the competition there and really being able to differentiate your product in such a manner that it's not completely based on price. It is a tough push and I think our sales force is doing a really nice job and our manager has really got them focused on these particular market areas.

For 2015 I don't believe we have ever said that China would be profitable or breakeven in 2015. I think it's a little bit longer pull for us.

Okay. Thank you.

Thank you.

(Operator Instructions)

It appears we have no further questions at this time.

Great. Thank you.

Thank you.

This does conclude today's conference. You may now disconnect and have a wonderful day.