Simpson Manufacturing Co., Inc. Q3 2009 Earnings Call Transcript

Oct.30.09 | About: Simpson Manufacturing (SSD)

Simpson Manufacturing Co., Inc. (NYSE:SSD)

Q3 2009 Earnings Call

October 30, 2009 9:00 am ET

Executives

Barclay Simpson – Chairman of the Board

Karen Winifred Colonias – Chief Financial Officer, Treasurer & Secretary

Analysts

Arnie Ursaner – CGS Securities

Trey Grooms – Stephens, Inc.

Keith Johnson – Morgan, Keegan & Company, Inc.

Analyst for Steven Chercover – D. A. Davidson & Co.

Peter Lisnic – Robert W. Baird & Co., Inc.

Analyst for Garik Shmois – Longbow Research

Alan Robinson – Royal Bank of Canada

Barry Vogel – Barry Vogel & Associates

[John Koehler] – Oppenheimer & Company

Operator

Welcome to the Simpson Manufacturing Company third quarter 2009 earnings conference call. I would like to turn the meeting over to your Chairman, Mr. Barclay Simpson.

Barclay Simpson

Thanks for joining our CFO Karen Colonias and myself. Before discussing the third quarter results I want to tell you about a stock transaction that I may have to make before the end of the year. I made a charitable commitment to my university UC Berkeley several years ago and it’s time to pay it off. The donation will be something like 600,000 shares of SSD. Okay, enough of that. I have no other charitable commitments that I need to sell stock to fulfill and I’m not selling the stock, I’m giving the stock to the charity.

We’re not happy about our third quarter results, we’re never happy if it doesn’t beat the prior year results. On the plus side, the cost cutting that we have felt obliged to do has enabled us to make money even though our major market, US housing starts remains at something like 70% down from three years ago and as yet our sales people are not seeing signs of a recovery. When it comes it will be ready but we’re not going to sit around waiting for something over which we have no control.

In the meantime, we continue to develop new products internally. Recently, a group of structural connector fasteners designed to replace the billions of fasteners now supplied by other and a bunch of other new products every year. Home center sales for the year were down only 9% which would appear to indicate that sales for other than new housing are significant.

As most of you know, our major objective is to become more and more of an international company and we’re making progress. For example, in order to better serve the Middle East and Asia, in December we’re opening a sales office and warehouse in Dubai. In Europe, despite the economies there being in rather bad shape and our sales being off 23% we made a profit and the fourth quarter is off to a good start. The costs of integrating Aginco, Liebig and Ahorn are pretty much behind us and their products should start to have a positive effect on sales. Not on profits yet but on sales.

Our long range target is Eastern Europe and from our operations in Poland and in the Czech Republic, we’re making progress but it’s going to take time to be really significant. China is coming along but like Eastern Europe, it’s going to take a while to figure out the products for that huge market, to develop relationships with potential customers and to get the tooling made to manufacturing them there. But, like Eastern Europe we have a bunch of first class people working on it and the basics are roughly the same as has made us the leader in both the US and Western Europe despite a considerable difference in products in those two and China will probably be like that.

Dura-Vent, which has cut our profits by over $2.5 million this year actually contributed a small amount to profits in the third quarter but we’re still looking at it and figuring out just exactly how to develop it. A plus is that our cost cutting measures have kept our gross margin around 36% but I understand that not all of you are happy with that, that you expected it to be a little larger. We actually feel pretty good about it because with that kind of margin we can spend the money to become more and more international and still make a profit while we’re establishing a strong position in future major markets.

On the acquisitions side, as usually we’re looking at several potentials but none where we have enough information to make an offer as yet. However, unlike many companies that depend on new construction, we’ve kept a strong financial position so we can take advantage of acquisition opportunities. So, questions?

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from Arnie Ursaner – CGS Securities.

Arnie Ursaner – CGS Securities

Can you give us the percentage of your revenues and profits from international please? And, if you can separate out China or give us a sense of the magnitude of the losses you’re incurring there.

Barclay Simpson

The magnitude of losses are cutting down there yet in China and it’s pretty substantial. I don’t have exact numbers because we haven’t gotten them really separate out yet.

Karen Winifred Colonias

Revenue is 22%.

Arnie Ursaner – CGS Securities

As you think about seasonality in your business, typically you get some activity if there are hurricanes or other events that occur in this time of the year. We don’t seem to have had a very strong hurricane season. You’re going in to the winter I’m assuming both you and your customers are looking to reduce your inventories. Can you give us a feel as best you can for your inventory levels going in to the seasonally low period and your customers’ inventories going in to this period.

Karen Winifred Colonias

Profits for international were pretty much flat, revenue 22% profit level flat.

Arnie Ursaner – CGS Securities

Flat meaning similar percent of the overall company? I’m just trying to understand what flat means, I assume it’s the same percent of revenue but I want to be clear on that.

Karen Winifred Colonias

We lost money in Asia.

Barclay Simpson

Lost money in Asia, we made a little bit in Europe.

Arnie Ursaner – CGS Securities

But as a percent of the profitability of the company, it’s much less than the 22%?

Barclay Simpson

Oh yes.

Karen Winifred Colonias

Right.

Arnie Ursaner – CGS Securities

What is the percent these days? Can you give us a feel for that?

Barclay Simpson

Well, it’s very low, very low.

Arnie Ursaner – CGS Securities

Going back to the seasonality and inventory question?

Karen Winifred Colonias

Our inventories, we’re at a level at this point where we need to start building inventory. We have our pre-seasonal and fourth quarter is typically a slow time based on winter conditions that happen in the northeast so it’s just typically a slower time. However, we don’t think there’s a lot of inventory in pipeline with our customers and it does take a little time for us to build inventory so we will be looking at fourth quarter to build some inventory so that we will be able to take care of any customer demands as they come in to the first and second quarter.

Arnie Ursaner – CGS Securities

Would you expect your facility utilization to be higher or lower in Q3 and the impact that could have on your margin?

Karen Winifred Colonias

I would expect that it would be similar to Q3 and so it will help cover our overhead absorption.

Operator

Your next question comes from Trey Grooms – Stephens, Inc.

Trey Grooms – Stephens, Inc.

Just to touch on China again, I know that you said at one point, I guess a quarter or two ago that the plant there was only about 20% full or 20% utilized. Do you guys have a goal of when you want to get that plant full and fully utilized? Do you have an internal goal set for that?

Barclay Simpson

Oh yes, we have an internal goal which at this point we don’t have enough information so that goal really has enough behind it so I don’t want to discuss it. I can tell you that we’re going to make every effort to get that plant going as quickly as possible.

Trey Grooms – Stephens, Inc.

Arnie asked about the drag I guess you’re seeing on China on profitability and I guess we can’t get that number currently but can you give us a sense for do you think that will be a less of a drag in 2010 or more of a drag in 2010 based on kind of overhead or sales people you might be hiring, etc.?

Barclay Simpson

Well right now I’d be surprised if it’s considerably less drag in 2010. I think it may be somewhat similar because we’re not cutting back to make current profits better in things that are important for the long run and certainly China is very important for the long run so we’re spending there and we’ll continue to spend to develop that market to find out exactly what products we need to make there and to get them going as quickly as possible even though at the very start we lose money on them.

Trey Grooms – Stephens, Inc.

Just to try and get a broad sense of may the amount of losses you’re experiencing there, you say you didn’t break it out exactly but is it $5 million a quarter, $10 million? I mean just kind of a range, can you give us just some sense there?

Karen Winifred Colonias

It’s less than $5 million a quarter.

Trey Grooms – Stephens, Inc.

One last question on steel, last quarter you said that you were in the market buying some steel with the prices being lower and with steel prices moving up are you getting more or less aggressive in the steel buying now? Then, what kind of impact did you guys seen from lower steel in the third quarter?

Barclay Simpson

As yet, we’ve had very little impact from lower steel. We think that in the fourth quarter we’ll have some impact but as yet not significant. It’s very hard, it’s kind of like trying to predict the stock market trying to predict the price of steel these days. We’ve got a very smart lady in charge of buying our steel for many years and she has great relations with the steel mills and still you do occasionally make mistakes and pile it up which we did last year. You pile it up for the future because you’re afraid it’s going to go up more and it doesn’t. Now, the other way, we have a very strong inventory of steel now at relatively low costs but we’re still using steel at high costs so it hasn’t affected us much yet.

Trey Grooms – Stephens, Inc.

Last quarter you said for the full year you thought that gross margin might come in about 35% for the year, is that still your current expectation?

Barclay Simpson

Well, maybe that or a point higher.

Operator

Your next question comes from Keith Johnson – Morgan, Keegan & Company, Inc.

Keith Johnson – Morgan, Keegan & Company, Inc.

Just following up on Trey’s question on steel, just to make sure I understand correctly. If I look at some of the published steel indexes, of course this isn’t in detail based on the steel that you buy but, some of the indexes show that steel in North America sort of bottomed kind of in the June/July time period and has steadily risen as we come in to winter. Is that consistent I guess with what you guys have been experiencing?

Barclay Simpson

Yes.

Keith Johnson – Morgan, Keegan & Company, Inc.

And you use a weighted average cost to do your steel inventory and your cost of production?

Barclay Simpson

Yes. But, we buy it in big coils and until we cut those coils to fit a particularly product it isn’t part of the cost structure.

Keith Johnson – Morgan, Keegan & Company, Inc.

So that low cost steel, is there a way you can give us a little color on kind of the amount in inventory or kind of how it’s being weighted with the current purchases?

Barclay Simpson

I really don’t want to go in to that.

Keith Johnson – Morgan, Keegan & Company, Inc.

The SG&A accounts, the cost savings is there on a year-over-year basis was very good. Most of the cost cutting efforts that you guys did really started in the first quarter of ’09, is that when they began to take hold in the SG&A accounts?

Karen Winifred Colonias

I would say most of those started actually second quarter.

Keith Johnson – Morgan, Keegan & Company, Inc.

If I look historically at the general and administrative costs, you generally see a pretty good drop off as you go in to the fourth quarter every year if I look at the last four or five years going back in time. But, you are coming at a pretty low level of $19.3 million. Can we continue to expect similar seasonality in some of these cost line items as we move through the year?

Karen Winifred Colonias

I would say you should see similar reductions in fourth quarter.

Keith Johnson – Morgan, Keegan & Company, Inc.

Then I guess last question just on the venting products, a pretty substantial kind of year-over-year decline in sales relative to what you guys did in the second quarter of 2009. Was there anything that shifted from a seasonality standpoint or are there some other factors affecting that market that we should be aware of?

Barclay Simpson

There are other factors affecting the market. We have had as you’ve heard before from me, we have had some customers decide to make their own venting products themselves. That has changed the market quite a bit over time. New products that we provide venting systems for have changed some also. Things like tank less water heaters and that kind of thing which take a different kind of ventilation and it takes a little while to adjust to it. So, we’re really looking hard at Dura-Vent and it did not cost us any money this last quarter. It was on the positive side, not much but on the positive side. But, we’re looking very hard at how to make it better in the future.

Keith Johnson – Morgan, Keegan & Company, Inc.

The seasonal products in Dura-Vent I guess pellet vents and those types of things, did that not see a seasonal pull on the sales system this year? I guess it was pretty good last year maybe going in to winter.

Barclay Simpson

Seasonal affects it definitely just like it does our structural connect.

Operator

Your next question comes from Analyst for Steven Chercover – D. A. Davidson & Co.

Analyst for Steven Chercover – D. A. Davidson & Co.

I just wanted to get the operating earnings for connectors and the Dura-Vent. I didn’t know you guys have some kind of approximately number, do you guys have anything to give us specifically?

Karen Winifred Colonias

Operating income from connectors $20.783 million, operating income from vents $597,000.

Operator

Your next question comes from Peter Lisnic – Robert W. Baird & Co., Inc.

Peter Lisnic – Robert W. Baird & Co., Inc.

The first question I guess would be the gross margin 35 to maybe a point higher, is that a function of steel and lower cost steel flowing through or better volume? What sort of is behind that modest increase in expectations?

Barclay Simpson

Well, a whole bunch of things. Yes, it is probably a little better steel cost, probably.

Peter Lisnic – Robert W. Baird & Co., Inc.

But nothing on the volume side to make you incrementally more bullish?

Barclay Simpson

No, no there isn’t.

Peter Lisnic – Robert W. Baird & Co., Inc.

Then, I just want to understand the SG&A question that was asked earlier, typically you see a seasonal decline from third quarter to fourth quarter in the 10% to 15% kind of ballpark. Should we be expecting a similar sort of seasonal decline in the fourth quarter? It should like we should but I just want to make sure we’re clear on that one?

Karen Winifred Colonias

I think you’ll see a seasonal decline but probably not of that magnitude.

Peter Lisnic – Robert W. Baird & Co., Inc.

Can you run through a little bit on relative to where you were a quarter ago exactly what your pumping through China and some of the operational progress you made? Just ignoring the numbers but what have been some of the successes from either a product or marketing or sales perspective there?

Barclay Simpson

Well, we’re really just getting started in that market and it’s a huge prospect for the future and as yet we really don’t have the information that we need. What we have been able to do is develop a strong sales force and we have run through some people there, we have a very strong bunch left. I think we’ve got what we need to figure out those markets but man, it doesn’t happen overnight. It didn’t happen overnight in Western Europe but the same things that work there will work in China. I wish I had some numbers for your, right now I don’t have.

Peter Lisnic – Robert W. Baird & Co., Inc.

I was thinking more from an operational perspective are you putting through more product through that plant or different products?

Barclay Simpson

Not yet. We have some planned already but the majority of the products that are going to be made in plant we don’t know what they are yet. Our sales force is out there getting that information and I expect that by the end of next year we’ll have those facilities pretty well used.

Peter Lisnic – Robert W. Baird & Co., Inc.

I guess on Dura-Vent if I’m able to read body language 1,700 miles away or whatever it is over the phone, it sounds as though there’s some strategic question there in terms of A) how do you make the business more profitable or have it grow faster or B) potentially is it really a core asset. Am I reading that right, can you maybe discuss what sorts of recent thoughts you’ve had on that business in terms of how to grow it or how to strategically position it?

Barclay Simpson

Yes, you’ve analyzed it quite well and as yet we’re not happy with what we’ve been able to do there but we’ve got some ideas that we’re working on and I’m really not ready to talk about them yet.

Operator

Your next question comes from Analyst for Garik Shmois – Longbow Research.

Analyst for Garik Shmois – Longbow Research

I just have a demand question for you, there have been a few estimates out there with regard to home starts for next year in the 700,000 range which implies about a 20% increase. Just generally speaking can you talk about how much demand needs to be up before you begin to bring back some of the costs that you’ve reduced so far.

Barclay Simpson

If housing starts come back that way, yes we will put in to use some of the facilities which we have shut down. That’s something that is extremely hard to predict and you have a lot of optimist coming out with great predictions about things have turned around and we’re not seeing that yet. Our sales force is not seeing that and we’re ready, any time it flips around we’re ready. What we have done, a typical example is in Southern California we’ve shut down a lot of operations there but we are keep the facilities and we will have the facilities. We’ll flip some around but we’ll have the facilities ready so that when the market flips around we can flip around with it. But, I don’t see that happening yet.

Analyst for Garik Shmois – Longbow Research

Just a related question, are you seeing any signs of stabilization either in various parts of the US or the US compared to Europe, some parts stabilizing before others?

Barclay Simpson

Well, the Midwest has been less hit and we have been able to get a higher percentage of the market, in the Midwest and the east so we had less of a hit there. California has been the worst, California and Florida have been really hit hard percentage wise. In Western Europe and it is largely because I think we’re doing more and more better effort there in our acquisitions like Liebig and Ahorn and Aginco are starting to help our sales there. European sales are not as bad as they were. They have come back some whereas the US sales have not. But, I’m looking for European sales next year to be better. Whether that will come about or not, who knows you can’t predict it, it’s like trying to predict the stock market.

Analyst for Garik Shmois – Longbow Research

Final question for you, can you remind us how much cost savings you’ve taken out this year and how much have been reflected so far through the quarter? Then, how much is permanent versus temporary?

Karen Winifred Colonias

Our original cost savings plan as we discussed to save $57 million companywide. We’ve seen a little less than half of that. Most of those plans were put in place early second quarter. How much of that is permanent would definitely be a function of what sales start doing and what is happening in our industry.

Operator

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

Alan Robinson – Royal Bank of Canada

I have a follow up question on the steel costs issue. I appreciate there’s a time lag between the time you your steel and the moment the price of that steel gets reflected in the cost of goods. Could you give us an idea of when the low points of steel prices will hit your cost of goods? Did that point already happen in the third quarter or is the time lag longer than that?

Karen Winifred Colonias

The low point certainly has not hit in the third quarter and it’s a very staggered system so it’s very hard to determine an exact point at which we can see that. We have not yet seen our lower cost steel be impacted on the standard cost of our product. Again, I would anticipate that we would see some of that occurring in the fourth quarter.

Alan Robinson – Royal Bank of Canada

By the sound of it, it may also have an impact through to the first quarter or perhaps beyond?

Karen Winifred Colonias

Again, that would be a function of our sales and the production of those parts using that steel, yes.

Barclay Simpson

One thing we have not done is raise prices when the steel goes up. We have in the past raised some prices. Here in this year certainly we’re pretty careful there because our customers, some of them are in trouble. Their business has gone way, way down and so as you notice our profits have gone way, way down also. That is because we have had some steel costs that we haven’t put in to higher prices.

Alan Robinson – Royal Bank of Canada

Looking at your balance sheet, you had some very strong cash generation during the quarter. Karen, could you give us some details there, what was your operating cash flow during the quarter and what were the sources of cash I guess?

Karen Winifred Colonias

Well, the main source of cash would be the reduction in our inventories, that’s the main difference you’re seeing that in our cash balance.

Alan Robinson – Royal Bank of Canada

Then what was your operating cash flow during the quarter?

Karen Winifred Colonias

$88 million.

Alan Robinson – Royal Bank of Canada

That was for the quarter or the nine month period?

Karen Winifred Colonias

That’s the cash from operations for the nine months.

Operator

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

Barry Vogel – Barry Vogel & Associates

Can you give us the percentage change in the quarter in terms of sales starting with the West excluding California?

Barclay Simpson

The change in the west was 29% minus.

Barry Vogel – Barry Vogel & Associates

And California?

Barclay Simpson

24%.

Barry Vogel – Barry Vogel & Associates

South Southeast?

Barclay Simpson

South Southeast 23%.

Barry Vogel – Barry Vogel & Associates

And Midwest?

Barclay Simpson

17%.

Barry Vogel – Barry Vogel & Associates

And northeast?

Barclay Simpson

31%.

Barry Vogel – Barry Vogel & Associates

As far as the home centers I think I wrote down in your initial remarks that overall home centers were down 9% in the quarter versus last year?

Barclay Simpson

No, that’s what they were down all year, 9%.

Barry Vogel – Barry Vogel & Associates

Can you give us what they’re down in the quarter?

Barclay Simpson

The quarter I think was 23%.

Barry Vogel – Barry Vogel & Associates

What about the largest customers, how much were they down in the quarter?

Barclay Simpson

We don’t have to talk about that and I’m not going to.

Barry Vogel – Barry Vogel & Associates

Now, going back to the strong wall and the anchoring systems, you mentioned that Europe sales were down 23% in the quarter, am I correct?

Barclay Simpson

Sales where?

Barry Vogel – Barry Vogel & Associates

In Europe. You made a comment early in your remarks.

Barclay Simpson

Yes, that’s correct.

Barry Vogel – Barry Vogel & Associates

What about anchoring systems, what were their sales?

Karen Winifred Colonias

Anchoring systems were down 17%.

Barry Vogel – Barry Vogel & Associates

And how about strong wall?

Karen Winifred Colonias

[Inaudible] walls were down 33%.

Barry Vogel – Barry Vogel & Associates

Karen, while I have you on the phone and you have all the numbers, was strong wall profitable?

Karen Winifred Colonias

Yes, it was.

Barry Vogel – Barry Vogel & Associates

Was it very small?

Karen Winifred Colonias

It is a small component, yes.

Barry Vogel – Barry Vogel & Associates

What about anchoring systems in terms of profitability in the quarter?

Barclay Simpson

We had big costs on anchoring systems introducing them in to China and so forth. We had a loss there didn’t we Karen?

Karen Winifred Colonias

Yes.

Barry Vogel – Barry Vogel & Associates

Can you give us some idea of the size of the loss Karen?

Barclay Simpson

That’s spread around so much so it’s pretty hard to figure but it was substantial.

Barry Vogel – Barry Vogel & Associates

Karen can you give us your current reading on capital expenditures this year and depreciation and amortization?

Karen Winifred Colonias

Capital expenditures $14.5 million.

Barry Vogel – Barry Vogel & Associates

And D&A?

Karen Winifred Colonias

$29 million.

Barry Vogel – Barry Vogel & Associates

Can you give us your best guess for effective tax rate for the year?

Karen Winifred Colonias

That’s still too hard to anticipate based on what’s going on in our industry.

Barry Vogel – Barry Vogel & Associates

Going back to Dura-Vent, historically the fourth quarter usually was the best quarter of the year. It’s very nice to see you have a small profit rather than large losses. On a seasonal basis is it wrong to assume that they will be profitable in the fourth quarter?

Barclay Simpson

I really as yet, we really don’t have enough information to give you a good answer to that. I don’t feel confident about any estimate there on Dura-Vent right now. That market is so hard to figure and its changed so much. It might well be okay or it might not.

Barry Vogel – Barry Vogel & Associates

Did you finish your consolidation of the Vicksburg plant in to California?

Barclay Simpson

Yes.

Barry Vogel – Barry Vogel & Associates

So those costs are behind you?

Barclay Simpson

Yes. That’s a major reason that it wasn’t showing a loss.

Barry Vogel – Barry Vogel & Associates

Karen, I have one more question, as far as the inventory rebuild, do you have some idea what inventories might go up, just generally in the fourth quarter versus where they were at the end of September?

Karen Winifred Colonias

I think that’s obviously a function of what our sales will be in fourth quarter. Currently we’re at a level where we are producing less than we are selling. That’s why we’ll be using a little bit of an inventory build but I don’t have a feel for what the percent will be.

Barry Vogel – Barry Vogel & Associates

Could it be in the numbers $5 to $10 million.

Karen Winifred Colonias

I think that’s a little difficult to determine right now.

Operator

Your next question comes from [John Koehler] – Oppenheimer & Company.

[John Koehler] – Oppenheimer & Company

I had a question regarding some of the actions you had taken in the downturn to preserve margins, some of the reduction in the 401K benefits and employee benefits in general. I was wondering if you’ve given a portion of those back or when you might consider reinstating some of those?

Barclay Simpson

Well, we haven’t cut employee benefits.

Karen Winifred Colonias

The pension plan.

Barclay Simpson

But that’s a long range deal. The only thing that we have cut is the pension plan but we had and I’m sure you don’t know too many companies that put 15% of salaries in to the pension plan for that individual and we were. We cut it back some. Eventually I expect that we’ll go back to 15% but just when that’s going to happen I don’t know.

Operator

At this time there are no further questions in queue.

Barclay Simpson

Thank you all.

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