Simpson Manufacturing Co Inc (SSD) 2015 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the second 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 the factors are cautionary statements and discussed in the Company's public filing and reports. Those reports are available on the Company's website.

Please note today's call may be recorded.

Now I would like to turn the conference over to Mr. Tom Fitzmyers.

Please proceed.

Thanks, everyone. Good morning and welcome to the Simpson Manufacturing Company Inc second-quarter 2015 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 the 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 nearly 9% compared to last year based on an increase in housing starts and construction activity in many parts of the region, even though many parts of the US were hard-hit by rain.

European and Canadian sales were down due to foreign exchange effects, but on average were up modestly in local currencies. As we've 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 up $5 million or 17% due to increased gross profit offset by a slight increase in operating expenses as noted in the press release.

Europe's operating profit was $3.3 million down $400,000 over last Q2 due primarily to lower gross margin. Gross margin in Europe was lower overall 39.1% this quarter versus 40.5% last year. We continue to have a very strong financial positions, which gives us flexibility and the capability to continue investing in our long-term strategy.

In June we announced that we bought back about 250,000 shares at an average price of $33.24 for a total of $8.5 million. Finally the quarterly dividend again is $0.16 per share.

Karen.

Thank you, Tom.

In the second quarter we released our truss software to a select group of customers. We believe we are positioned to pursue one third of this estimated $500 million market at today's start with this software release, our sales team, and our manufacturing capabilities.

We will use the next two months to review additional customer needs and to ensure we have the necessary technical and implementation support teams in place. A general release of the software is scheduled for Q4.

In the Q1 conference call we discussed additional capital spending. We've signed a contract to buy a 175,000 square foot building in West Chicago. This will be our new North America chemical manufacturing plant. We will combine our Addison, Illinois and Baltimore, Maryland locations into this facility. This will allow us to more cost effectively manufacture products for the concrete construction markets. This facility will also be our research and development center. We're expanding our line of concrete products and solutions.

In March we announced the closure of our sales offices in Asia. That process is well underway and should be substantially completed by the end of the year. The company-wide Q2 financials show we've made some positive steps in our SG&A as a percent of sales at 29.2%.

We will continue to monitor our operations and SG&A expenses striving for long run returns that are acceptable to us and our shareholders. I would now like to turn it over to Brian to share some additional financial information.

Thanks, Karen, and good morning all.

As Tom mentioned exchange rates had a significant negative effect on quarterly sales which we estimate to be about $7 million as the dollar strengthened primarily against the European and Canadian currencies. We estimated the negative effect of foreign exchange on operating income about $900,000 for the quarter.

The margin differential on wo0d to concrete products is about 15 points this quarter compared to 13 Q2 to last year. With lowered margins on increased concrete products sales and wood product margin slightly down on increased sales, the Q2 2015 gross margin was 45.4%, down from Q2 last year. As noted in the press release we still believe the estimated gross margin will be in 44% to 46% range for 2015 with the usual caveat that it depends on the rest of the year.

Total operating expenses as a percent of sales were down 1.5% in the quarter compared to last year. In regard to taxes, the tax rate of 38.5% is up compared to last year Q2, due to about $2 million in losses subject to valuation allowances, most of those losses occurring in Asia as we wind down sales offices there. We believe the annual effective tax rate will be between 37% and 39%, up slightly from our prior estimate last quarter, and that's due primarily to a better estimate of the closing cost in Asia for the remainder of the year.

Q2 2015 CapEx was about $7.2 million primarily for manufacturing equipment and software in the US. We estimate total 2015 CapEx to be in the $30 million to $33 million range including software. And have the additional real estate project in West Chicago that would add to that amount of another $12 million to $15 million this year with $7 million to $10 million estimated to be added for 2016 to complete that project.

In this project we are combining the operations of two chemical facilities into one facility as Karen noted earlier. And we are currently renting those two chemical facilities. The amount of CapEx estimated for 2016 for that facility would be for improvements and equipment.

For 2015 depreciation and amortization expense is expected to be $29 million to $31 million, of which $23 million to $25 million is depreciation, consistent with our prior quarter estimate. That new facility should not have a significant impact this year on depreciation.

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 we filed in early August.

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

(Operator Instructions)

Daniel Moore, CJS Securities.

Good morning.

Morning, Dan

Brian, you mentioned gross margins, obviously, a nice improvement sequentially. Maybe just dig in a little deeper on the key drivers, update us on your outlook for steel? And if those type of things fold, are those levels we saw in Q2 sustainable for the remainder of the year?

Regarding the levels we saw in Q2, I think we would believe those would be sustainable. The one note about steel is, we believe there's a lot of uncertainty in that market. As we noted in the release, some of the anti-dumping trade issues have been filed by the US Steelmakers, so I think that's leading to a fair amount of uncertainty. Getting back to the overall guidance, we're still comfortable with that particular range.

I presume, based on that the pricing pressures that you had been seeing, going back a year or two, continue to abate, generally speaking?

This is Karen, Dan. I think from the pricing pressures, again as the housing market becomes stronger, there's a little bit less focus on the pricing pressures. We are seeing some cases where some of our larger customers are jumping into a different tier from a rebate level. That's just because we are seeing that increase in that sales volume.

As the housing continues to strong, little less emphasis on the pricing pressures and much more emphasis on availability and service.

Great. Switching gears one more, Karen, you gave us good detail, thank you, on the truss software initiative. Any additional color you're willing to share just about nuances of customers with the pure beta testing, the pluses and minuses, what they are seeing, feedback they are giving you and confidence around the expectations for a broader rollout in Q4?

Just a little bit different approach on how we went into the software market for trusses, which was really looking at the customer needs and the things that they were looking to have to be more efficient. I think we've provided some of those elements into the software.

I would caution everybody as the software never stops improving there's always requests for more enhancements. Really, what we want to ensure is now that we have some positive feedbacks from the customers as we look, have the technical support and implementation, we want to be sure that we don't falter in that space. That's why we've done a little bit more of a selective release on the current version and are looking to be sure that we have got that support in place before we do a full release.

Okay. Forgive me if I missed it, but did you give the CapEx expected for the new facility in Chicago?

Yes, Dan. That was -- for this year we are expecting it is going to be in the $12 million to $15 million range. Then next year another $7 million to $10 million, depending on the timing on when things -- when we acquire the facility and then when we are able to start making the improvements necessary for the chemical facility.

Okay. I will jump back in queue. Thank you.

Garik Shmois, Longbow Research.

Hi, thank you. First question, follow-up on the truss market opportunity. You talked about capturing potentially a third of the $500 million available market. Just wondering -- certainly we're in the early stages here, but can you provide any sort of timeframe parameters around when you might be able to get up to a full ramp in capturing the total available revenues?

Let me just clarify, it would be great if we captured a third. A third of the market, I believe, will be the opportunity available to us based on the feature set of this software. Really there's a specific customer base that we're looking to be able to offer this truss software to that will have them meet their needs.

As far as the timing, it takes a while for people to convert. We will certainly be working in the -- when we have the release and into the first quarter, on converting some of these customers over. There is a window of time to convert before they get into the truss-busy season again.

We really have to work on this early first quarter and into early second quarter on those conversions. And that's why we're really wanting to ensure that, from an implementation standpoint and that technical support, we're prepared.

Okay. Thanks for the clarification. Switching to the new facility in Chicago, is there any sort of quantifiable rationalization savings or charges that you'll be seeing through closing the two facilities and rolling it into one, the one in Maryland and the other one in Illinois? Secondly, how should we think about R&Dspend now that the R&D will be held at the new Chicago facility?

Hi, this is Brian. The quantifiable numbers, it's -- obviously, we're expecting some savings there. It's too early to come out with those. We do expect greater efficiencies in our operation and the like, as far as chemical manufacturing facilities, but I think it's a little too early right now to come out with those specific numbers.

On the R&D spend, it's not necessarily going to significantly add to R&D spend. It is really just going to consolidate a couple of labs and offices so that it will be happening in one location as opposed to multiple locations today. So incremental spend, I don't think it would be significant. Again, I think we would look to greater efficiencies in the R&D area as we look to come out with new products, test those products, test existing products and the like.

Okay. That is helpful. I guess just a follow-up to that. Will you have to move the R&D staff? It sounds like you will -- from the multiple facilities to the one consolidated location? Are you anticipating any sort of attrition there?

We're looking at that, of course, and we've been talking with both groups. One group is already in the vicinity, Addison and West Chicago. Obviously, the Baltimore folks, that's a different move, and we're looking at that. We hope to retain as many of the folks as we can. Of course, a move of that distance it may be difficult to do that. However, we fully intend to try to keep as many of the folks as we can.

Okay. Makes sense. Lastly, I'll ask a weather question. You did cite some rain in certain parts of the US in the quarter. Just wondering if there was any meaningful impact to the revenue growth that you saw in the United States? If so, are you seeing a catch-up at all here in the third quarter?

We saw a fair amount in the southeast area. That had a bit of an impact there. Although looking back to the last year Q2, I recall there were still many parts of the country that still had a fair amount of snow. So from a comp basis to Q2 last year, I'm not sure there was a significant impact. Of course we're going to try to catch up as much of that rain impacted business as we can, and we're working on that. I think it's a little too early to tell, right now, on that.

Okay. Thanks and best of luck.

Thank you.

(Operator Instructions)

Josh Chan, Baird.

Hi, good morning. Just focusing on the North America business. As you went through the quarter in April, May and June, can you talk about the pace of demand that you saw, whether you saw any acceleration or slowdown as you progress through the quarter?

Hi, Josh, this is Karen. I think, as Brian mentioned, the really -- in the sort of the May timeframe, the southeast market was substantially hit by weather. We have seen a little bit of an increase or an uptick in the June, coming out of that weather condition.

Okay. Then switching to gross margin, did the top line -- was up fairly meaningfully, at least in North America, but we were a little surprised to see gross margin step backwards. Could you explain what were they drivers there? I know volume probably helped, but what was the offset?

Josh, I'll start, maybe Karen will add a little bit here. She had noted that as certain customers, as their sales pick up, they may enter into a new rebate tier, so we saw a bit of that. That's got a, pretty much, a dollar-for-dollar impact on gross profit. There's also a mix issue, too. So as sales are up in both concrete and wood products on a relative similar basis, concrete has got less margin than wood, so you see a bit of a mix issue there on gross margin.

Okay. It looks like the concrete margins themselves stepped back compared to last year. Was there any particular issue going on there with the concrete side?

Nothing really to point out. I think that, as we've seen over the last few quarters, ebbs and flows depending on the specific type of products in that particular mix. But I don't know the we've got anything particular that we would point to.

Okay. Last question from me is, on Asia, are we expecting the losses to dissipate as you work through the office transition and when do think that will be completed?

Sure. For Asia, we would expect closure related expenses on the Asia sales offices. At this time we are estimating about $1 million through the rest of the year. And that has to do with administrative staff winding down operation -- or winding down the offices and the such. We've got a fair amount of facilities that we're renting today that we're either going to exit or not, so there could be some rent. There's rent expense built into that number, and that may accelerate, if we are able to exit an office early. But for the balance of the year, our estimate today is $1 million.

Okay. When you go into next year, that's basically be behind you, right?

Correct.

Okay, great. Thanks for the color. Best of luck in the second half.

Thanks, Josh.

Barry Vogel, Barry Vogel & Associates.

Good morning, ladies and gentlemen.

Morning, Barry.

My first question has to do with the home center sales, which you usually give us some indication of what's happening there and key in on your largest customer, which we've done with you on the conference call for many years, that would be helpful.

Barry, it's Brian. So, home centers were up low-single digits for the quarter.

What is that like 4% or 5%?

Right. A little less than that. Largest customer was up mid-single digits.

Okay. As far as capital allocation -- and I guess, Brian, you can answer this, because you are the Chief Financial Officer. Obviously, there's dividend increases. There's stock buyback, and there's growth investment. Is there any reason why, all of a sudden, you bought 254,000 shares where you hadn't really done anything there? That's the first question.

That's a great question. As we look at capital allocation, our first preferred option would be to grow the business, improve operations and the like. However, as cash balances grow, we want to make sure if we are not able to do an acquisition or the like -- and we are looking, as Karen has often mentioned, we're always looking at opportunities to improve our businesses.

However, if we're not -- if we don't have anything in the immediate pipeline, then we look at other capital allocation strategies. So we try to opportunistically look at buybacks and add some of those shares via the buyback at opportunistic times. As you may know, we've got certain times of the year where we're open to go into the market and trade and make those buybacks. So we try to do that.

Again, we have in internal target that we discuss as far as a price, and if we are seeing it in that space or in that range, we opportunistically buy back. We're always looking and discussing with our Board, capital allocation strategies. Not this quarter but last quarter, we raised the dividend. Although only $0.02, it was about 14% increase there.

So we're looking at various capital allocation strategies. Again, preferred would be to profitably grow the business. Next would be to then look at buybacks or dividends and the like.

Okay. The reason I raise this is, this is the first time in a while where you've taken action on several fronts, which leads me to believe that you're more optimistic in making changes than you might have been in the last couple of years. Is that probably true? You're moving finally into the truss market after a lot of work. You're consolidating chemical facilities. You're pulling back in Asia-Pacific. You're buying stock. You're trying to increase dividends. You haven't been this active on so many fronts in a while.

Hi, Barry, this is Karen. I think as Brian mentioned, we're obviously always looking for ways to grow the Company and certainly look from the shareholder standpoint as the best things to do from a capital allocation. We are, as you mentioned, have been working very hard on our truss initiatives, and we are starting to see that kind of get to the point where we would be able to generate some revenue to offset some of those expenses we put in place. We are excited about that.

The chemical facility is something that we're always looking at from a plant standpoint, how to be the most cost-efficient manufacturer, and certainly both of those chemical facilities where it came from acquisitions. And so the one in Addison was our Ackerman-Johnson, which we acquired probably 20 years ago. Then bringing this Baltimore acquisition really kind of tied in the opportunity to consolidate these two. So are always looking at what we can do from that standpoint.

I think the timing of things are just -- you're seeing a lot of activity. Some of those have been in place for a while, and they're just really starting to come to the forefront of being effective for us from a revenue standpoint.

That's a good answer. Thank you very much.

Thank you.

(Operator Instructions)

Min Cho, FBR Capital Markets.

Great. Thank you. Just a couple of quick questions. In the last conference call you mentioned that you were supposed to release your US code, the FRP line, in the quarter. I want to know if that had gone through, or if you have any updates on it?

Yes, the FRP is one of our concrete strengthening products.\ That's a fiber reinforced polymer, so it's our carbon material. We have received our ICC, which is the national code acceptance. We've received our number. We are starting to market that product, and we're working very heavily with our sales force in the third quarter to really start marketing that product.

We are starting to see some work with our specifiers. That will be a product it's really going to be sort of job based. So we won't really have a leading indicator that's going to help us look at where estimates would be, because it will be a job-based product. We are out with our sales force selling that product.

Okay. Is that a higher margin concrete line?

It is. It's a carbon laminate product and a carbon cloth product. As we've mentioned before, in that FRP space margins typically are around north of 55%.

Okay. Finally, are you continuing to look at M&A targets, or should we expect that to be sidelined a little bit until the chemical facility is further along?

No, we are very aggressively looking at M&A. As we mentioned from a capital allocation standpoint, doing things with the combining [perception] facilities make us more cost effective and the work there. But the second would really be looking to do some acquisitions. We are heavily looking at some of our growth areas, which as I've mentioned before, in the fastener area we think there's lots of opportunities, also in this concrete strengthening area.

So we are still very heavily looking for an acquisitions that will fit within our strategy, which is really to grow more into this building materials and not quite be so tied to the residential. So we are constantly looking for opportunity.

Okay, great. Thank you.

Okay, it appears we have no further questions at this time.

Thank you.

Thanks, everybody.

Thanks.

This does conclude today's conference. You may disconnect at any time, and thank you for your participation.