Simpson Manufacturing Co Inc (SSD) 2015 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the fourth-quarter 2015 Simpson Manufacturing Co., 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 may 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 is being 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 Co., Inc.'s fourth-quarter 2015 earnings call. Our earnings press release was issued yesterday. It's 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 for today's call are Karen Colonias, Simpson's CEO; and Brian Magstadt, Simpson's CFO. I will start, followed by Karen, and then Brian, and then we will be delighted to take your questions.

North America had a very good sales quarter. It was up 15% compared to last year, based on an increase in housing starts and construction activity in many parts of the regions. And similar to last quarter, our European and Canadian sales were down, primarily due to foreign exchange effects. We believe good weather in parts of North America compared to Q4 last year, and builders getting in front of a potentially wet winter contributed to the increase in sales.

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 $8 million or 65%, due to increased gross profits, partially offset by the increase in operating expenses, primarily R&D and engineering, as noted in the press release.

Europe had an operating loss of $1.5 million, up slightly over last Q4, due primarily to lower gross margins. And it was nearly offset by lower operating expenses as a result of currency translation differences. Gross margins in Europe were lower at 34% last -- this year versus the quarter last year, which was 35.7%.

We continue to have a very strong financial position, with nearly $259 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 the quarter, we completed our accelerated share repurchase by buying back about 190,000 shares at an average price of $36.27 for a total of $6.9 million. For the year, we have repurchased 1.3 million shares for a total of $47 million.

At our Board meeting earlier this week, the Board renewed our share repurchase authorization for $50 million, which runs through the end of 2016. And finally, the quarterly dividend, again, is $0.16 per share.

Karen?

Thank you, Tom. In 2015, we completed one year of our three-year capital allocation plan, which includes share repurchases and potential dividend increases based on our cash position, and subject to future approvals by the Company's Board of Directors. This plan does not change the Company's overall strategy of growth and diversification of our business and product offerings to reduce our dependency on North America residential construction.

We started to grow organically through acquisitions, which can leverage 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, primarily in the fasteners and concrete repair space.

In late December of 2015, we had a targeted release of our truss design and manufacturing software. The design features allow us to approach about one-third of the truss market. Over the next four to five months, our truss specialists will be actively presenting this software and working on converting customers.

In January, I attended the International Builders Show in Las Vegas. The show was well-attended and the mood was cautiously optimistic for 2016. We had several new products displayed in both our concrete and fastener line, and they were well-received by specifiers and builders.

We are continuing to make positive steps in reducing our R&D, engineering, selling and admin expenses as a percent of sales -- 31.5% this year compared to 32.2% in 2014. We will continue to monitor our operations and our operating expenses.

Now I'd like to turn the call over to Brian, who will share some additional financial information.

Thanks, Karen. As Tom mentioned, exchange rates had a significant negative effect on Q4 comparable sales, which we estimate to be about $4.4 million, as the dollar strengthened primarily against the European and Canadian currencies. We estimate the negative effect of foreign exchange on operating income was about $1.5 million for the quarter compared to last Q4.

The margin differential of wood-to-concrete products is about 16 percentage points this quarter compared to 9 percentage points Q4 of last year. With increased wood profit margin on increased sales offset slightly by lower margins on increased concrete product sales, the Q4 2015 gross margin was 44.8%, up from Q4 last year. As noted in the press release, we believe the estimated gross margin will be in the 44.5% to 46% range for 2016, with our usual caveat that it depends on how the year goes, volumes, et cetera.

Total operating expenses of R&D and engineering, selling, and admin as a percent of sales were down about 160 basis points in the quarter compared to last year, and 260 basis points, excluding the one-time software write-off. Regarding taxes the tax rate of 34.3% this Q4 is up compared to last-year Q4, due primarily to a release of an uncertain tax position last year. We believe the annual effective tax rate for 2016 will be between 37% and 39%.

Q4 2015 CapEx was about $15 million, primarily for the purchase of real estate in West Chicano that we announced last year, and for manufacturing equipment and software in the US. The total CapEx in 2015 was about $34 million. We estimate total 2016 CapEx to be in the $33 million to $35 million range, and we are planning to complete improvements of West Chicago in the move of the two existing leased chemical facilities in late 2016. For 2016, depreciation and amortization expense is expected to be between $30 million and $33 million, of which depreciation makes up about $25 million to $27 million.

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 Annual Report on Form 10-K to be filed late February.

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

(Operator Instructions) Daniel Moore, CJS Securities.

Can you provide a little bit more color on the strength that you saw in the North American market in Q4? The key drivers in terms of end-markets or customers, and any benefits, be it inventory restocking or weather? Or was it really just a core improved strength in your end-markets?

Hi, Dan. This is Karen. Certainly, the weather was the main factor. If we remember back in Q4 of 2014, most of the Midwest was under snow fairly early, and certainly the East Coast. Those weather conditions came much later in the year, and so pretty significant differential there. And we were able to continue to grow and build products in that market space.

And we are actually seeing in the West Coast, there is this concern about El Nino. We had a very, very wet December and January. And I think a lot of the builders are working on getting their foundations in place, so that they can then build through that estimated rainy season.

The -- we saw growth in all of our lines of distribution, whether they be through the wholesale distributors or our contractor distributors and also our DIY market. So, it was pretty evenly spread through all of those means of distribution.

And are you seeing or do you expect to see a correlated or related -- maybe a little bit of a slowdown in Q1? Or not necessarily as a result?

So far, with January completed, it's fairly in line. January 2016 is very in line with what we saw in January of 2015.

More flattish rather than the growth that we experienced in Q4 this -- so far?

Yes. And I think it's more of a natural weather that we're seeing; we're finally seeing that snow hitting in Eastern states. And so I think we're seeing more in line of what we would anticipate for a Q1.

Okay. And you've talked about your goal for 2016 and going forward of reducing operating expenses. Just want to clarify -- can you or do you expect to reduce operating expenses in dollar terms? Or is it more as a percentage of sales going forward?

Well, we are certainly looking to try and reduce in both areas, but more as a percentage of sales. As I've mentioned, we -- our operating expenses were fairly high over the past couple of years because we were really building the foundation necessary for both the concrete area and the truss area.

And so we had some fairly high operating expenses, as we were looking at getting our testing done, our engineering, our marketing. We now have that foundation in place, so we don't look to have to add, from the standpoint of operating expenses, in those new markets.

One more and I'll jump back in queue. Can you remind us in ballpark terms of the total spend to date in truss in terms of developing the latest version -- what type of ROI you expect? And maybe how long you expect that payback period to be?

Well, I think as we've mentioned, our expenses on truss are about $8 million a year. We are very excited about this release that we just had. It's actually the first time we've had the new product to be able to try and get some additional customer base with this new product. And that product again has only been out for about a month now.

So we are really working on trying to get about a third of that market opportunity -- again, that's what the product has the capacity to meet those customers' needs. And we will just have to see how that progresses as we go through 2016.

Okay. I'll jump back. Thank you.

Thank you.

(Operator Instructions) Tim Wojs, Baird.

Nice results. I guess my first question, just from a new construction standpoint, what's your expectation for starts growth in the US in 2016? And how do you think the cadence of that plays out this year versus last year? I think last year, you saw a little bit more faster growth in starts activity in the back half of the year. So just curious how you think -- what you are hearing from your builder customers and some of your distribution customers?

Yes, I think the starts -- whether we were at the NHB or at the housing meetings, everybody is around 1.2% to 1.25%, that's typically what we're hearing from most of the industry. At the Builders Show, I think most of the builders there think it will be a pretty normalized type of cadence again -- typically more building time in the second and third quarter.

I don't think anybody is thinking anything unusual from our standard cadence on how housing construction goes. And again, everybody seems fairly optimistic as they were looking going into 2016.

Okay. And then just on the gross margins guidance, Brian, what do we -- what's the embedded assumption around just steel costs? I know that steel prices are down. It takes a little bit of time to kind of work through the P&L. I guess what are your assumptions for steel costs in 2016? And then have you actually seen some of that lower raw material cost flowing through gross margins already this year?

Yes, good question, Tim. So, we're looking -- as we noted, there's a lot of uncertainty in that market, especially with a lot of the trade issues that are going on with imported steel. So, that really is what's driving our comments on the uncertainty there.

I would say that it's -- at this point, our expectation is probably no real significant change at this point. I think from a gross margin standpoint on the guidance, as we look at our product mix, we are looking out at what products are coming in, and whether it's additional truss products that we're still meeting some volume to absorb overhead there or other products that make up the mix -- that's where we're coming in on that guidance.

And again, one of the big caveats is just overall, production volumes and absorption of fixed costs through those factories, and we look at a little bit of growth to help offset a little bit of the cost that increase in running a factory. So, that's about where we're at today on that.

Okay. Could you remind me what capacity utilization is today?

Yes, Tim, with our factories today, I would say it's between -- you know, around 60% to 65%.

Okay. Okay. And then just on Asia, we've had some -- the losses there were a little bit bigger this year, and that's been a drag to profitability. How do we think about those losses in 2016? Do we get the kind of breakeven in Asia? Or is that still going to be a couple-million-dollar headwind in EBIT?

Well, for the Asia sales offices, we've got a couple of leases that we're working through to get those things closed up. The Asia-Pac is also including the PAC RIM of Australia, New Zealand, South Africa. So, we definitely see the losses going down, because we had a lot of the close-down costs in 2015.

Now there may be a little bit of a continued drag as we finish the wind-down of those legal entities in China and Asia. But as far as our manufacturing operations, that obviously is still a key asset for us. And in China, we've got sourcing offices in the region, and engineering offices. And those support functions will continue, but there really shouldn't be any significant change year-over-year on those support functions.

Okay.

One of the other keys is increasing the number of products and lines that we're carrying down in the PAC RIM to help them grow, and grow some profits down there. So, a little bit early to tell on that.

Okay. Okay. And then when we think about the $50 million repurchase authorization, I mean, is that something that we should think you guys will use through the year, you'll be maybe opportunistic with? Or is that something that we should kind of embed in estimates and kind of take it as you will use that $50 million and repurchase through the year in 2016?

Well, Tim, I think, as we look at that authorization -- again, it fits within our strategy, and that we will be opportunistic if we don't have opportunities from an acquisition standpoint. Again, we want to be able to get that capital back to the stockholders. We still are looking very heavily and very seriously for M&A acquisition, but as we wait for those to come to -- to come together, we will be very opportunistic as we look at that $50 million from the stock repurchase.

Okay. And then two final ones. Just on the software write-offs, are those kind of behind us? Or should we expect some more software write-offs in the first half of 2016? And then could you just remind -- there's been some consolidation in -- at the upper end of the LBM distribution business or market in the US. Could you just remind us how you're positioned with some of those bigger LBM distributors? And if you've seen any impact from that consolidation yet?

Yes, Tim, I'll take the first part of that and I'll turn it over to Karen. The -- for the software, I believe that's behind us, in large part. So, we've -- as we've mentioned before, we try to look at emerging technologies and opportunities, and to work into our business, whether it's apps or customer-facing software or software that we use internally to help run our business a little bit better. And some are very successful and others don't meet our expectations. And so -- but to answer your question, I believe those are behind us at this point.

Okay.

So, you want to take a part of that?

And then on the consolidation, all four of those distributors were customers of ours. And so we're working with them on their consolidation and their yards that they are going to have. We have great relationships with the consolidated two groups. We had great relationships with all four of those companies.

So, we're looking forward to doing business with them as we go into 2016 and helping them. And no real difference or no real impact for us on those four lumber distributors consolidating.

Okay. Great. Well, nice job and good luck on 2016.

Thank you.

(Operator Instructions) And it appears we have no further questions at this time.

Great. Thank you very much.

Thank you.

And this does conclude today's program. You may disconnect at this time. Thank you and have a great day.