Simpson Manufacturing Co Inc (SSD) 2014 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the third-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 predictions of further events, are subject to factors which may vary and actual results might differ materially from these statements.

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

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

North America had a good sales quarter compared to last year, and sales in Europe, although they're up, are seeing the effects of the continuing tough economic environment. Sales were up nearly 9% in North America for the quarter due to increased home building activity in many parts of the region.

The Home Depot was up nearly 15% in the quarter. Housing starts in the US are up from this time last year and we are continuing to benefit from these starts. But unlike lumber or other products that have a more direct correlation to the starts, our products are used to a greater extent in code based areas subjected to natural forces such as seismic or wind events. As we mentioned before, we estimate that about 55% to 65% of our total wood company sales, products are dependent on housing starts.

North America's operating profits were up $1.3 million due to increased sales volumes, and they were offset by increased manufacturing and operating expenses. Europe's operating profits were $3.4 million, a $200,000 decrease over last Q3 due primarily to flat gross profits and a slight increase in operating expense.

We continue to have a very strong financial position with $258 million in cash at the end of the quarter, very little debt, and a $300 million unused line of credit, which gives us flexibility and the capability of continuing to vest in our long run strategic plan. I also wanted to note that we did buy back about $3 million worth of shares during the quarter and we may buy back more and Q4.

Karen?

Thank you, Tom. As we've stated previously, we have been hiring people to support our core connector business, as well as our new business initiatives in the wood truss, concrete repair, and strengthening markets. We believe that these are large market opportunities in which we need engineering, marketing, manufacturing, sales, and customer support.

These initiatives encompass all of the elements that our brand was built on and that differentiates Simpson Strong-Tie from our competition. Our people are our most important asset, and we need to ensure they have the tools and resources necessary to support our customers.

As always, we're dedicated to our entire product line and we work hard every day to ensure that we continue to meet our customers' needs for service, support, and product availability. We will continue to monitor our operations and SG&A expenses around the world to strive for long run returns for us and our shareholders. I'd now like to turn this over to Brian for some more financial update.

Thank you. So as noted in the earnings release, Q3 2014 gross margin was 45.6%, down slightly from Q3 of last year. The margin differential of wood to concrete products is about 12 percentage points this quarter compared to about 13 percentage points Q3 last year, with concrete products up slightly and wood products down slightly.

As noted in the press release, we believe the estimated gross margin will be in the 45% to 46% range for the entire year 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 $900,000 in the quarter or slightly less than 0.5% of net revenue.

The tax rate of 36% is comparable to last year Q3 although the foreign operations had slightly higher loss to subject to valuation allowances this year compared to last year. We still believe the annual effective tax rate will be in the range we've previously estimated which was between 37% and 39%, but could end on the lower end of that range for the year.

Q3 2014 CapEx was about $8.2 million primarily for manufacturing equipment and software in the US. We estimate total 2014 CapEx to be in the $21 million to $23 million range. For 2014, the year depreciation and amortization is expected to be $29 million to $30 million of which $21 million to 22 million is depreciation. No changes in those estimates from last quarter.

Before we turn it over to questions, I'd like to remind you that if you'd 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 early November. We'd like to now open it up to your questions.

(Operator Instructions)

Garik Shmoies, Longbow Research.

Hi. Thanks. Just have a question on -- in North America. You had indicated in the release production volumes were flat against the 9% sales increase. Just wondering if you could talk about the production schedules in the quarter, presumably worked on inventories, are inventories were you need them to be, and what's the outlook for the fourth quarter with respect to production rates as opposed to expected sales.

Hi, Garik. This is Karen. I think as you are aware, our biggest volumes are always occurring in third and fourth quarter, a little consistent with how production and weather conditions. So you're correct. We burned down some of our inventory that we had built in the second quarter to meet our third quarter sales. Typically, we would build a little less inventory in fourth quarter as again, that's typically a slower timeframe for us.

Okay. Makes sense. And then if you could just comment a little bit on your sales to your largest customer is up 15% in the quarter. Can you maybe parse out how much of that you think might have been just channel fill to them versus how much organic sell through they are actually seeing?

Sure, and let me just correct one thing. I think I said something incorrect there. Our largest sales are in Q2 and Q3. I think I said Q4. So Q2 and Q3 are our largest sales. Q1 and Q4 typically smaller and so that's why we see that difference in production.

As far as our largest customer on that 15% increase, as we reported in both Q1 and Q2, their sales were a little bit lower than certainly we would have anticipated. I think some of that was filling the channel and we're now seeing them running about at last year's sales levels with this 15% increase in Q3.

Okay. Great. And then my last question is, in Europe, the press release indicated lower sales prices there. Is this a new development meaning the competitive landscape has intensified? Is this, in part, mix or is this just a continuation of some of the weaker macros that we're seeing in Europe?

Garik, it's Brian. I think it's primarily the latter, the weaker economic environment there. They had a really good Q1 from a weather perspective compared to last year, but that they are definitely not seeing the same growth in the latter quarters as we did in that first quarter. But primarily that weaker economic activity.

Okay. Thanks so much. Best of luck.

Thank you.

Arnie Ursaner, CJS Securities.

Good morning. This is Robert [Magic] on for Arnie Ursaner. You just presented at the BCMC trade show. Can you update us on how that went?

Sure, Robert. Just to refresh everybody, the BCMC is the Building Components Manufacturing Conference. It's an annual show held every year where we really have the opportunity to talk about some of the things on our truss initiative. There's equipment shown and software shown, and that's really the big annual show. We had a very good show.

A lot of people and a lot of customers interested in some of our enhancements that we've made and some improvement on our software. I think they're pleased that we're listening to the customer requests as we develop our software, and there's certainly seeing that in some of the demonstrations that we showed them.

So overall, a good show for us. And we're making some very good progress as we look at our [truss offs] where which, of course, is the main element needed to really engage and be able to sell both truss software and plates into that market space.

Okay. Great. Thank you.

You're welcome.

Josh Chan, Baird.

Hi. Good morning. Thanks for taking my question. The first question is on gross margin, as you look into 2015 balancing what you see in terms of volume and pricing and raw material cost, is there any reason why gross margin shouldn't expand next year?

Hello, Josh. This is Brian. So to the extent that we're utilizing our factories more and running more production through there, we could benefit from increased overhead absorption. Other than that, the other elements would be just speculation.

So I would say that to the extent that volumes increase, we see a bit of -- a little bit of a benefit there, but other than that, I don't know that there'd be any other significant changes.

Okay. And then on foreign currency, the US dollar has strengthened pretty significantly recently, and so is there any way to ballpark what sort of impact it might have on your operating profit line? Do you have a lot of local costs or how significant should we think about that impact being?

For the quarter on operating income, it -- I think it had less than a $1 million impact. So a lot of our operations are operating in their local currency. But the FX in the quarter at the operating income line was less than $1 million.

Okay. Okay, that's good. And then lastly, you mentioned repurchasing some shares during the quarter. Given kind of the stock movements recently, is there any expectation to purchase more shares? I guess the question being what determines the amount of shares that you buy on a quarterly basis?

Hi. This is Tom. We are pretty opportunistic of about buying shares and we buy them, we're looking at whether it's a good investment for the Company and also reflects the confidence that we have going forward. We have a $50 million Board-approved stock acquisition program, and we bought about $3 million under that as we said recently this last quarter.

And we will just continue to look at it. It just depends really on circumstances as we go forward but when it's an attractive opportunity for us, we will tend to buy that. We view our position with the Board every quarter.

Okay, great. Thank you so much for your time.

(Operator Instructions)

Min Cho, FBR Capital Markets.

Great, thank you. It seemed in the press release that there was no comment about pricing in North America. So first I'm wondering if we're going to assume that it was flat and was that kind of a positive blip in the quarter or are we starting to see some positive pricing trends emerging with the increased demand?

Hi, Min. This is Brian. So there wasn't any significant effect to the revenue line. The pricing, so it didn't have an impact. I don't know that we are able to say that it's significant changes ahead there, but there were no impacts, no significant impacts on the quarter.

Okay. Can you discuss maybe your year-over-year growth trends in the foundation products or the products that you consider the foundation products?

You're talking about from the concrete area? Well you know in your 10-Q, you talk about how foundation products are leading indicators for your additional -- for your construction related products. I'm assuming that's mostly concrete related and you do talk about year-over-year growth, so I was wondering if you have that information.

Actually, those are more embedded products which are actually part of our wood connector line. And I don't have that data. We don't have that data in front of us. Sorry. So I don't have any information to tell you there.

Okay. Also, are there any significant line reviews coming up at Home Depot?

We are constantly looking at our mix of products and things to ensure that Home Depot has the turns that they are looking for and certainly we are providing that service for them. And so we do not have, as I'm aware, any line reviews currently that were required for Home Depot at this time.

Okay. And then my final question has to do with your -- the revenues in Asia. They're obviously down year over year even with the new -- relatively new concrete products that are online now. Can you provide a little more detail about which geographies are little bit stronger or weaker, was this a mix issue, or just anything on the Asia front?

One of the things that impacted Asia was a product that we were providing a mechanical anchor when we owned Liebig, and it was a big popular product for subway areas. When we sold Liebig, we sold off those assets so that was a little bit of a negative for them as far as being able to get some of those subway jobs. And it wasn't just that anchor itself, it was -- that was a key anchor in a combination of products needed. So we saw little bit of the downturn in our subway business because of that.

Okay, so the biggest reason there. I'm sorry, one more question. Did you hire additional people in the third quarter? If you can just tell me what your current headcount is?

Give me just a second. At the quarter, we hired about 30 people throughout the entire Company.

Okay. Great. Thank you.

Barry Vogel, Barry Vogel & Associates.

Good morning, ladies and gentlemen.

Good morning, Barry.

I have a couple of questions for Karen. First of all, could you give us a little bit more detail in terms of your progress that you see as the truss business is being developed versus the couple of comments about the BCMC show?

Sure. I think we're still a very small percentage of the market, as we said, the software that we currently have with some of our customers has limited capabilities and so we have not been actively out pursuing additional truss customers because we know we would not have the software that would allow them to be more efficient at their jobs.

So the small business that we currently have again is maintaining our customers that were on the legacy software from the acquisition. Those customers, as well as other customers, are certainly seeing the strides we're making in getting a new software program out that will in fact make the customers job much more efficient and therefore be of value to them. So we've seen a little bit of growth this year over last year.

I think we would see a little bit of growth next year, but we're still not ready to the point where we can make a full push on all the truss business. We will be looking next year, really pushing it, maybe another additional small segment of the market that doesn't have extremely complicated both truss designs and where we are actually providing the whole packets of truss wall panel and core system, which is some of things the competitor's product will currently do.

Can you give us some idea of the annual operating losses that the truss business is resulting in?

Hello, Barry. It's Brian. It's similar to prior quarters. It's no significant changes.

So how much is that amount? I don't recall writing that down in my notes. Approximately.

It looks like it's about $3 million in the quarter.

The operating loss of $3 million per quarter is the effect of the truss business?

That was what it was this quarter.

Okay, so that's in the third quarter and how about the other two quarters?

I don't have that, Barry.

Would be sort of similar range?

No, I mean we've been -- maybe it's up little bit but it's fairly comparable.

Okay, because I know you're spending money there and it's a slow start up and there's a lot of opportunities and it's obviously affecting the North American operating profits.

Correct.

Okay. Now as far as your balance sheet, you continue to have this great balance sheet with $258 million in cash, it seems that your D&A this year, for example, is more than your capital expenditures, so absent anything serious happening in your business conditions, you are going to continue accumulating more liquidity in your balance sheet.

If you had to look today at the use of your capital, going forward in terms of the first -- the four areas where you can use our capital, how would you rank them today?

Barry, this is Tom. Good morning. Couple of thoughts about that. We review our capital allocation opportunities all the time and specifically every quarter, and as you know, not too long ago we increased our dividend some, and we were pleased we could maintain our dividend through a difficult period from 2008 on, so we review that all the time.

As far as far as stock buybacks go, again, we're very opportunistic about that. But the rest of the capital allocation issues, Karen is going to talk about.

I would say that when we prioritize, we are still actively looking for some acquisitions and that would be what we would really like to use that cash for. You know the concept of organic growth in this concrete restoration area is a pretty slow process.

As I've mentioned previously, we would really like to find some acquisitions that can help us have not only a bigger footprint in there but certainly have some additional product lines. So we have not only people here at Simpson who that is their role to actively search and find some companies that will fit into the model we are looking for, as well as we have a couple of M&A firms engaged helping us look in both Europe and in the US.

So in order preference, acquisitions will be number one?

Yes.

And where would you rank additional dividend increases in share buybacks?

Well as Tom mentioned, that's certainly something that we are constantly looking at so I don't think we really sort of put them in a ranking. We certainly review those constantly on the quarterly basis and review them with our Board, also.

Okay. Thank you very much.

Thank you, Barry.

Arnie Ursaner, CJS Securities.

You actually now have Arnie. Good morning. Sorry, I had two calls at the same time, so I apologize if you may have answered this. Housing starts are improving. We had a million this month, we've had four months above a million. Can you remind us of the operating leverage in your business once we get above a million and your capacity utilization at this point?

Arnie, it's Brian. From a capacity utilization, I believe we've been noting that we're 65%, 70% in our factories so we have capability to push a lot more product through those factories today. As far as an operating leverage perspective, we don't specifically have a number per se. I mean, to be able to specifically address that.

We've seen starts, obviously higher this year compared to last year, and that's benefiting our North America operations there, so some of the added sales are definitely attributed to that with the improved building activity, but a specific leverage number, we don't have.

In working capital and steel, could you comment on the inventories you're carrying and your view of steel in the upcoming couple of quarters?

Arnie, this is Karen. Obviously, we're always looking at making and ensuring that we've got the raw material necessary to meet the upcoming demands so we have a very good purchasing agent that works, excuse me, an employee that works on purchasing and she does an excellent job of ensuring that we're trying to buy steel at the best price.

So we are very comfortable with where our current steel position is, taking a look at where we think forecasted will end for the year and also again, potentially going into the first part of the year.

Okay. I'll jump back in queue. Thank you.

And we have no further questions at this time.

Great. Thank you, everyone.

Thanks very much, everyone.