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Executives

Barclay Simpson - Chairman

Michael Herbert – Chief Financial Officer

Analysts

Arnold Ursaner – CJS Securities

Garik Shmols – Longbow Research

Alan Robinson – Royal Bank of Canada

Barry Vogel – Barry Vogel & Associates

Steven Chercover – D.A. Davidson

Robert Kelly – Sidoti & Company

Keith Johnson – Morgan Keegan

[Mike Cantelari – Mott Pillar & Capital]

[Mark Traster – SAS Advisors]

Simpson Manufacturing (SSD) Q4 2008 Earnings Call February 6, 2009 9:00 AM ET

Operator

Welcome to the Simpson Manufacturing Company's fourth quarter 2008 earnings conference call. I would like to turn the meeting over to your chairman, Mr. Barclay Simpson.

Barclay Simpson

Good morning everybody and thanks for joining our CFO Mike Herbert and myself. Well it wasn't a happy quarter or a year as far as our sales and profits go. The U.S. economy of course is in the tank and Western Europe 15% of our sales last year, up from 13% in '07 also is in trouble.

But we have no control over these economies so we're not spending time worrying about them or waiting for them to come back up. Perhaps the worst part is that for the first time last year, we had to lay off quite a few people, some of whom have been with us for a number of years also and unlike some other industries with which you may be familiar, our top people are making considerably less money than in the first few years of this century.

They only make a lot of money when our branch win their branch. Their particular branch makes a lot of money and of course it's the same with everyone here at the home office.

But, regardless of what happens to the U.S. economy, our goal is to become much more of an international company. We're looking hard for suitable acquisitions with products that will sell in other lands. Two German companies, Ahorn and Liebeg, both of whom were acquired last year are prime examples.

Liebeg makes mechanical anchors to metric standards and has the European code approval that enables us to start selling anchor systems products in Europe as well as in Australia. Also, these products fit the Chinese market and we will be manufacturing them in our new plant in Shanghai later this year.

Ahorn in operations in Germany, the Czechs Republic and China broadens our quick drive product line and their new big drive tools and fasteners get us in the commercial and industrial roofing and other applications. These products are marketed with the associated air nail gun and the compressor to make a complete package.

ProTech, a leader in inventing products for newer, high efficiency condensing boilers and tankless water heaters is based in Albany, New York. This acquisition gives Simpson Dura-Vent needed new products as well as an east coast warehouse. Dura-Vent sales including ProTech in the fourth quarter, that includes ProTech, were up 16% over last year and were profitable. However, as SDV sales so far this year are down, so the ProTech acquisition really could be quite timely.

Our 2007 acquisition Strong Secure continues to do well with their sales being up last year, hardly a common occurrence for products that largely go into U.S. housing. While those were only a bit more than 4% of SSD's total, it was a first effort in a tough market by both Swan and Simpson StrongTie people. But early results this year show an even tougher market.

Just last month we acquired DeckTools, a Florida based company that develops and licenses deck design and estimation software. The software provides professional deck builders, home centers and lumber yards a simple solution for designing decks including specifications, and estimating and also being able to estimate material and labor costs. It's a somewhat different direction that might lead to other markets.

Our Chinese operation which we see as a center of a major part of our business in three to five years is coming together. We now have active sales forces in Hong Kong, Beijing and Shanghai and just completed our 175,000 square foot plant in [ZangZegang] which is 50 miles from Shanghai.

And also, we've strengthened our operation in another area in Poland, which is headquarters for our efforts to make Eastern Europe a significant part of our European revenues. With our strong balance sheet, we continue to look hard for acquisitions as well as develop new products internally like just recently, the Moment Frame.

All of the information that I am getting both internally and externally says that recovery of the U.S. market is years away. If so, despite our efforts to increase our share with new products, it may take several years for our international efforts and acquisitions to generate enough sales and profits to substantially increase our sales and earnings which happen for every single year since we went public in 1994 except for the last two years.

But, our people do know that their company is not for sale, and this guy talking to you who has a bit of an interest in Simpson Manufacturing has never been more excited about our future. So, I'm happy to take any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first call comes from Arnold Ursaner – CJS Securities.

Arnold Ursaner – CJS Securities

I want to start with the bad debt expense of $1.9 million which obviously impacted your earnings in the quarter. You attribute it to a single customer. Is this customer out of business? Is there some change of recovery? Could you maybe expand a little on that?

Barclay Simpson

There's a chance of recovery. However, it doesn't look too good.

Arnold Ursaner – CJS Securities

My second question relates to inventories which I know you have a goal of having three to four months of inventory for all your customers, but you inventory numbers seem to be getting I don't want to say out of hand, but they're certainly relatively high as a percent of trailing sales and given your outlook, they're probably an even greater percentage of future sales so several questions related to that.

How much of that is finished goods versus raw material? You mentioned in your prepared remarks that you think the price of steel could be hitting a bottom. With some of that opportunistic purchases of steel and maybe have Mike speak to how you might want to work this down. Any more you can expand on the growth in inventories relative to sales?

Barclay Simpson

Our steel costs as you heard me say before; one thing we are not going to do is run out of material and not be able to fill orders. So we go overboard and when the word was out that the steel mills were thinking about closing down some operations to keep demand equal supply, we got a little concern, so we laid in a lot of steel at high prices, and we're still working with that steel. So the cost of inventories is up all the way around.

We think that once we get rid of that steel, but it's going to take a little while, then our inventory costs will go down.

Arnold Ursaner – CJS Securities

Are you trying to say that the volume of steel that you have has actually gone up a fair amount?

Barclay Simpson

Well it did. It went up quite a little bit.

Arnold Ursaner – CJS Securities

Mike, can you expand a little more, perhaps some details or facts around that please?

Michael Herbert

During 2008 we did not change our policies on procuring steel. We tried to make sure we had enough for our customers. As sales began to drop off we had to stop purchasing steel for the last few months, and so we have been eating into that inventory. So what you see on the financials is the cost of steel when it went up last year.

Arnold Ursaner – CJS Securities

I'm sure you'll be asked by many of the analysts in multiple ways things that will lead or question guidance which I know you don't give. But I do have a different more structural question. Your cash comp for performance related comp is based on some kind of budgeting number you have going into the year. For years, your company wasn't impacted by cyclicality in the U.S. You were still expanding geographically in a lot of other ways but that's no longer the case.

As you prepare numbers and goals internally for a year like 2009, how do you guide your managers in setting performance related goals for the upcoming year?

Barclay Simpson

That's a very good question because our people of course are making a lot less money than they did. But, you don't force any manager to set a goal that he doesn't think is reasonable and that he can make. So they're ambitious goals, but they are reasonable. So they're not what they used to be three years ago for instance.

However, and of course the big unknown is, we're putting every effort behind it, but the big unknown is how soon all these international relations and acquisitions are going to get us back into double digit increases and it's awfully hard to guess.

Right now for instance, in China, we think that's going to be an absolutely major part of our future, but we're still figuring out what products to make there. That sales force has only been around for a year. So we've got a lot on unknowns but overall it looks great. But, trying to be specific is very difficult.

Operator

Your next question comes from Garik Shmols – Longbow Research.

Garik Shmols – Longbow Research

Just wanted to ask a guidance related question. First off, on gross margins they were up relative to last year, but I think they're a little disappointing related to your comments on the third quarter call. Just provide some visibility if you can on the direction of guidance of gross margins going forward.

Michael Herbert

Our gross margins will be lower. We have substantially reduced our factories' output so that overhead will not be absorbed so we will have lower gross margins going forward for I expect, all of 2009.

Garik Shmols – Longbow Research

On pricing, I'm just wondering if you could talk about the price increases that you did in September. Are those still holding or have you had to give back some of that right now?

Barclay Simpson

We don't discuss that in pubic.

Garik Shmols – Longbow Research

On the M&A fund, can you talk a little bit more about what you're seeing there, evaluations and if you're seeing any more potential sellers coming to the market?

Michael Herbert

The challenge is, we all have a high degree of self worth, so as we are out there looking for companies, we have not found a significant amount that have come down to valuation that we would consider attractive, although we are starting to see more.

Barclay Simpson

We're very careful. One of our major strengths in times like this are that we have a very strong balance sheet and we're not going to throw it away. However, we are looking harder than we ever have for acquisitions, and this is all over the world.

Operator

Your next question comes from Alan Robinson – Royal Bank of Canada.

Alan Robinson – Royal Bank of Canada

Could you comment on volume comparisons between the fourth quarter of '08 and '07? I'm trying to get an idea of the extent in which price increases affected your sales comparisons during the quarter.

Barclay Simpson

We don't go into that. You'll have to make your own guess.

Alan Robinson – Royal Bank of Canada

In terms of, I'm trying to get a feel longer term trends. What kind of contributions did the acquisitions make to results during the quarter?

Barclay Simpson

Very little except ProTech with Dura-Vent. They made a relative, quite a large contribution, but generally it takes a year or two to integrate an acquisition. There are all kind of problems there with people and products and figuring out just how we can put it together to the biggest benefit.

So it takes a little time. I think this year, the later part of the year we should now start to have some positive effects from people like Ahorn and Liebeg.

Alan Robinson – Royal Bank of Canada

Have you experienced any cultural issues at all with the integration of those European acquisitions?

Barclay Simpson

Actually no, we aren't. It's surprising. Also in China, people ask me, "Don't you have a lot of trouble there with the government", or something like that, and actually getting the okay's to build that plant there and getting it built were easier than it is here in the States. We give jobs to Chinese.

Alan Robinson – Royal Bank of Canada

In terms of steel cost, input costs, when do you think you'll be able to take advantage of the lower prevailing prices we have now, and can you just give us an idea of how you approach steel ordering, to what extent you employ longer term contracts and to what extent it's sort of at the moment purchasing decision.

Barclay Simpson

It's much more of an at the moment purchasing decision, but backing it up is the strong belief that you don't build a company by running out of product. So, we go overboard to make sure we have all the materials and all the people not to run out of product so our customers go somewhere else.

So, you're thinking all the time. We have very good relations with the steel mills and probably about as good as anybody has. You know, when we make a contract we follow through on it and we pay our bills on time. We think we find out about things probably as soon as other people do.

But, so often it's like trying to figure out the stock market. You just can't do it. So you don't take a chance. You lay it in which why our inventories are so high.

Alan Robinson – Royal Bank of Canada

Could you give us an idea as to the performance across your five domestic territories, California, West, Mid West, South, South East, Northeast?

Barclay Simpson

Would you like it for the quarter or for the year?

Alan Robinson – Royal Bank of Canada

For the quarter please.

Barclay Simpson

For the quarter, California was down 24% and this is, for the wrong reason, it's a plus. We are constantly working and it's been happening over the years. We started out as 100% in California, and now we're down to 18.2%. That overall is less dependent on one thing.

The West was down 29% and that puts it at 15.9% of the total. The Mid West was only down 4.8% and we got some new business. That's now 11.4% of our total. The South, Southeast was down 15.7%, that's 18.6 % of our total. That's the first time I believe that one of the areas is greater than California. And then we have the Northeast which was up 5.9% up to 14.6%.

That's full domestic was 78.7%. Now this is in the quarter. In the quarter for the first time Europe went down also 17%. Those economies just aren't too healthy.

Alan Robinson – Royal Bank of Canada

That's 17% in the quarter.

Barclay Simpson

Yes, and it's now 13.7% of our total sales.

Alan Robinson – Royal Bank of Canada

Mike do you have any figures on cash from operations for the quarter and CapEx, and also what your CapEx plans are for the full year.

Michael Herbert

For 2008 we spent approximately $16.6 million on capital. 2009 we plan right now on $13.5 million. Cash from operations for the year is $52.7 million.

Operator

Your next question comes from Barry Vogel – Barry Vogel & Associates.

Barry Vogel – Barry Vogel & Associates

The home center business as a total what was the change versus the fourth quarter last year?

Barclay Simpson

In the quarter, home centers were down 17.4%.

Barry Vogel – Barry Vogel & Associates

And you largest customer, what were they down?

Barclay Simpson

Well we don't have any customer now who is over 10% of our sales so we don't have to discuss that.

Barry Vogel – Barry Vogel & Associates

You don't have to but how about giving us some transparency?

Barclay Simpson

Our largest customer in the quarter, that's Home Depot of course, still is, and they were down 15.6%.

Barry Vogel – Barry Vogel & Associates

Have you had yearly change on those two numbers?

Barclay Simpson

In the year Home Depot was down 4.8% which is considerably better than the economy, and a percent of total company sales was 9.3%.

Barry Vogel – Barry Vogel & Associates

And your entire home center business was it down for the year?

Barclay Simpson

The entire home center business for the year was down just 5% and was up from a percentage of total from 17.1% to 17.8%. And we kind of think that business this year will increase as a percentage of our total sales because they don't necessarily depend on housing.

Barry Vogel – Barry Vogel & Associates

Could you give us the change in the quarter for Strong world sales and anchor system sales?

Barclay Simpson

In the quarter?

Barry Vogel – Barry Vogel & Associates

Yes. The change in the quarter versus last year.

Barclay Simpson

The sheer walls were down in the quarter 40%. Now you know that's housing.

Barry Vogel – Barry Vogel & Associates

And Anchor Systems, what were they down?

Barclay Simpson

Anchor systems were up 3.1% for the quarter.

Barry Vogel – Barry Vogel & Associates]

The connect to product operating income for the quarter?

Michael Herbert

Income from operations for connector was $3.3 million.

Barry Vogel – Barry Vogel & Associates

Does that include the impairment charge?

Michael Herbert

Yes. Sorry, plus 2.9%.

Barry Vogel – Barry Vogel & Associates

And venting products operating profit?

Michael Herbert

$1.2 million.

Barry Vogel – Barry Vogel & Associates

Were there any other items that affected the operating profits, in the other category?

Michael Herbert

We had the good will charge and we had the one for bad debt.

Barry Vogel – Barry Vogel & Associates

So the good will charge I know, and the bad debt is $1.9 million. And as far as depreciation and amortization next year, what's your best guess?

Michael Herbert

$28 million.

Barry Vogel – Barry Vogel & Associates

And you tax rate next year, what's you best guess?

Michael Herbert

Between 39% and 49%.

Barry Vogel – Barry Vogel & Associates

I wanted to ask you a question going back to this steel thing. I agree with the prior questioner that your inventories seem a bit of hand even though I know you always like to have enough steel so you don't run out of steel, but I was surprised that your gross margin was as good as it was given the drop in revenues and I'm comparing that to last year and also the third quarter. Could you tell us in general terms what the full effect of the steel prices were on your forth quarter margins?

Michael Herbert

Our steel is based on weighted average. As the year went on the price of steel did increase. That did have an impact on our steel. I do not have the specific numbers for the quarter. Overall though we are decreasing our pounds of steel on hand both in the fourth quarter and also into Q1.

Barclay Simpson

But it's going to take a little while.

Barry Vogel – Barry Vogel & Associates

Is there any reason to believe that given the fact that steel prices have dropped and in terms of the cost to the customer and that has nothing to do with the spreads. It's strictly the cost to the customer that you may have a more deleterious effect because of our inventory accounting in 2009 versus 2008?

Michael Herbert

Our inventory is based on net realizable value. Our customers know that we've increased prices very slowly because we carry so much inventory. So they appreciate that. They also know that when the price does drop, they understand that we can not drop our prices because of the cost of the inventory we maintain for them. So at this time we do not believe we're going to have any impact on net realizable value but we can operate for sure.

Barry Vogel – Barry Vogel & Associates

As far as the status of that property that's been for sale, can you give us an update?

Michael Herbert

The property is still for sale. We've had some interest on it recently. We have not concluded anything. The environmental problem we h ad with that property will be resolved in the month of February, positive for us and we should be able to move forward on that.

Barclay Simpson

Barry, you have some interest in buying it?

Barry Vogel – Barry Vogel & Associates

Perhaps. One other question, the SG&A expense, it seemed extremely high in the fourth quartet at $45 million given the fact that revenues were way down. Can you give us color on that? That stood out. When you do the margins analysis and you look at the revenue drops, it was 30% of revenues.

Michael Herbert

We are working very aggressively at the company to make sure that all our costs are in line going forward with the current economic environment, so I would expect that to drop as we move forward.

Barry Vogel – Barry Vogel & Associates

We've never seen a 30% SG&A expense.

Michael Herbert

It's a tough economic environment.

Barry Vogel – Barry Vogel & Associates

So you have taken steps to lower that number?

Michael Herbert

Yes we have and it will continue. We have more steps on the way.

Barry Vogel – Barry Vogel & Associates

I had a question about Europe. Can you give some color on the U.K., Germany and France in the fourth quarter in terms of sales?

Barclay Simpson

The U.K. is the one that is in the biggest trouble as I guess I don't have to tell anybody on this call. It was down 46% in the quarter.

Barry Vogel – Barry Vogel & Associates

And how about Germany and France?

Barclay Simpson

Germany was up 21.6%. France for the first time was down but only 7.2%.

Barry Vogel – Barry Vogel & Associates

So basically Germany and France are doing fairly well under these conditions.

Barclay Simpson

Germany is doing relatively quite well. I've got to say that part of that reason is that we weren't doing a particularly good job in Germany as late as last year. We had to get some new people integrated and we had to do a whole bunch of things which our manager did, and now they're stating to pay off. So if you have poor base to compare with it helps.

Barry Vogel – Barry Vogel & Associates

What was the net effect of China last year on you earnings per share?

Barclay Simpson

The net effect of China was practically nil. It hurt us some, of course. We're just spending money but that's going to go on for awhile.

Operator

Your next question comes from Steven Chercover – D.A. Davidson.

Steven Chercover – D.A. Davidson

Do you have any product that might benefit from an infrastructure spend, perhaps it comes from the new big drive fasteners?

Michael Herbert

Our anchoring product will help in the infrastructure spend because they're used in the roads and bridges. On the big product line, that is primarily used for securing metal roofing and so we are launching that product. Since we acquired Ahorn we've been reworking that and getting it ready for real life launch and we're launching that in the first country in Australia in April.

Steven Chercover – D.A. Davidson

With respect to the good will impairment, can you tell us which acquisitions were behind that?

Barclay Simpson

It was Furfis. It was acquired in 1999.

Steven Chercover – D.A. Davidson

The plant in China, I though China was going to be 100,000 square feet, 175,000 you said?

Barclay Simpson

It's always been that. Maybe I didn't make it clear.

Steven Chercover – D.A. Davidson

I just thought that somehow the opportunity had gotten bigger.

Operator

Your next question comes from Robert Kelly – Sidoti & Company.

Robert Kelly – Sidoti & Company

Mike was just talking about how you're going to aggressively attack SG&A. What steps are you looking at to get that budget lower, if you can share that with us?

Michael Herbert

We are reducing spending across all the company. We are reducing head count across all the company. Barclay talked in his speech about we've had to lay off a significant number of people in the U.S. including in the factories, over 500 in the last 13 months. We are looking at every single thing we can.

Robert Kelly – Sidoti & Company

On the inventories, it was asked, I'm just going to try one more time, could you break out units versus price as far as the increase year on year in 4Q '08?

Barclay Simpson

No, we don't go into that.

Robert Kelly – Sidoti & Company

As far as pricing, and I know some people had asked about that given that dynamic steel inventory, when steel moves, when was the last price increase that you had and do you expect more to flow through in 'l09?

Barclay Simpson

Once again, we just don't like to talk about that.

Robert Kelly – Sidoti & Company

Did you have one in the second half of '08?

Barclay Simpson

Yes.

Robert Kelly – Sidoti & Company

China begins to ramp up during this year. Can you share more with us what you plan on selling? Have there been any more developments there?

Barclay Simpson

As yet, I think it's going to take most of this year for us to really get an idea as to what products are going to sell there and sure, we have some ideas right now because the sales force is where we get them, and we're spread out now with sales people all over China as well as the rest of Asia.

But, as yet, there isn't information yet that we're sure of. I think by mid year that we should know a lot more and when you ask that question in the last half of the year, I should be able to give you a much better answer. I'm sorry I can't right now.

Robert Kelly – Sidoti & Company

Mike had talked about you start to cut back production. I'm assuming to thin out inventories at your customer and distributor levels? When did that start? Was it a q$ '09 event? Was it late 4Q? Can you give some help there?

Michael Herbert

Late in the fourth quarter. Also to add something on the China facility, we moved our Canadian factory to China. That was shipped in three pieces. One piece has arrived. The other two pieces of shipment of equipment, the one is about to arrive and the other one is two months away.

We significantly built up our anchor systems inventory across the United States and Canada to make sure that we had enough product for our customers during that move and as we brought that new plant up.

Robert Kelly – Sidoti & Company

China strikes me as predominantly an anchor market at least as you get going?

Barclay Simpson

It is right now but you've read about earthquakes there. So we think that given a little time and when they get some really tough codes in, and if they put in a building code, it will bet it will be enforced. And I think that given two or three years I wouldn't be surprised if structural connectors aren't a major part of our sales there.

Operator

Your next question comes from Keith Johnson – Morgan Keegan.

Keith Johnson – Morgan Keegan

Starting off with Dura-Vent. The last couple of quarters its been profitable, a big change from what you experienced in the first half of 2008 and I think you talked a little bit about the seasonality of the products, vents, chimney liners. As we look into 2009 should we expect a continuation of this type of profitability or are there some other circumstances we need to watch out for?

Barclay Simpson

It looks like a tough year. It looks like a tough year all around because unless you're seeing things different than what we are, there's not going to be any flip around.

Keith Johnson – Morgan Keegan

In Dura-Vent you had expenses in 2008 related I guess to the Vicksburg production decision. How did that affect the year's performance?

Barclay Simpson

Well it had some effect alright, about $2 million in charges.

Keith Johnson – Morgan Keegan

Mostly in the first half of the year?

Michael Herbert

We went through, I'd say it affected the whole year. It was a phased move. You have to remember about Dura-Vent it's a cyclical and seasonal business. Part of the challenge they also have besides the economy is that with the price of heating, gas and oil being so low, that will also have an impact on 2009.

Keith Johnson – Morgan Keegan

So I guess all the lines at Vicksburg are shut down at this point?

Michael Herbert

That's correct. We have a small warehouse operation filling up back there as we market that building for sale.

Keith Johnson – Morgan Keegan

A little bit on the SG&A aspect, the $1.9 million bad debt expense hit that category. It looked like you talked about personnel, or administrative personnel expenses about $2 million or so above on a year over year basis in the fourth quarter? I wasn't sure what was driving that.

Michael Herbert

Primarily the acquisitions we had done.

Keith Johnson – Morgan Keegan

Were there any type of severance related? You talked about a lot of having to make hard decisions on the employee base as far as severance related charges. Any type of those type of numbers rolling through your SG&A accounts in the fourth quarter or for the year?

Michael Herbert

Yes, but not any significant amount at all.

Keith Johnson – Morgan Keegan

Professional fees look like they kind of keep hanging around being up on a year over year basis, I guess partly related to our acquisition hunt. Do you expect that to continue?

Michael Herbert

Yes I do. And also with the change in the accounting rules we have to expense our due diligence fees with our lawyers and our accountants that help us with those.

Keith Johnson – Morgan Keegan

When I look at on a sequential basis going from the third quarter to the fourth quarter the gross margins look like they dropped off, round numbers 500 basis points. Could you kind of break that out between the hit that you took related to the price of steel coming out of inventory and also the effect of operating rates that you may have seen as you came across the last three months?

Barclay Simpson

I'm sorry. We really don't go into that kind of detail.

Keith Johnson – Morgan Keegan

On the operating rate side?

Barclay Simpson

We're not going to talk about our cost of materials and how they change and how they change things.

Keith Johnson – Morgan Keegan

You made a comment earlier that because of the way steel prices move, you're working inventory down and your weighted average cost of steel was still partly dealing with higher costs. At what rate do you think you'll work through that if I look out into the first half of '09?

Barclay Simpson

If you could tell us exactly what our sales are going to be I could give you a better answer.

Keith Johnson – Morgan Keegan

On the revenue line, big drop in connectors, I guess probably the worst in year over year decline in this housing cycle. A lot happened in the fourth quarter. Was there an additional pull back of your customers do you think just because of the vast amount of uncertainty out there in the market?

Barclay Simpson

I think that's true.

Keith Johnson – Morgan Keegan

Do you think some of that may have come back a little bit? I know that '09 is going to be tough. I wasn't talking about a turn around but as conditions stabilize albeit at a low rate, do you think some of the customers would change their order habits?

Barclay Simpson

That certainly is a possibility but not likely, not from what we're hearing.

Keith Johnson – Morgan Keegan

So when we look back at the first quarter of '08 when you saw about a 13% or 14% year over year decline in revenue, the second quarter of '08 kind of bounced back, still down but not near as bad. I'm trying to get a feel for if you think there's a shift going on maybe early ordering in the third quarter, it hurt you in the fourth quarter and we come up to a better environment in the first quarter of '09?

Barclay Simpson

No.

Keith Johnson – Morgan Keegan

So early ordering didn't really, wasn't really a factor?

Barclay Simpson

No, it hasn't. The feeling in the community of builders is really as negative as we've ever seen.

Operator

Your next question comes from [Mike Cantelari – Mott Pillar & Capital]

[Mike Cantelari – Mott Pillar & Capital]

Just a follow up on the bad debt expense, that was just from one customer at this point, a single customer the increase in the quarter?

Michael Herbert

Yes.

[Mike Cantelari – Mott Pillar & Capital]

And do you see others on the horizon that could fall to the same fate? Have you go any preliminary word on that?

Barclay Simpson

Well of course. The way the market is right now and what we're hearing from our customers and generally, and I'm sure you're reading all this, it just doesn't look positive in the near future this year. It looks like it might be a very tough year. So we are of course, concentrating on other areas and we're looking harder than ever for acquisitions because we certainly can't count on the U.S. market turning around in the short or even in two or three years.

[Mike Cantelari – Mott Pillar & Capital]

Is the difficulty in the customer coming from one segment versus another or is it spread across.

Barclay Simpson

It's spread across, although housing is the worst.

[Mike Cantelari – Mott Pillar & Capital]

On the legal and professional fees, that's mainly acquisition related, the increase there on the quarter?

Michael Herbert

That's correct.

Operator

Your next question comes from [Mark Traster – SAS Advisors]

[Mark Traster – SAS Advisors]

The $1 million in legal fees; is that expected to come back down coming into this year or should I continue to see that in the next quarter or two? And secondly on the administrative personnel expense related to the acquisitions, are you far enough along in the acquisition integration that that's going to be a new run rate, or is that still expected to come down?

Michael Herbert

On the acquisitions we're always looking for efficiencies and merging the operations together so that is, we are merging some of those operations together. Hopefully we'll have additional acquisitions this year which will keep that number up a little bit higher. We'll have to see. We can't predict the future. What was the second question?

[Mark Traster – SAS Advisors]

I was asking about the legal fees as well. Is that something that's going to start coming down in the next quarter or two unless you have any acquisitions?

Michael Herbert

With the change of accounting rules we have to expense fees in 2009 and if we go after more and more companies, that number could increase. We budgeted $2 million for that number this year. Again, it's going to come up if we find the companies, or don't find the companies, and how much we spend doing the due diligence. I would expect that number to increase a little bit this year.

Operator

Your next question comes from Arnold Ursaner – CJS Securities.

Arnold Ursaner – CJS Securities

The $1.9 million bad debt charge, is that a retailer or builder?

Barclay Simpson

It's a distributor. We don't sell to builders directly.

Arnold Ursaner – CJS Securities

A domestic distributor?

Barclay Simpson

Yes.

Arnold Ursaner – CJS Securities

Mike, I think you spoke to gross margin, and the way you worded it was lower for '09, but the question I have from a clarification point of view is, is it lower than the 35 or so that you had in the current quarter or the 37 you had for the year? Lower than which?

Michael Herbert

Both

Arnold Ursaner – CJS Securities

Last year you had your first analyst day, and I was wondering if you are giving and have given thought to a follow on analyst day this spring.

Barclay Simpson

Yes, May 18.

Operator

There are no further questions at this time.

Barclay Simpson

Thank you.

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Source: Simpson Manufacturing Q4 2008 Earnings Call Transcript
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