Simpson Manufacturing Co Inc (SSD) 2015 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the first-quarter 2015 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.

Thanks, everyone. Good morning, and welcome to the Simpson Manufacturing Company first-quarter 2015 earnings call. Our earnings press release was issued yesterday. It is available on our website at simpsonmfg.com. Today's call is also being webcast, and a replay of that webcast will be available on our website.

As usual, joining me 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, up 10% compared to last year, based on an increase in housing starts and construction activity in many parts of the region. Although many areas of the US had a tough winter, we don't believe it was as bad as last year's winter. Europe sales were down due to foreign exchange effects, and we are seeing impacts of a continuing tough economic environment there. Total net revenue there was essentially down slightly in local currency, even with Q1 being an exceptional quarter last year for Europe.

As we mentioned before, we estimate that about 55% to 65% of our total Company wood product sales are dependent on housing starts. North America operating profits were down $2 million or 9%, due to reduced gross profits and increased operating expenses, as noted in the press release. Europe's operating loss was $1.6 million, worse by $700,000 over last Q1, and this was due primarily to lower gross profits. Gross margin in Europe, however, was higher, 38.2% this quarter versus 35.3% last year.

We continue to have a very strong financial position -- $230 million in cash at the end of the quarter, no debt, and a $300 million unused line of credit which gives us flexibility and the capability of continuing to invest in our long-term strategic plan. Before I turn the call over to Karen, I also wanted to mention that our Board of Directors has just increased our quarterly dividend to $0.16 per share. That's an increase of 14%. Karen?

Thank you, Tom. We continue to make strides in the development of our new design software for trust manufacturers. This project remains on track for a Q2 release. This is a large market; we estimate it to be over $500 million at today's housing starts. We believe we are positioned to meet the needs of about a third of that market with this new software release, our experienced sales teams and our manufacturing capabilities.

With regards to our customers serving the residential builders and home center markets, we continue to supply those customers with our no-equal service, support and inventory. Our sales teams, engineers and inside sales support take customer service to levels that are unmatched in our industry.

All our customers and users of our products benefit from our continuous and obsessive focus on meeting customer needs when it comes to supplying and supporting our many product lines, including connectors, lateral systems, fasteners and anchor products. We're also on track for a Q2 release of our new US crude listed FRP -- fiber-reinforced polymer product line -- which is used to strengthen concrete projects.

In March we announced that we are closing our sales offices in Asia. This was not an easy decision, as we have many good employees in this region. We had continued losses in those Asia sales offices, and decided that we could no longer continue down this path. Those losses averaged in excess of $2 million annually over the last four years, on revenues that had grown from over $4 million in 2011 to just over $9 million in 2014.

We will continue to manufacture mechanical anchors in our plant near Shanghai, as well as maintain our sourcing and support service offices in Asia. And we remain committed to our sales strategy in Australia, New Zealand and South Africa markets.

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

Thanks, Karen. As noted in the earnings release, Q1 2015 gross margin was 43.9%, down from Q1 last year, primarily due to the workers comp credit adjustment last year. The margin differential of wood to concrete products is about 17% points this quarter compared to 15% in Q1 last year, with concrete products down and wood products just down slightly.

As noted in the press release, we believe the estimated gross margin will be in the 44% to 46% range for 2015, although depending on the rest of the year, that may change. Total operating expenses as a percent of sales were up a fraction of 1% in the quarter compared to last year.

Regarding taxes, the tax rate of 38.1% is down slightly compared to last year Q1. And we still believe the annual effective tax rate will be in the range we estimated in the last Annual Report, which was between 36% and 38%.

Q1 2015 CapEx was about $6.4 million, primarily from manufacturing equipment and software in the US. We estimate total 2015 CapEx to be in the $30 million to $33 million range, excluding software. Although we're looking at some additional spending which may help our long-term prospects, which were not included in that amount. For 2015, depreciation and amortization expense is expected to be between $29 million and $31 million, of which depreciation is $23 million to $25 million for the year.

We did make an acquisition in our European concrete products business, where we acquired a previous distributor, which we believe we can grow beyond what they were previously doing with our products. The cash paid was less than $1 million, plus there's a [smaller amount].

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

Thank you.

(Operator Instructions)

First, we'll move to Daniel Moore with CJS Securities.

Good morning and thank you for taking the questions.

Good morning.

Obviously 10% revenue growth pretty solid in North America. Tom, you talked about weather. How much of a benefit was weather year over year? And just a little bit of detail on where you're experiencing pockets of strength, either by geography or end-markets in North America?

This is Karen. Certainly in the Northeast, we still had -- they still had a tough winter. As a matter of fact, I think there are areas that are still under snow. But when we look at the rest of the region, we're not limited by rain in certainly the western parts of the country.

We are seeing good growth in the western states. We're seeing good growth again in some of the areas in the southeast. So I think overall, as we look at housing starts coming back, they're tracking very similar in those larger population areas.

I'm trying to get a sense of, do you feel like Q1 was a beneficiary -- weather was a beneficiary? Or are the trends that we saw sustainable, the high-single-digit to approaching low-double-digit growth -- is that sustainable as we look forward?

I think the weather was not as big an impact as you would normally think for Q1. So I think if starts stay where they are, that we would see that be more of a sustainable growth.

Excellent. And [12] volume -- what was pricing like during the quarter?

There were no pricing anomalies. Pricing was flat during the quarter.

Okay. And then just one follow-up on the gross margin or COGS. Gross margin in North America, a little lighter than we had anticipated. What were some of the key cost factors pressuring margins? And do you anticipate any material change in those for the balance of the year?

Daniel, it's Brian. Some of the issues there were a product mix. As you see, the differential between the wood and the concrete products expanded a little bit. As I mentioned in the prepared remarks, although wood was down slightly, concrete was down a little bit more there.

And as wood sales -- the wood sales, as noted in the release, were up 5%. The concrete was up 6%. So a bit of a mix -- a bit more sales on the lower-margin concrete products affected a little bit of that margin, in addition to that worker's comp credit there.

Lastly on that, and then I'll jump back in queue. On the concrete side, is it cost pressure? Is it pricing competitive? What's driving the little bit of margin pressure there?

I don't know --

Let me see if I can take that one. The concrete products in some of these markets is a newer product line for us. And so we are working on the cost side of that gross margin, as well as differentiating our product to be able to deserve a higher price. But we're definitely seeing improvements in that gross margin in the positive direction on our entire concrete product line.

Very helpful. I'll jump back in queue. Thank you.

Thanks.

Thank you. Next we'll move to Garik Shmois with Longbow Research.

Thank you. Just a follow-up to the last question with respect to the wood-to-concrete spread. I think that spread was narrowing as you moved through 2014. You did touch upon as to why that started a reversal a bit here in the first quarter.

Can you touch upon your visibility with respect to the gross margin spread as you look out to the remainder of 2015? Will you anticipate as some of these newer concrete products mature, that the spread will narrow again?

Or conversely, as the residential market supposedly picks up, do you think the spread might end up widening? Just some perspective would be great.

Garik, it's Brian. I think that we're estimating -- I wouldn't anticipate a significant change either way. I think obviously there is a bit of seasonality on the wood side, with construction activity there. So I don't think we're expecting any significant anomalies there.

But Karen, you got anything you'd like to add there?

I think as I mentioned, we have some fairly new concrete products that we're still working on, putting things together. I mentioned we have a new code-listed report coming out in the second quarter. That will help us differentiate our product, and gives our sales guys some tools to go in and talk to specifiers.

Any time we're able to put features and benefits behind our product -- systems approach, code reports -- that allows us to work on that higher price point. And we're always working on the operations from the standpoint of the cost.

So again, I think we'll see the gross margins on our concrete lines, as we put these things in place, creep up. But as Brian mentioned, I'm not sure we would see some significant difference in the spreads.

Okay, thanks. Switching now to Asia, with the actions that you've taken. Can you provide a little bit more color on your medium- to long-term plans for that market?

It doesn't sound like you're exiting it completely, given you have a manufacturing presence. But are you now no longer focused on the wider Asian market, and you're narrowing your approach? Is that correct?

And secondly, what is the long-term goal, with respect to the Asian market and profitability there?

Garik, just to reiterate -- we closed our Asia sales offices. I think our teams in Asia, our managing director there did an excellent job of trying to search out opportunities for our products in that sales market. As we've mentioned many times, that is a very, very difficult market from a sales standpoint -- difficult from the standpoint of differentiating your product and being able to not have to sell on price.

When we look at the Simpson model, as we look at all of our product lines, we are always trying to, again, get a product that allows us to differentiate, give our sales people the tool. Because we don't want to become a commoditized product. And as we spent some years there in China, it became fairly clear that even as we would bring new products in the market, they would very quickly be commoditized.

So from a sales standpoint, we have completely removed ourselves from that market. We do have an excellent manufacturing facility just south of Shanghai that provides most of the mechanical anchors. The majority of that product has always been shipped and manufactured back to the US market.

So this change from the sales aspect in China will not impact -- it will very slight impact on the manufacturing. We also have excellent sourcing offices that help us in buying some of our fastener products and our mechanical anchors. And of course, we have some other resources there. So we will continue to use those support facilities. They support -- and this manufacturing facility. Because they do support the rest of our operations. But we will not continue to sell products in the China market with our sales force.

Okay, thanks for that color. Lastly, if you could touch upon the priorities for cash moving forward? You announced that you're raising the dividend today. There's a very small acquisition that you've announced.

Could you talk about where you would rank order on the cash priority scale from this point forward -- the acquisition pipeline, as opposed to how you think about the buy-back?

Well, yes -- this is Tom. We evaluate this continuously, and certainly [correlate] with our Board, and that's why we increased the dividend 14%. We think a lot about the dividends, because we don't want to go backward on raising our dividends. We're in a cyclical business. And I think it's really important for us to have flexibility in managing what we do.

I think Brian has estimated -- and I think we've said this in the past -- that it's in the neighborhood of maybe $100 million-plus that we have offshore, one way or another, running our businesses. We have $230 million cash today, which we're delighted to have.

We're thinking about acquisitions that would fit, as Karen has talked about in the past. It could be in the fastening area or chemical area.

Brian had indicated our CapEx -- it's possible because of some things we're thinking about might go up, to some extent. So all of that is being factored into the cash that we have, and the priorities which I think we've outlined.

As far as the buy-backs go, when the price of the stock is in the area that it's in today -- we're opportunistic buyers, and we don't feel that, that's quite the right price for us. As you know, we have been given the green light for $50 million in buy-back by our Board of Directors.

Last year we bought back about $3 million. This year we haven't bought back any, and that's because of the pricing. But we would certainly be prepared to seriously look at that, if the price of the stock declined in that area that we purchased it last year, which was $32, $33 -- $31, $32 -- in that range.

We think that's a good investment for the Company, and it reflects our continuing confidence in the Company overall. But that's opportunistic. We're evaluating it all the time though.

Okay, thanks for the help.

Thank you. Next we'll move to Steve Chercover with D.A. Davidson. Please go ahead, your line is open.

Thank you, good morning. My first question is perhaps a little nitpicky. But how do you incur $35,000 in interest expense when you're debt free? At year-end, you had $18,000 in debt, so your interest was two times debt. And we're not even talking about the $260 million in cash.

Dave, it's Brian. That's a great question. It's not necessarily interest expense. It's bank fees and other various items like that, that go into that line. But you've got a good point there that not necessarily interest expense on debt.

Okay. So it's for the privilege of having access to cash if and when you need it?

Part of our line of credit is, we've got annual maintenance fees. Those go in there as well.

Okay, thanks. I know it's not a needle mover, but it just seemed odd.

No, it's a good question.

Okay, then switching gears, obviously we know and you've said that the winter of 2015 was generally less severe than 2014; perhaps Boston would beg to differ.

(laughter) No doubt.

If we see a seasonal snapback and it starts -- can hit $1.1 million, do you think we can still see earnings momentum? And do your order files or backlogs support this?

Steve, it's Brian. I'll start off on that one. I think I would say, we would believe so. But as we have indicated in the past, it does really matter where starts are for us in the country. Obviously starts in certain parts of the US have less product in them than, say, your coastal areas, your seismic or high-winds.

So starts really do matter. I think we're seeing strength in certain parts of the country. Southeast -- I think it's been strong for the last couple of years.

I think the West is picking up a little bit there. When you see starts -- for example, in California, they're going to be a bigger dollar impact to us. Because more of our product goes into a structure or a start in California, for example, than the middle of the country.

So the mix of starts and the locations do impact that. But in general, I'd say, as starts are increasing in those regions, we ought to see that momentum.

Okay, thank you, Brian. And then final question -- it deals with China. How is it that products become commoditized? Is it because competitors reverse-engineer your product? Or is the market simply not willing to pay an appropriate prize for what you sell?

Hi, Steve, it's Karen. What really happens there is, when the product becomes new to the market, you can demand a higher price premium. But as other local manufacturers duplicate that product, you very rapidly lose that price premium.

So, it is a function of copycatting and there's not strong enough patent protection along those lines?

Well, it's not only strong enough patent protection, but also the stringent requirements that you would have, --from the specification of a product to the actual product getting to the job -- is not as strong in that China market as it is in the US and the European market. So even though you could get specifications -- and I'm not saying that the products don't meet capacity. It's very hard to get [firm] specification to the product actually used on the jobsite, because basically the lowest cost is what then becomes the element to get that product to the jobsite.

Okay, thank you.

Thank you.

(Operator Instructions)

Meanwhile, we'll move to the site of Barry Vogel with Barry Vogel & Associates. Please go ahead, your line is open.

Good morning, ladies and gentlemen.

Good morning.

I want to go back firstly to the capital allocation issue. If we look -- and I just want to quantify -- the $233 million of cash on the balance sheet, you said something about offshore. What is that, $100 million of that is offshore?

Approximately. As we all know, when it's in a country, there could be significant tax ramifications by repatriating that cash. It's somewhat locked in-country.

Okay. Karen and Brian, if we look at capital allocation -- and notwithstanding that you've been asked this question ad infinitum -- and your balance sheet continues to get stronger and stronger. If we look at the fact that business conditions generally in your mix of business has not been great the last couple of years. And you're sitting here not only with a $300 million unused credit line and $233 million in cash, including $100 million that's offshore.

But if we look at this year in 2015, and we look at the possibility of cash generation -- and that includes your small dividend increase -- you could possibly generate, depending on your inventory levels and your receivable levels, $50 million a year in cash, despite everything. So don't you think that it may be you're overly conservative?

I know you're cautious. But if you never do anything, it's never going to happen, in terms of taking advantage of this Fort Knox balance sheet and cash flow situation.

I'll just address that from the acquisition standpoint, and then I'll let Tom follow up with the other opportunities of what we can do with the cash. As I've mentioned in the past, we are continually looking for acquisitions to grow in a couple-markets basis. And we've specifically talked about the fastener market and the concrete repair.

I think I've mentioned, I think the concrete repair area is about a $3.5 billion market space. We have a small part of that market, so we are actively looking at opportunities to grow from acquisition in that space -- and very similarly in the fastener market.

We have several M&A firms looking us. We have two people on staff that, this is 100% of their job. I want to assure you that we are looking for ways to use that cash, from an acquisition standpoint, to continue to grow Simpson Strong-Tie. And then I'll let Tom go ahead.

Well, thanks. Also, Barry, with respect to acquisitions, it's not always the case that you can buy something and have it be immediately accretive, regardless of the size. And I think that's also a strong focus that the Company has. In many cases, the valuation hasn't changed too much from former times.

Also, we are in a cyclical business. And I think in the 2008 period, we were happy to be able to have the flexibility to manage our business the way that we did, because we have the cash and low debt. That helps us a good deal.

Thinking about that, thinking about our acquisitions, we increased our dividend. We're delighted to be able to do that. We think that we have some interesting opportunities in the CapEx area to improve the Company overall. We'll just have to see.

That could be substantial amounts of money that we would spend on that. And we're really opportunistic about buying the stock back.

So something that we continuously evaluate, and there's not necessarily a specific priority associated with that. But if Karen and Brian came up with a good acquisition that was substantial and accretive, that could use a lot of the cash that we have, and maybe even [go to] the line -- credit that's unused.

Okay, everything you said is valid. Except, as far as acquisitions, we all know that the past track record over a 10- or 15-year period on a net basis has risk as well, as we know. So acquisitions is not always necessarily the panacea for all this tremendous financial strength.

Again, I'm basing it on a risk factor. Because you talk about risk in other ways.

And, Karen, I want to ask you something about this new software release. We haven't had much information recently about how the trust situation is going. But how long would it take to see progress with the new trust software release if it was successful?

Well, as I mentioned to you, we're in beta with several customers right now on this software release, and we are looking to do a general release in the second quarter. I think, as with anything, it's not flipping a switch overnight, especially when you're asking customers to change their software program.

We have a pretty extensive target list and plan on how we would convert those customers, and certainly supply them support. I would anticipate that you wouldn't see a huge spike, but some gradual growth in these markets, and then maybe a little more opportunity going into 2016.

We also have to keep in mind that, based on the cycle of business, there is really a certain window of opportunity for some of these manufacturers to take a look at our software, and potentially change. So it's not the 12-month window for you; there's a little bit narrower window.

Okay. And I have one last question. As far as home center revenues, which is a very important end-user market for you guys, what percentage was it up in the first quarter? And what percentage was your largest customer up -- or not up -- or flat, or down?

Barry, it's Brian. Home centers as a category were up high-single-digits. And I would say, our largest customer is a bit less than 10% of total sales today. I believe their growth was consistent with the category.

Thank you very much. I appreciate it. Keep up the good work.

Thank you.

Thank you. Next we'll move to Josh Chan with Baird. Please go ahead, your line is open.

Hi, good morning. I just have a question about capacity utilization. Where do you think you're at in terms of utilizing your capacity? I think Tom mentioned the potential to increase CapEx substantially. I was wondering if that's the intention, or whether you're close to having to make more capital investments?

Josh, I'll start. This is Brian. The things that we're looking at that Tom mentioned would not necessarily be to increase capacity in our primary wood product manufacturing facilities. We believe we've got a proper footprint there. Although to be able to handle additional capacity, we work with our customers to let them know -- they understand that we can handle their needs if they were to take a bit of a jump.

So it's not necessarily adding capacity there. Generally, it would be in different areas.

Okay. So, would it be on the concrete side then?

Too early to tell at this point.

Okay.

And I believe we've mentioned in the past our capacity utilization, just in general. Karen, what do you think? We're around that --

We're still around that, probably 60%, 65%.

Right.

Okay. So you've still got a lot of room.

Then my second question -- I apologize if this was asked earlier, but your gross margin guidance for the full year is 44% to 46%. And you already did 44% in the first quarter, and that's typically a seasonally weak quarter for margins. So why shouldn't gross margin be better than the low-end of the range that you provided there?

Well, we didn't necessarily say that would be coming in at the low-end of the range. But with one quarter under our belt, that's why we've got that 44% to 46% band.

We'll see where we end. As we go through the year, obviously we're going to get better insight into the entire year.

Okay. So maybe you're being a little cautious just having only one quarter under the belt?

That's a good characterization.

Okay, great. Thanks for your time.

Thanks, Josh.

Thank you. Next we have a follow-up from Daniel Moore. Please go ahead, your line is open.

Thank you again. I'll try, although I think based on the last answer, you may not want to give a lot of detail. But the CapEx -- you're contemplating additional opportunities beyond the $30 million to $33 million. Just wondering if you would provide any color?

And then second, just curious, Brian, given the closure of the sales offices, will you continue to break out Asia as a separate segment going forward?

Great question. So let's tackle the second one first here. We're looking at that. There is specific accounting guidance on what makes up the Company's reportable segment. We look at that.

Obviously it's going to take something that had small revenues, and make it smaller. So I don't have an answer for you on that one today.

On the first question, regarding CapEx, we really don't want to say. At this point, we're just contemplating some things that are not necessarily part of that normal annual spend that we're looking at.

Okay, thank you again.

You're welcome.

Thank you. And at this time, we have no further questions.

Great, thank you, everybody.

Thank you very much. Appreciate it.

Thank you.

Thank you. This does conclude today's conference. You may disconnect at any time, and have a great day.