Simpson Manufacturing Co Inc (SSD) 2017 Q2 法說會逐字稿

Greetings, and welcome to the Simpson Manufacturing's Second Quarter 2017 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Kimberly Orlando, working with Investor Relations. Please go ahead.

Good morning, ladies and gentlemen, and welcome to Simpson Manufacturing Company's Second Quarter 2017 Earnings Conference Call. On this 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 these factors and cautionary statements are discussed in the company's public filings and reports, which are available on the SEC's or the company's corporate website. Please note that the company's earnings press release was issued yesterday at approximately 5:00 p.m. Eastern Time. It is available on the company's website at www.simpsonmfg.com. Today's call is being webcast and a replay will be available on the company's website.

Now I would like to turn the conference over to Karen Colonias, Simpson's President and Chief Executive Officer.

Thanks, Kim, and good morning, everyone. I'll begin by walking you through some highlights from the second quarter of 2017, and then I'll turn it over to our CFO, Brian Magstadt, to walk you through the financials and our future outlooks in greater detail.

Second quarter consolidated net sales were up 14% year-over-year to $263 million, primarily due to our recent acquisitions, driving growth in Europe, as well as increased sales volumes and average net sales unit prices in North America. The U.S. housing and remodeling markets are continuing on path to a slow, but steady recovery. And we believe U.S. housing starts, which are a leading indicator for roughly 60% of our business, should continue to improve at high single-digit rate on an annual basis over the next few years.

Our consolidated gross profit margin was 47%, reflecting a 150 basis point decline over the prior year, due primarily to our recent acquisitions in Europe, which have a lower gross margin than our consolidated business, as well as increased fixed factory and tuning overhead costs in our legacy businesses. Our ability to achieve industry-leading margins from both a gross profit margin and operating income margin standpoint is due to the high level of value-added services that we provide to our customers. These differentiators include strong brand recognition, extensively tested solutions at our state-of-the-art test lab, deep 40-year relationships with engineers who get our products specified on the blueprint and pulled through to the job site, product availability with delivery in usually 24 hours or less, active involvement with code officials to improve building codes and construction practices, and strong customer support through education for engineers, builders and contractors to demonstrate ease-of-use and efficiency of our products.

As most of you know, Simpson Manufacturing Company was founded over 60 years ago, and paved the way to become an industry leader in engineered solutions for wood construction products. With an industry-leading position in the U.S. connector market, the wood construction products are core to our operations. And as such, we remain dedicated to continue to grow our offering in the single and multi-family residential and commercial space.

Also, over the past 10 years, we've had success in extending our product offering into fasteners, which has enabled us to grow our wood product construction line, as well as provide us with a multi-product solution for engineers, incorporating both our connectors and fasteners together for a stronger connection.

In addition to focusing our core wood products business, we have continued to make solid progress on our 3 growth initiatives during the quarter. These include ongoing development of our truss software product offering, continuing to scale our operations in Europe as well as increase our market share and operating profit, greater product diversification through growing our share in concrete repair and protection offerings.

On the wood side, we believe one of the biggest opportunities we have is in the truss space. We've made positive strides in the ongoing development of our truss software product offerings, which is crucial to this endeavor. From a market size perspective, we estimate Simpson's current share of the roughly $500 million to $600 million truss market at approximately 2% to 3%. Importantly, the market opportunity for truss is roughly the same size as our entire wood connector business. We've worked hard to understand the needs of our customers as well as their pain points in order to differentiate and make them more efficient through the use of our software.

Our software solution is not only modular, in that designers can choose to use whichever modules are most relevant to them, but it's also cloud-based, which lessens the possibility for lost work and ensures the software is available for any device 24/7.

Our truss specialists have continued to convert and train customers on our truss design and management software. And during the second quarter, we converted 15 small- and medium-size component manufacturers, which is our target customer, with an additional 15 to 20 scheduled for the second half of 2017.

As a reminder, the second and third quarters are the busiest time of the year for the construction industry. So we expect to convert the most customers during the off-season in the fourth and first quarters of each year. As discussed on prior calls, the associated R&D spend with our truss initiative has been approximately $8 million per year, which we believe we should be able to leverage once we begin to recognize a more meaningful amount of revenue from the truss business. We expect to provide more details around our future outlook for truss as well as our path to profitability for this initiative by year-end.

Turning to Europe. We have been continuing our focus to gain share in this market, while simultaneously working to improve our operating profits and margins to be more comparable with other European peers in this space. While Europe has been contributing to our bottom line results, we've been working on various initiatives to turn Europe into a more profitable part of our business. The acquisition of Gbo Fastening Systems, in particular, has helped us extend our product offering in Europe to address our customers' needs and looking for a larger, more complete product offering. Specifically, Gbo is helping fastener products into Western Europe as well as our connector products into the Nordic regions.

Our market strategy for Europe is the same as North America: to sell engineered solutions rather than just products, while continuing to build our reputation as a tested and trusted brand in Europe. Europe presents an attractive opportunity to grow both our wood and concrete products.

Moving on to our third initiative, a greater product diversification through growing our share in concrete repair and protective offerings. Outside North America, the majority of the world build structures with concrete. The need to repair and protect aging structures, such as bridges, parking structures and peers is imminent. The challenge in the concrete space has been replicating our wood model through strong relationships with engineers and specifiers in order to get our products pull-through to the job site. In addition, demonstrating our tested solutions versus just selling products is not only the cornerstone of our business model, but it is crucial to the success of this opportunity.

Unlike the wood market, projects in the concrete space are job-based. So there is no leading indicators, such as housing starts for roughly 15% of our business that is concrete. This is a desirable factor from a diversification standpoint and that the less reliant we are on U.S. housing starts for growth, the better we expect our business should be able to perform throughout all industry cycles. We look forward to providing more details around our concrete initiative by the end of the year.

An additional highlight during the quarter includes our previously discussed plan to move some of our high-volume production out of our plants in Riverside, California, to our other 3 connector manufacturing locations, in an effort to improve our operating efficiencies as well as to ensure we are operating as cost effectively as we can. As of today, we are about 12 months ahead of schedule, and we plan to complete this project by the end of third quarter of 2017. We are currently tracking at 60% utilization, up from 45%, when we began this initiative with the goal of 75% utilization on 2 full shifts.

We've also been working with Home Depot on the rollout of our mechanical anchor products into 1,900 store locations. The rollout is expected to continue throughout 2017 and into 2018. As discussed on our last call, once completed, we expect this opportunity will meaningfully contribute to our concrete business line going forward.

Our SAP implementation has been progressing both on track and on budget as we work to complete the first of 4 phases in our multiyear project through 2019. The associated costs with this endeavor are estimated to amount to $34 million over the next 3 years. SAP has been integrated in an effort to improve business analytics, inventory management and purchasing as well as to generate overall productivity.

Turning to M&A. Both our recent acquisitions, Gbo Fastening Systems and CG Visions have been performing well. Both acquisitions are now about 5 months into the integration process and are tracking toward plan. The acquisition of CG Visions is enabling us to build closer partnerships with builders by offering software and services to help them control their costs and increase efficiencies at all stages of the home-building process. Just last month, we showcased the CG Visions software to our target audience of mid- and large-size builders at the Pacific Coast Builders Conference held in San Diego. Initial feedback was very positive and we look forward to presenting the CG platform to additional builders in the future.

The acquisition of Gbo Fastening Systems, one of Europe's leading manufacturers of fastening solutions, helped increase our share in wood connector products for the Nordic region and into Western Europe. We are currently working on sales and marketing plans for a complete fastener line and expect to be ready to introduce this to buying groups by year-end.

In regards to capital allocation, we continue to have a strong financial position, which affords us the flexibility and capability to continue investing in our long-term strategy to increase stockholder value and to return capital to our valued stockholders. Last year, we outlined a strategy to return 50% of our cash flow from operations to stockholders via quarterly cash dividends and/or stock repurchases. During the quarter, we paid out $8.6 million in quarterly cash dividends as well as entered into a $20 million accelerated share repurchase agreement. We remain debt-free, but we have an untapped $300 million revolver available to us should we need -- should the need arise to take on additional leverage in the future, especially in the case of a larger acquisition.

We will also remain focused on investing in our existing business to grow organically.

In summary, we remain confident in our long-term strategy for growth. We have many initiatives that we are diligently working on, and that we realize these efforts will take some time to bear fruit, we look forward to being able to share with you some additional targets to best measure our progress on these initiatives going forward by year-end.

Before I conclude, I wanted to announce our former Chairman, Tom Fitzmyers, officially retired from the board as of our Annual Meeting of the Stockholders on May 16. And we would like to thank him for his many contributions. We also elected a new Independent Director, Michael Bless, at the Annual Meeting and we look forward to benefiting from his experience and insights.

I now like to turn the call over to Brian, who will discuss our second quarter financial results in detail.

Thank you, Karen, and good morning, everyone. I'm pleased to discuss our financial results with you today. Our consolidated net sales for the second quarter of 2017 were $263 million, up 14% compared to $230 million in the second quarter of 2016. Net sales in the second quarter included $15 million from our recent acquisitions of Gbo, CG Visions and MS Decoupe. And were further driven by strong sales to contracting distributors, dealer distributors, home centers and lumber dealers, primarily due to increased home construction activity and average unit sale prices. Within the North America segment, net sales increased 9% year-over-year, primarily due to increased sales volume on improved economic activity as well as increases in average net sales unit prices. In Europe, net sales increased 47%, largely as a result of the recent European acquisitions of MS Decoupe and Gbo, though were partially offset by the negative effects of foreign currency translations.

As a percentage of net sales, wood construction products, including connectors, truss plates, fastening systems, fasteners and shearwalls represented 85% in the second quarter compared to 86% in the prior year quarter. Concrete construction products, including adhesives, chemicals, mechanical anchors, powder actuated tools and the reinforcing fiber materials represented 15% of total net sales in the second quarter of 2017 compared to 14% in the prior year quarter.

Our consolidated gross profit increased 11% to $123.5 million from $111.5 million in the second quarter of 2016, resulting in a consolidated gross profit margin of 47%, down 150 basis points from the prior year period. As Karen mentioned, despite this year-over-year decline due both to the impact of our recent acquisitions and increased fixed overhead costs in the remainder of our business, our ability to achieve an industry-leading gross profit margin is directly attributed to our unique solutions and value-added services.

On a per segment basis, our gross profit margin in North America decreased slightly to 49% from 50% in the prior year quarter. In Europe, our second quarter gross profit margin decreased to 37% from 41% in the year ago period, primarily due to the recent Europe acquisitions. These gross profit margins averaged 25% for the quarter.

From a product perspective, the gross profit margin on wood products was 48.4% compared to 49.6% in the prior year quarter, and was 35% for concrete products compared to 37% in the prior year quarter.

Now turning to our second quarter cost and operating expenses. Consolidated research and development and engineering expenses increased 16% year-over-year to $13.3 million, primarily due to the recently acquired businesses as well as higher personnel and software licensing costs from the recent acquisitions. As Karen explained, included in research and development and engineering expense is approximately $8 million per year recognized ratably for the ongoing development of our truss software initiative. Consolidated selling expenses increased 15% year-over-year to $28.5 million, primarily due to the recently acquired businesses as well as higher advertising and personnel expenses.

Selling expenses in North America increased $2 million and in Europe, increased by $1.6 million compared to the prior year quarter. General and administrative expenses increased 5% year-over-year to $36.6 million, primarily due to the recently acquired businesses, coupled with increased personnel, software licensing and legal and professional fees, which were partly offset by decreases in cash profit-sharing expense and in stock-based compensation. General and administrative expenses in the North America segment increased $2.4 million and in Europe, increased by $0.2 million compared to the prior year quarter.

We are intently focused on reducing our total selling, general and administrative expenses as a percentage of net sales, which were under 30% for the quarter. Now in 118 basis points from the prior year quarter. While we do not expect SG&A as a percentage of net sales to be reduced to the 22% level we achieved in 2006, we are focusing on ways to be able to better leverage our expenses as we begin to monetize our various strategic initiatives.

As you may recall, back in 2006, we operated as a one-product company, and over the past 11 years, we have made the strategic decision to diversify our offerings in order to be able to perform throughout all industry cycles and be less reliant on U.S. housing starts for growth. We are now a more complex 2-product line company with wood construction products that include connectors, fasteners and truss play products; and our concrete construction products, which include anchors and concrete repair products, which come with additional overhead and resources needed to operate, including our highly valuable sales force that enables us to obtain industry-leading gross profit and operating margins.

In addition, we've always placed a significant emphasis on research, development and engineering, as we aim to continue to be a thought leader in the industry, addressing evolving building codes and providing end-to-end product systems for our customers.

Total expenses included a $50,000 gain on disposal of assets. As a result, our consolidated income from operations increased 10% year-over-year to $45.1 million compared to $40.9 million in the second quarter of 2016. In North America, income from operations increased 5% year-over-year to $42 million, and in Europe, it increased 118% to $4.1 million.

On a consolidated basis, our operating margin decreased slightly to 17%, down approximately 60 basis points from the second quarter of 2016, primarily due to the recent acquisitions, which contributed less than $100,000 in losses from operations, including purchase accounting expenses, such as intangible amortization.

We believe a 17% operating income margin is still a solid level, and as Karen mentioned, it directly reflects the investments in value-added services we are able to provide our customers.

Our effective tax rate increased to 37.2% from 35.8% in the second quarter of 2016. As a result, net income for the quarter was $28.2 million or $0.59 per fully diluted share compared to net income of $26.2 million or $0.54 per diluted share in the prior year quarter.

Turning to our balance sheet and cash flow. At June 30, 2017, cash and cash equivalents totaled $141 million, down from $167.1 million at March 31, 2017. Capital expenditures were approximately $16.6 million for the quarter and were primarily related to ongoing efforts to complete the Texas facility expansion and for improvements in the new chemical facility in West Chicago.

During the quarter, we also completed a project in our production and warehousing facility in Poland to support improvements in capacity. We also invested in additional manufacturing equipment and software development and capitalized certain cost related to the ERP project. We remain debt-free with only a small portion of capital leases amounting to approximately $2 million.

On July 13, our Board of Directors declared a quarterly dividend of $0.21 per share for stockholders of record as of October 5, which will be payable on October 26. We also repurchased 425,000 shares during the quarter at an average price of $41.28 for a total of $17.5 million, as part of a $20 million accelerated share repurchase agreement to be completed in the third quarter of 2017. The remaining amount authorized under our repurchase program, which expires at the end of 2017, is $51 million. Going forward, we will continue to invest in our business both organically and via acquisitions, as well as aggressively return capital to our stockholders in the form of quarterly cash dividends and/or buying shares back in our stock in 2017 and beyond.

Before we turn it over to questions, I'd like to briefly discuss our outlook for the full year ending December 31, 2017. As such, we are reiterating our previously provided guidance for consolidated gross profit margin, which we continue to expect will be in the range of 45% to 46%. We are slightly revising our outlook upward for depreciation and amortization expense, which is expected to be in the range of $32 million to $34 million, of which $26 million to $27 million is pure depreciation. Capital expenditures are still expected to be in the range of $50 million to $55 million, which includes the completion of our Texas facility expansion and new chemical facility in West Chicago by year-end.

And lastly, we continue to expect our annual effective tax rate to be in the range of 34% to 36%. In summary, our second quarter financial results were fundamentally strong, reflect the various investments we've been making in our business, including truss software in Europe with the associated recent acquisitions and by working to deepen our foothold in the concrete repair and protection space, in addition to various other costs necessary to improve our company. These initiatives have yet to fully materialize and reflect the operating leverage and earnings power that Simpson Manufacturing strives to achieve, despite maintaining an industry-leading gross profit margin and EBIT margin. Over the coming quarters, we plan to provide additional metrics and targets to help our investors to better measure our success and progress on these initiatives, and we look forward to keeping you updated.

Thank you for listening today. We'd now like to open up the call for questions. Operator?

(Operator Instructions) Our first question today is coming from Tim Wojs from Robert W. Baird.

So first question I had, Brian, maybe just on the gross margin of 45% to 46%. I was a little unclear in the press release just with the commentary around what you thought steel prices might do in the third quarter. So is there a way to think about how we should benchmark steel? If we kind of snap the line today and assume that, that steel remains where it is, is that what you've included in the 45% to 46% gross margin guidance?

Correct, yes.

So if it fluctuates, that guidance will change?

Correct. And there's some potential volatility with trade issues on steel in that market. So we anticipate that there could be volatility, but modeling a somewhat flat market is where we are coming out on that gross margin.

Okay, okay. That's helpful. And then, you guys gave gross margin and a couple of the below-the-line items. Any commentary on what you might think sales growth could be in 2017?

Tim, Karen. Yes, I think, we're seeing pretty similar -- when we look at the housing starts sort of they're tracking mid- to high-single digits. And as we pointed out, we sort of track 50% of our business in parallel with those housing starts. We are seeing a little bit better revenue standpoint from the Europe entities. And so I think, that's, again, sort of that post track into where we are with housing starts as a reasonable approach.

Okay. Okay. And then I know you guys don't -- you won't give any if -- number specifics today on some of the longer term targets or metrics. But is there a way that maybe you could give us a preview of what you actually may give us in terms of -- if it's going to be longer-term margin targets or EPS targets or just added color on the initiatives, I think, that would be helpful for everybody.

Yes. So we plan to give some firm metrics in some areas and some time frame associated to meet those metrics. And probably some more color on some of our other initiatives. And as we mentioned in the release, we'll have those put together and out to the shareholders and investing community here before the year is out. Still working through a lot of the details, obviously, with our operational people.

Understandable. Great.

Our next question today is coming from Steve Chercover from D.A. Davidson.

Few questions. So first of all, truss has been and remains an exciting opportunity. And obviously, there is a huge amount of growth. So a, what is your target market share of that $500 million to $600 million market? And secondly, beyond MiTek, can you identify a few of the competitors, so we can track the space?

Sure. So competitors in the truss space, we believe MiTek would have the largest share of that market space, and we would estimate that to be around 70%, maybe a little bit higher than that. The next largest competitor will be ITW. And then there is a small competitor called Eagle and then we have our product line. So really a pretty small group with a couple of those having very large market share. When we come out with some of those financial details and that color will have you a better idea of what we are proposing we believe our market share opportunities are in that space.

Okay. Thanks for that, Karen. And then, with respect to acquisitions, how quickly do you rebrand the product lines in the Simpson name? And does Simpson have the same brand equity in Europe as it has here in North America?

Yes, that's a great question, Steve. Depending on what the product is, is really a function of how quickly we may rebrand it. So we don't have a set particular method. In Europe, for example, we acquired S&P Clever, which is our concrete business and we acquired that about 6 years ago. So that is not rebranded, that is S&P, a Simpson company. Because the S&P had a very good brand name in that space and so wanted to take advantage of that outfit. We have purchased obviously when we acquired that company. If we look at some other companies, other activities in the U.S., most of the companies we've acquired in the U.S., we have rebranded Simpson. When we think of CG Visions, we have a, again, branded that as CG Visions, a Simpson Strong-Tie company because they have a great name in the software area for builders. So we don't really have a sort of a set process, it just depends on what the acquisition is and where the product is.

Okay. That makes sense. So if you don't rebrand it because they already have their own brand, so to speak, you might just put your logo on it so that you also get a little bit of tie in?

Correct. Correct. So if the company we've acquired or the product we've acquired has good brand recognition, if it's a trade brand, we might just keep that as the product name. But if it's, for example, S&P, already said this example, again that's the company name and it's much more known in the concrete space, so we'll just put it as a Simpson Strong-Tie company, when we put our marketing literature out.

Got you. Okay. Two more. Good to see you getting a handle on SG&A, again, 22% isn't the target, but is there a target?

And, Steve, that's another thing we'll be looking at as when we come out with some specific metrics where we believe that targeted SG&A can get to. As we mentioned, we have put the foundational things in place needed for these truss initiatives, as well as our concrete initiatives. And so we're starting to see some improvement in the revenue and that's helping offset and sort of reduce that SG&A as a percent of sales, and we expect to continue to see that trend.

Great. Final question. Not to be too nitpicky, but I guess, I'm the old-timer around here, so back in 2006, as I recall, you had, what was it, Dura-Vent, but I think, Brian said, you were a 1-segment company. So I'm wondering, do you say that because it was kind of metal bending geared towards housing as opposed to concrete? But why would -- I thought, that was a separate segment?

Good question, and I should clarify, and thank you for bringing that up. Thinking about -- once we decided to sell off Dura-Vent, we recasted the financials under a continuing operations model. So thinking about Strong-Tie only. So yes, you are correct in that, Simpson Manufacturing previously had the venting business and the connector business, I was referring only to the Strong-Tie business.

Our next question today is coming from Dan Moore from CJS Securities.

It's actually Chris Moore for Dan. Maybe just talk about the SAP implementation a little bit more. I think you said $34 million over the next 3 years. Has spending peaked at this point in time? And are there some key milestones that we should be looking for over the next 3 years?

Chris, it's Brian. So as we are looking at that project, it is on track and on plan. And as we have projected out those cash flows, certain cash flows get capitalized earlier in the project. And then as we move more into training and go live, we'll have expenses running through the P&L. So today, we're more in the capitalization phase. As our first locations -- we looked at bringing our first couple of locations on -- live in early 2018. The expenses will move more into or the spending will move into more into expense. For example, training is an expense item versus a capitalization item. So today, I'd say we are more in the capitalization of spending phase versus the expense.

Got you. Got you. And maybe can you just update us a little bit on the M&A pipeline?

Chris, it's Karen. As we've stated before, we're looking for things that fit within our strategic initiatives, really from expanding in our fastener line, some things in the concrete space and certainly in Europe, we'd like to be able to increase that market share by acquiring some more connector companies. Today, we still have outside advisors looking for businesses for us, as well as we have a group of people here at Simpson that work in M&A. Pipeline seems to be a little bit slower than normal. I think a lot of people are kind of interested in what's going on from tax initiatives and things with the government. So still very active and looking, I would say, things have slowed down a little bit as far as companies that are fitting the model that we're interested in.

That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.