Simpson Manufacturing Co Inc (SSD) 2015 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the third-quarter 2015 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 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 would like to Tom Fitzmyers. Please proceed.

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

As usual joining me and present 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 8% compared to last year based on an increase in housing starts and construction activity in many parts of the region. And similar to last quarter, our European and Canadian sales were down, primarily due to foreign exchange effects. 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 up $3.5 million or 12% due to increased gross profits, offset by the increase in operating expenses, primarily R&D and engineering as noted in the press release. Europe's operating profit was $3.6 million, up slightly over last Q3 due primarily to higher gross margin and the lower operating expenses, a result of currency translation differences. Gross margin in Europe was higher, going from 41.5% this quarter versus 39.7% last year.

We continue to have a very strong financial position, with $242 million in cash, and a $300 million unused credit facility, which gives us flexibility and the capability to continue investing in our long-term strategy.

In September, we announced that we bought back about 395,000 shares at an average price of $34.63 for total of $13.7 million. For the year, we have repurchased 22 million. We also spent $25 million on an accelerated share repurchase program, which we'll conclude by the end of the year. Finally, the quarterly dividend again is $0.16 per share.

Karen?

Thank you, Tom. In late September, we announced our three-year capital allocation plan, which includes share repurchases and potential dividend increases based on our cash position. And as always, subject to future approvals by the Company's Board of Directors.

This plan is not change the Company's overall strategy to grow and diversify our business and product offerings to reduce our dependency on North American residential construction. We want to grow organically and through acquisitions which lever our engineering, testing, manufacturing, and distribution strengths. We are currently engaged with a number of M&A firms in North America and Europe working to find good acquisition targets.

The BCMC show, which is the Building Components Manufacturings Conference -- that show is held this week in Milwaukee, Wisconsin, where we demonstrated our latest software release. The comments were very positive on our progress in designing software to meet our customer needs.

With this software release, the sales team that we have in place and our manufacturing capacity, as well as our technical support team, we believe we are positioned to pursue about one-third of this estimated $500 million market opportunity. A general release of the software is scheduled for later this year.

Also in the third quarter, our manufacturing facilities for our carbon fiber, or FRP materials, passed their quality control inspection and we will have our final ICC code report sometime next week. Part of our strategy as always is to use new technology to advance our business in all areas. And when we choose to discontinue a project with no further cash flow benefits, we write those off.

With that, I'd now like to turn it over to Brian.

Thanks, Karen. As Tom mentioned, exchange rates had a significant negative effect on Q3 comparable sales, which we estimate to be about $6.4 million as the dollar strengthened primarily against the European and Canadian currencies. We estimate the negative effect of foreign exchange on operating income was approximately $800,000 for the quarter.

The margin differential of wood-to-concrete products is about 15 percentage points this quarter compared to 12% Q3 of last year. With lower margins on flat concrete product sales and increased wood product margin on increased wood sales, the Q3 2015 gross margin was 46.4%, up from Q3 last year.

In that number, though, is a one-time pension settlement, which added about 0.5% to the current gross margin -- about $1 million. As noted in the press release, we still believe the estimated gross margin will be in the 44% to 46% range for the entire year 2015, with the usual caveat that it depends on the rest of the year.

Total operating expenses as a percent of sales were down slightly in the quarter compared to last year, although we took that charge in writing off a project that Karen had noted that had been capitalized over the last year. That was in the R&D and engineering line.

Regarding taxes, the tax rate of 38.4% is up compared to last year Q3, due primarily to about $1 million in additional losses subject to tax valuation allowances compared to last year, 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%, in line with our prior estimate last quarter.

Q3 2015 CapEx was about $5.6 million, primarily for manufacturing equipment in the US. We estimate total 2015 CapEx to be in the $35 million to $40 million range, excluding software. And the added real estate project in west Chicago that we announced on the Q2 call is included in that dollar range. That facility is expected to close escrow before the end of the year and we are planning to complete the move of the two existing chemical facilities in late 2016.

For 2015, depreciation and amortization expense is expected to be $29 million to $30 million for the year, of which $22 million to $23 million is depreciation, down slightly from our prior-quarter estimate.

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. And 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 Shmois, Longbow Research.

Thank you and nice quarter. First question is you indicated in the release that you saw sales growth in North America to many of the channels that you service: lumbar dealers, distributors, home centers.

Just wondering, we did see a pickup in new housing, but was there any restocking that occurred in any of your channels that might have had impacted sales trends? Or do you believe that most of your sales trends in North America related to these channels was driven by point-of-sales and market demand?

Hi, Garik. We have not seen a dramatic increase in our customers from a restocking standpoint. Obviously I think everyone saw the housing starts came up, so we are seeing really the flow-through of our material based on that demand.

And certainly I think another large point is repair and remodeling is also up. And we have several products that go through our channels of distribution that support that market space also.

Okay. Thanks. You indicated also that you did see some decrease in sales price in North America. Was that more of a continuation of the same competitive landscape that you've seen over the last several years, or has there been a change in the competitive landscape? Or is this a situation which you are giving back some price because of raw material benefits?

No, I think the competitive landscape hasn't changed much. It's very similar to how it has been in the last few years. And so I think that's what you are seeing there is just a little bit of a continuation of that.

Okay. And then my last question is on M&A. You called that out as a continued focus -- you are looking both in North America and Europe. Just wondering if you can speak to the pipeline right now?

And then also specifically to Europe, you've had success over the last decade expanding in Europe. What are the opportunities that you see there and what would it take for you to aggressively expand into the Europe market and maybe some lessons you've learned in the past that you hope you can improve on moving forward?

So let me take that in a couple steps. From the pipeline standpoint, I think I've mentioned that we are very interested in looking at acquisitions that can help us expand and grow our fastener market line. And we're also very interested in looking at products that can help us grow in this concrete repair.

I think I've mentioned that that's a very, very large $3 billion market opportunity and we want to be able to organically grow, but more rapidly grow in that space from an acquisition. So those are really two highly focused areas, but we have a couple people here who are looking predominantly in those areas, but also as other things become available.

When we think about Europe, our focus in Europe is really on connector manufacturing. Our market share there is significantly lower than it is here in the US market. They build much more with concrete and not as much wood, so it's not as large a overall market, but we want to be able to get a larger part of that market share. So our focus in Europe is really more on connector manufacturing companies.

The difficulty in Europe as I've seen in doing acquisitions is typically these are long-term family-owned companies -- sometimes 150 years of tradition. And it just takes a much longer time to court those potential targets; have them get to know you. And sometimes when I said longer -- these are multiple year projects.

So it just is a I find a much longer time to try and get an acquisition across the board when we look at Europe than the US. But we also have particular M&A firms and our director there of European operations -- that is their major objective, to look for acquisitions in that space.

Great. Thank you.

Steve Chercover, D.A. Davidson.

Thank you and good morning. Just a couple quick ones from me, please. First of all, can you tell us a bit more about the software development write-off? Was that associated with the truss business?

Steve, this is Karen. So we use software and technology in all of our aspects -- all of our business lines. So it happened to be one that fit obviously within our business elements. But again, we have it in both ICI and fasteners, in our truss business, even in our general connector business.

So unfortunately, it was a project that didn't work out for us. But as you know, technology changes and it's certainly something going on every single day and this was something that we looked into that just didn't work out. But the technology again is used in all aspects of our business.

Okay. But we all know that you are terrific at the fasteners and whatnot, but maybe software is not your forte? So is that something that might be better off outsourced? I remember when you brought it in-house and I don't recall these write-offs before.

We do -- we use -- we have both in-house software development and we also outsource. So we try and use the best avenue possible for us to be able to come to technology with the market in a rapid time and also make sure it's something that's meeting our competitor needs. Again, unfortunately, this was a project that just did not come to fruition.

Right. And then I was wondering how your approach to M&A in this current cycle is going to differ from the last cycle? Because you have to acknowledge that there were a couple of acquisitions that really didn't pan out six or eight years ago.

I think a little bit of a difference on our M&A approach as we look at it in this cycle is that we are looking for sort of larger acquisition targets. We're really looking for fairly well-established company that can give us maybe either a customer base, production expertise. So we are really looking for larger companies than we may have been looking for in the past.

Does that increase or decrease the risk? The bolt-ons didn't necessarily work out, but they also weren't particularly damaging. So I guess if you are buying a really good franchise, then that's less risk, but -- I don't know. Can you elaborate?

From my perspective, Steve, I think it's any time we -- there's always going to be risk when we look from an acquisition standpoint. And the risk could be associated with a cultural fit, which we talk a lot about here at Simpson. And we spend a lot of time when we look at an acquisition to be sure culturally it is going to fit with us. But again, there's always risk because it's not our known market and certainly a market that we have developed.

So I think there is risk in both a small-sized acquisition and a little bit larger-sized acquisition. Some of the things that help us at least reduce the risk from looking at maybe a little bit more established acquisition target is usually if they've got a reasonable revenue. They've already get in place good quality control, good engineering, certainly good customer base and that sort of thing. So -- but I would say there's always risk whenever we do an M&A or whenever we do an acquisition.

Okay. And just finally, between your cash and your undrawn facilities, you've got a war chest of $500 million. How big is big? Is it the whole shooting match; is it $100 million?

I would say we are looking at -- we're looking at targets anywhere probably from $50 million to $150 million.

Great. Okay. Thanks, Karen.

Josh Chan, Baird.

Good morning. Thanks for taking my questions. Just want on the previous M&A question -- so in terms of kind of a financial perspective, do you have any metrics that you kind of target when it comes to larger acquisitions? Whether it's like a multiple or ROI or things of that nature that you are looking at?

Hi, Josh; it's Karen. So for M&A obviously, I think you guys are all aware: multiples today are running between maybe 10 times to 12 times the EBITDA. We start off first of all looking for a company that's going to help us grow in our strategy.

So again, I've mentioned the strategy of really trying to diversify from this North American housing market, but really look into these areas where Simpson can be additive. So we're really looking for companies that are in the building space. Do they have a product that can be differentiated?

I mentioned to you, we always want to give our salespeople a tool when they go into get our product specified and we don't want that tool to be price. So it has to be something that can be engineered; can be specified to meet within those parameters where we can differentiate it.

So we really start to see are we looking at something that fits within our strategy? Then we kind of funnel that down. Is it a customer base? Is there some IP there? Is it a unique manufacturing process? And then we'll start reviewing all the numbers from that standpoint.

So our first metric is to find the right company, the right people, and the right product that work for it. From a metric standpoint, I think we get pretty well almost in what the market is doing as far as the things from a multiple. And that's typically how we see potential targets are also looking. So from a valuation standpoint, that's typically what's happening these days.

Okay. Great. Thanks for the color on that. And if I look at the quarter, SG&A expenses were down fairly nicely, especially when you exclude the R&D charge. Is that because of a concerted effort to kind of control costs? How sustainable is declining SG&A looking forward?

So I have a very, very large focus on SG&A and everyone here in the Company. We are looking -- and as I mentioned to you, we kind of had spike in SG&A when we did some acquisitions.

And really the reason is that the way Simpson goes to market is I need all the feature set behind the product. So that's why I have code reports and testing and marketing literature, salespeople -- I need all those things in place.

What we're seeing is we've got that foundation in place for our ICI business and our truss business and we're starting to gain some revenue from those. So there's no need to have additional SG&A in that space. But we look at it very, very carefully and I would like to see that number continue to drop and we will still be working on that.

So I would not anticipate seeing SG&A increase. And we will still be, again, as I mentioned, very closely looking at all aspects as to what we can do to continue that number on a down trend.

Okay. Great. And then my last question. Looking at gross margin next year, what are some pluses and minuses that you see? I know scale prices -- the outlook could be a little volatile, but presumably you get some volume growth. So what are some pluses and minuses that you see as you look at the gross margin line going into next year?

Hi, Josh; this is Brian. So the -- other than the items that you noted that there, we're always looking at how we can make our operations more efficient, whether it's in the office or on the factory floor, to be able to meet additional customer needs and demands without having any significant cost to that.

So it's probably more of the smaller incremental improvements. I don't know that we would anticipate anything moving that line with any significance at this point. So going into next year, we'd probably be looking around that similar range where we're at today. If not, just a little bit better based on some of the things that you mentioned there.

All right. Understood. Thank you for your time today.

(Operator Instructions)

Daniel Moore, CJS Securities.

Good morning. Thanks for taking the questions. Karen, you mentioned you obviously have software and technology in ICI, truss, connectors, lots of areas. Any additional color on which of the areas that the write-down related to?

No, Dan. As I mentioned before, again, we have technology in all of those areas.

Okay. And just looking at -- you mentioned that the -- I think you mentioned next week or in the short term regarding code acceptance. Can you just provide a little bit more color around that?

Yes. So that was on our carbon fiber materials -- the FRP business. We had completed -- obviously we had completed all the testing. One of the requirements as a manufacturer when you get a code report is that the code agency has to do a QT inspection on your production facilities.

So our carbon fiber material is produced in our Portugal location and it's also produced in one of our US facilities. That QT inspection has been completed successfully and we will get the actual hardcopy report should be coming out next week.

So that will allow us to be able to enter very aggressively the carbon fiber material -- excuse me, carbon fiber market with a code report, which, for that particular product, is really needed here in the North America market. We've got marketing ready; we've got our salespeople trained. So they will now be able to have a much more aggressive conversations with the specifying community to be able to use those particular products for concrete repair.

Very good. Looking at the segments, excluding FX, Europe was essentially flat. Can you update us perhaps on what you are seeing in Europe in terms of trends incrementally and what your expectations for growth might look like as we look out to fiscal 2016, obviously excluding currency?

In Europe, the UK is definitely doing quite well and we've seen that really over probably the past year. So they seem to be kind of out of their economic conditions there, so we anticipate that the UK will continue to grow. We have a couple small product lines that we've introduced there that we are trying to really expand into some different space.

From France and Germany, still very, very tough. Still having some major economic conditions in those countries. And as we look at France and Germany, that actually impacts our Denmark location because Denmark actually produces most of the product that is shipped into Germany. So from the connector standpoint in Europe, difficult, difficult time still for our major locations.

Our concrete repair products, on the other hand, are doing better. Those are road repair -- again, using our carbon fiber material as a concrete repair and strengthening. We're in a few different countries there. Those projects and products are doing a little bit better, and those are really a function of our S&P acquisition. So those are hanging in there and actually, we are getting a little bit of growth in some of those market spaces.

And the relative mix of wood to concrete in Europe -- is that 90%/10%? 80%/20%? I assume it's still wood dominant at this point?

Dan, it is Brian. It is wood dominant. I think 90%/10% is a bit much, but it's still predominately wood product in Europe.

Got it. And then two more -- Karen, just to clarify the SG&A. Obviously it came down nicely when you exclude the write-down. Is it SG&A dollars that you hope to actually bring down or as a percentage of revenue?

Dan, obviously we look at both. I'm really looking at the percent of revenue, yes.

You are looking at percentage of revenue. You are looking for that to decline going forward, all else equal?

Correct.

Got it. And then lastly, obviously you've been very aggressive on share repurchases. What's left on the current authorization and when would you potentially look to increase that or reauthorize that -- at what point?

Hi, Dan; this is Tom. So we've spent one way or another $47 million so far this year and we have authorization for $50 million. So we would expect that we would be able to complete that by the end of the year.

And on a quarterly basis, we review the capital allocation with the Board. And as we've mentioned in the past and Karen just talked about a three-year program, we're going to consider that very seriously over the next several Board meetings. So we'll tie that together with the potential acquisitions that we have and also the other needs for cash.

So we're looking at that constantly, trying to estimate exactly where we're going to be. And as you can see, this round, net of the $242 million in cash, we have spent $47 million. And that's out of the total cash we have, so we have $242 million left. So serious effort on our part to consider the capital allocation issues.

Very good. Appreciate the color once again.

Arnie Ursaner, Ursaner Capital.

Hi, good morning. My first question relates to the end-of-quarter share count, since you did a lot of the share repurchases toward the end. Brian, what was the end-of-quarter share count, please?

The end of the quarter amount was -- bear with me --.

Why don't I ask a different question while you are looking that up?

I got it. It's about 48.3 million.

Okay. My second question relates to your R&D spend. The two biggest factors you have in that line item that have caused it to jump in the last few years was the software development and FRP standards. With both of those now behind you in a lot of ways, shouldn't the R&D spending drop a fair amount going forward?

Hi, Arnie; Karen. As you know, again, from a software standpoint, that's a never-ending project -- always needing to put new enhancements into the software. So I would not anticipate that dropping because we still need to really enhance that product and keep it out in front of our customers and certainly meet their needs.

It would have a slight difference from the ICI, but this is just our first step on ICI. So we will continue to take that product line and find different applications, do code reports, full-scale testing, and that will be how we continue to grow that product line.

That leads right into my second question. When you bought the FRP business, it had pretty high growth, pretty high margins. And yet, as you said at the time, you had to Simpson it and build up the structure and everything else.

Maybe take a step back and highlight where you think we are in the process, but more importantly, where it ought to be in 2016 for either revenue or margin.

So when we think about the FRP product line, that was really the S&P acquisition that we did in Europe. And those margins are still very high, north of 55% margin that we're making on that particular product line.

The code reports that we've been working on have been for the US market. So for the European market, they already had code reports. And let me just make sure I'm clear that the margin was a gross margin when I gave you that number.

So when I look at Europe, I look at those as two different areas. So Europe is much more advanced in the use of that product as far as engineers being familiar with it. So we have code reports there in there in Europe for FRP. In the US, the code report we will be getting is for US acceptance for those particular products.

But the additional thing that's not happening in Europe is some of our cementatious materials that we bought from our Fox acquisition can be used in Europe. So now the code issuance starts for Europe for that product.

So getting a code report, doing full-scale testing, putting engineering support, as you know, is what differentiates Simpson and how we feel we can deserve some higher margins on some of our product lines and providing that support. So that is really a never-ending type of projects that we work on. Just a little bit different from Europe versus the stage in the US.

And again, how do you look at -- how do you expect this division or area to perform in 2016, given all these moving parts?

I would anticipate that we should see some -- with the code report, we should see a little bit of revenue increase there on this particular product line. And because the carbon fiber is a very highly engineered product, it does give us some better gross margins. So I would anticipate some positive movement in that space.

I think where I'm trying to go with this is you've invested an enormous amount in expense prior to getting the revenue. Maybe how should we think about the incremental margin on the revenue you will get?

I think it ought to be fairly comparable in that particular product category.

Okay. Thank you very much.

And it appears that we have no further questions at this time.

Great. Thanks, everybody.

This does conclude today's teleconference. You may now disconnect. Thank you and have a great day.