Simpson Manufacturing Company's CEO Discusses Q1 2014 Results - Earnings Call Transcript

|
 |  About: Simpson Manufacturing Co., Inc. (SSD)
by: SA Transcripts

Operator

Good morning ladies and gentlemen, and welcome to the First Quarter 2014 Simpson Manufacturing Company Incorporated Earnings Conference Call. In this conference call, the Company may discuss forward-looking statements such as future plans and events. Forward-looking statements like any prediction of future events are subject to factors which may vary, and actual results might differ materially from these statements. Some of such factors and cautionary statement are discussed in the Company's public filings and reports. Those reports are available on the SEC's or the Company's website. Please note today's call may be recorded.

Now, I would like to turn the conference over to Tom Fitzmyers. Please proceed.

Tom Fitzmyers

Thanks everyone and good morning, and welcome to Simpson Manufacturing’s First Quarter 2014 Earnings Call. Our press release was issued yesterday. It’s available on our website at simpsonmfg.com. Today's call is also being webcast and a replay of that webcast will be available on our website. As usual, joining me in Pleasanton for today's call are Karen Colonias, Simpson's CEO; and Brian Magstadt, Simpson's CFO. I will start, followed by Karen and Brian, and then we will be delighted to take your questions.

We are pleased with the results for the quarter. Europe had a good sales quarter compared to last year due to mild winter conditions with little snow, allowing contractors to continue working. We’re seeing improved economic conditions there as well. In the U.S., regions of the country experienced a dry winter where other parts continue to see snow. Housing starts in the U.S. are similar to last year and we are continuing to benefit from starts, but unlike lumber or other products that had a more direct correlation to starts, our products are used to a greater extent in code based areas which are subject to natural forces such as seismic or wind events and follow sequential construction processes like the foundation first then the walls and the roof systems.

We’ve mentioned before we estimate 55% to 65% of our total company wood product sales are dependent on starts. Sales were 7% in North America for the quarter, due to increased home building activity in many parts of the region. In Q1 Home Center sales were up 2% for the quarter and sales to the Home Depot were flat. Revenues in Europe were up 16%. North American operating profits were up $7.3 million due to increased sales volumes, lower manufacturing cost and that was reduced by a slight price increase and increased operating expenses. Also included in the North American operating profits was a correction related to over accrued workers’ compensation which had a positive effect to operating income of $2.9 million.

Europe’s operating loss of $919,000 in Q1 is a substantial reduction from last year’s loss of $4.2 million and it’s due to increased gross profits and reduced operating expenses. We continue to have a very strong financial position with over $200 million in cash at the end of the quarter very little debt, $300 million unused line of credit. All of this gives us lots of flexibility and capacity continue to invest in our long run strategic plan. Before I turn the call over to Karen I would also like to tell you that our Board of Directors just increased our quarterly dividend to $0.14 per share. That’s an increase of 12% and its payable in July. Karen?

Karen Colonias

Thanks Tom. We’re benefiting from increased building activity in North America and at the same time we’re also continuing to invest in current initiatives to strengthen our market position in both wood and concrete portions of our business. We continue to see substantial opportunity in our trust business and we’ve continued our software development efforts to meet our customer needs and to create a software enhancement for wood product segment.

Europe made substantial improvements in its operating income based on milder winter and also initiatives to reduce our SG&A expenses. Our Asia-Pac market segment is seeing increased revenue with the recent introduction of our repair and strengthening products for the concrete construction segment. We continue to look for strategic acquisitions, whether to expand our product offering or to strengthen our position in different geographic regions. At the same time we are supporting our operations in order to grow them in both home and abroad. To support these strategies we are hiring additional people and we will see incremental spending throughout the year. Our people are our most important assets, and we need to ensure they have the tools and resources necessary to support our customers. We will continue to monitor operations around the world and strive for long run returns that are acceptable to us and our shareholders. As always we are dedicated to our entire product line and we work very hard every day to ensure that we continue to meet our customer’s needs for service, support and availability.

I’d now like to turn the call over to Brian who will share some additional financial information.

Brian Magstadt

So as noted in the earnings release, Q1 2014 gross margin was about 46%, compared to 42% in Q1 of last year. The worker’s comp adjustment Tom mentioned was primarily in cost of sales, and that one-time correction accounted for approximately 1.5% on that gross margin and about $0.025 net income per share. Sales of concrete products as a percent of the total was the same as last year but the margin on those products were up, benefiting the total company gross margins. The concrete product sales relative to the total was 14% this quarter and last while the wood product sales were 86% for both periods. The margin differential of wood to concrete products is 15 percentage points for both quarters.

As noted in the press release, we believe the estimated gross margin will be in the 44% to 45% range for 2014, although depending on the rest of the year that may change. Operating expenses as a percent of sales was down in the quarter, compared to last year although certain compensation expenses that are based on performance such as commissions and cash profit sharing increased $2.9 million in the quarter or 1.6% of net revenue.

In taxes we had better foreign operations this quarter and that benefited -- and that beneficially affected the tax rate. The quarterly tax rate was 38.6% and we still believe the annual effect of tax rate for the year will be in the range we estimated in the Annual Report which was between 37% and 39%.

Q1 2014 CapEx was about $4.2 million, primarily from manufacturing equipment in the U.S. We’ve estimated total 2014 CapEx to be in the $22 million to $25 million range for the year. For 2014 depreciation and amortization is expected to be $29 million to $30 million of which $21 million to 22 million is depreciation. Before we turn it over to questions, I’d like to remind that if you’d like further information, please contact Tom at the phone number listed on the press release. Also look for our Quarterly Report on Form 10-Q to be filed in May.

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

Question-And-Answer Session

Operator

(Operator Instructions). And we’ll take the first question from Tim Wojs with Baird. Please go ahead. Your line is open.

Tim Wojs - Baird

Nice job. I guess I just had a couple of questions. To start up with gross margins. I guess did you expect that worker’s comp adjustment in your original 44% to 45% guidance?

Tom Fitzmyers

Yes.

Tim Wojs - Baird

You did. And so even excluding that you were towards the top end. So I guess as you kind of look out over the course of the year maybe what are the puts and takes to maybe get towards -- what could happen again towards the bottom end versus the top end of that range?

Brian Magstadt

This is Brian. So the sales volumes were up nicely in Q1 as we mentioned depending on sales and volumes through the rest of the year. Obviously if volumes are on the lower side then that’s where that number could come in, at the lower side.

Tim Wojs - Baird

Okay. So it’s really just dependent on volumes. I guess when you look at --you spoke about some SG&A investments in Europe and I guess I’m just curious what exactly those are and maybe how much that helped SG&A year-over-year in Europe?

Karen Colonias

This is Karen. I mentioned we have been working on reducing our SG&A in Europe. Our managing director has looked at some of our European operations and we’ve done a little bit of resifting from the standpoint of our engineering group and some of our sales efforts there. So we’ve looked at reducing SG&A.

Tim Wojs - Baird

So I’d go back and I meant the reduction. Actually the other question I was going to ask is just what are some of the investments you’re making across the rest of the business and how should we think of SG&A as a percentage of sales for the year?

Karen Colonias

So SG&A across the rest of the business, as we mentioned we have several initiatives in the North America markets and we are adding employees to help meet the needs from both the engineering side, the marketing side and the sales side and we estimate that to be about $5 million from an annual run rate.

Tim Wojs - Baird

That’s helpful. And then I guess just the last question from me. You mentioned in the press release a few times just some pricing pressure and I’m curious how pricing pressure looks sequentially. Your price is pretty stable with where you saw them in Q4 or are you still seeing a little bit of compression there?

Karen Colonias

This is Karen again. The pricing is fairly stable compared to what we saw in Q4.

Operator

And we’ll take the next question from Robert Kelly with Sidoti. Please go ahead, your line is open.

Robert Kelly - Sidoti & Company

The press release noted that average selling prices were lower year-on-year but I think Tom in his prepared remarks mentioned a small price increase. Could you just review where the price increase was?

Brian Magstadt

Actually Robert, this is Brian. To clarify, it was -- Tom’s prepared remarks should have referenced a price slight price decrease, not increase.

Robert Kelly - Sidoti & Company

Okay. And so average selling prices are lower because of the steel prices being down year-over-year and you kind of characterized that competitive pricing pressures have eased somewhat. I think that was an answer to the most recent question. Is that right?

Karen Colonias

That’s correct. Pricing pressures have eased somewhat.

Robert Kelly - Sidoti & Company

Okay. So if pricing pressures don’t change from here on out and volumes are in the high single digit range, is that what get you to the 45% gross margin guidance. You talked about how you might get to the low end. What happens to get you to the higher end?

Brian Magstadt

Volumes.

Robert Kelly - Sidoti & Company

So it’s strictly depending on volumes, you’re saying the pricing is pretty much similar for the balance of 2014?

Brian Magstadt

Right, we’re not estimating any change there in that margin estimate.

Robert Kelly - Sidoti & Company

Okay, fair enough. And then you called out the mild weather in Europe. Is there any way to quantify how much weather helped you in this quarter or hurt you in the year ago quarter?

Brian Magstadt

This is Brian, Robert. I don’t know if we have a dollar amount we can quantify comparing Europe and their weather conditions this year to last year. There was just a pretty big effect due to mild winter this year compared to last year.

Robert Kelly - Sidoti & Company

Okay, fair enough. And then just as far as the rest of the year for Europe; is mid-teen sales growth reasonable assumption or should we see something a little bit slower than that for the balance of 2014?

Karen Colonias

Well I think you might see something a little bit slower. Again Europe’s Q1 last year was absolutely on the opposite scale from weather condition as was it was this year. So I would estimate that that would be a little bit slower. We are seeing a little bit of improvement in the European economy and as I mentioned, our director there has done an excellent job of really focusing our sales efforts and looking at our expenses. But I would estimate that might be – that that would be a little bit lower.

Operator

And we’ll take the next question from Alex Rygiel with FBR Capital Markets. Please go ahead. Your line is open.

Alex Rygiel - FBR Capital Markets

Could you quantify the negative impact from weather at all? Is that possible?

Brian Magstadt

No, I mean, Alex, this is Brian. So in North America it was really interesting on the West Coast, very, very mild dry winter. Certain parts of the south east, mid-west, north east, just had obviously very difficult winter conditions for building activity. But to quantify dollar amount, I don’t think we have that.

Alex Rygiel - FBR Capital Markets

Fair enough. And can you discuss part of what your internal target is for concrete product margins and how long it may take to get there?

Karen Colonias

This is Karen. As we’ve mentioned, growing concrete margin and we’re certainly going in the correct direction. We’ll take a little bit longer. Volume is going to be a key element as we look at some of our cost of materials associated with that. And we’re really just kind of entering into this market. So as we get our testing and our specifications together, that will help us from the revenue standpoint and as that volume increases that will certainly help us on a manufacturing cost. I would estimate that it will get somewhere close the same as the wood margins.

Alex Rygiel - FBR Capital Markets

And lastly, the growth in the Asia Pacific market was excellent in the quarter. Do you think it continue at this space with similar margin or do you feel the need to kind of ramp cost and advance i.e. sales and so on?

Brian Magstadt

Alex, can you repeat that question please?

Alex Rygiel - FBR Capital Markets

Yes, your growth in the Asia and the Pacific was very impressive this quarter. First, do you think that growth rate can continue over the next handful of quarters? And secondly, is there any reason to believe that you need to sort of increase spending on sales or other costs that might change the margin profile of that business?

Karen Colonias

Okay. Sorry, I missed the location. The Asia, the growth you’re seeing in Asia is really a function of those product lines for repair and strengthening of concrete and the managing director in Asia has been very active at being able to target specific markets where those products are applicable. I think the growth numbers will be something that they will be able to come close to in the following quarters. And at this point we’re not really looking at adding additional operating expenses to grow that business.

Operator

We’ll take the next question from Barry Vogel with Barry Vogel & Associates. Please go ahead.

Barry Vogel - Barry Vogel & Associates

My first question is -- couple of questions are numbers. So they will be related to Brian. It was very impressive I thought that your SG&A expenses went up 4.6% on a 9% increase in sales. That we haven’t seen in a long time. Can you give us several reasons why that happened all of a sudden, number one? And number two, looking forward but you did make a comment that you intended to continue to lower SG&A expenses where you thought it was proper. Do you think that we’re going to see more of that to which of course would raise your operating profit margins from that source. That’s my first question.

Brian Magstadt

I can take that in two parts. So the sales increase -- obviously sales increased faster than operating expense increased and that’s been our premise as far as we’re entering in these new businesses, a certain amount of ramp up cost and such to be able to support those businesses and it’s our hope that those will not have to continue at that same rate of sales growth.

Now in the quarter sales were up nicely and we believe that we’re getting to a point where other than the incremental spending that Karen mentioned on some new folks and things to support our operations, that the pace of operating expenses, we wouldn’t expect to stay at the same increased rate of sales. So that’s why we’re seeing that. Although spending was up, it just wasn’t up as at the same rate.

So I think the second part of that question on SG&A being lower spending, I don’t think that’s the case. I think it’s just going to be proportionally lower than the incremental sales growth. So it will be up, it just won’t be up as much as revenue growth.

Barry Vogel - Barry Vogel & Associates

So basically that means that’s going to help margins going forward?

Brian Magstadt

We believe so, right.

Barry Vogel - Barry Vogel & Associates

Okay. Now I have a question on the comment you made about the above average sales increases to contract distributors and lumber dealers. I know you make those comments in your press releases. But I don’t remember having seen a comment like that about contract distributors and lumber dealers. Could you give us some color on that as to why that happened?

Brian Magstadt

This is Brian again. I believe that’s primarily related to increased building activity in certain parts of the country and in certain parts of North America. So those channels were up relative to the others.

Barry Vogel - Barry Vogel & Associates

On the other hand, I found it slightly disappointing that Home Depot sales were flat in an improving environment and overall sales were up only 2%. Could you comment on that? Give some color?

Karen Colonias

Hi Barry, this is Karen. Certainly as we look at Home Depot sales, we are very focused on working in partnership with them to increase some inventories. Again you have to keep in mind from a weather condition, a large portion of the Home Depot locations were also hit quite heavily by the winter conditions. But we are working with them, so that their inventory levels will be in good shape when spring comes about. So I think a portion of that flat was what you were seeing with weather just as we saw with some of these other customers.

Barry Vogel - Barry Vogel & Associates

So you would expect as the year progresses that the service center business would improve in terms of sales gains versus the first quarter.

Karen Colonias

Yes I would.

Operator

(Operator Instructions). And we’ll go next to Arnie Ursaner with CJS Securities. Please go ahead.

Arnie Ursaner - CJS Securities

Karen, just to clarify, you mentioned $5 million of annual incremental spend if you heard you right. Is that on top of the $10 million or so that you’ve already been investing in your growth initiatives?

Karen Colonias

So we have been mentioning that when we look at our trust business, that our trust business run rate is between $6 million to $7 million. A portion of this $5 million would certainly be employee based in that area. But also another portion would be based on what we’re doing with our repair and restoration and certainly what we’re doing in all of our areas to support this business.

Arnie Ursaner - CJS Securities

But from a modeling point of view we should build that in incrementally and then where would that be in the gross margin line?

Brian Magstadt

Arnie its Brian. Primarily in operating expenses.

Arnie Ursaner - CJS Securities

Okay. And going back to Europe obviously you mention an improvement but a key part of Europe also is S&P Clever, which is I know has been somewhat disappointing in its performance since you acquired it. How did it do in the quarter and what’s your outlook there for the rest of the year?

Karen Colonias

S&P was also able to take advantage of weather. As you know many of their products work for asphalt repair and because they were not under heavy know they were able to continue and do quite a bit of asphalt repair in the European operations. So their numbers were better for first quarter and I think we’re starting to see some opportunities to take that product into different parts of Europe. So I think it S&P is tracking very well right now.

Brian Magstadt

We haven’t been disappointed in their margins. It’s the sales growth experience that’s significantly affected by weather

Arnie Ursaner - CJS Securities

And then my second question is a broader one on the whole trust market. You obviously now have a viable competitor, which you probably didn’t have a while back and I know Karen you’ve been dealing with having a lot of dialog with customers, trying to impress upon them to value that Simpson brings. And it sounds like at least your competitor realized that aggressive price reductions was not going to win them a lot of share versus the service component you provide. Maybe you could take a step back and you had to build up your software capabilities. I know that’s a little behind plan. Maybe sum up where we stand at this point in the trust market for you and perhaps when you think we hit an inflection point?

Karen Colonias

I wanted to -- I would say thank you for -- again realize we put a lot of effort into everything behind Simpson other than the price and many people have heard me speak about the service levels and the engineering support and the product availability. And I do think that that is something that differentiates us from all of our competitors. When I look at the trust side, we are putting, as we mentioned some additional resources on that software development. We are growing a small amount of percentage of market share and that’s because we’ve got a great sales group out. But again, our trust software is really focused on a very small segment of market, just based on its capabilities. We are having releases every couple months and that’s helping us gain customers but I think we are still probably a good 18 months away to two years away from having a significant inflection point.

Arnie Ursaner - CJS Securities

So to be clear you had talked about the distributor who the software would weave itself into. You had talked about seasonality that if they didn’t put it in by the spring, it would be much more likely that it wouldn’t be installed till the fall after the busy season. Are we now targeting next spring or next fall with getting more of our software out there?

Karen Colonias

No I mean each customer, as you are trying to -- if you’re switching them from a software that’s a very significant initiative and typically that’s going to happen in their slow season. So you would be talking about to see anything significant with our current software offering in the fall as far as a customer increase.

Operator

(Operator Instructions) Well, we do have one more question from Steve Chercover with D.A. Davidson. Please go ahead. Your line is open.

Steve Chercover - D.A. Davidson

Most of my questions were already answered, but I also had a question on Asia where it’s great to see the sales are up 42% but the profits or I guess the loss was just diminished by 3%. So would you call Asia still a problem and how long will it take to get that up to a profitable level of business?

Karen Colonias

Yes, I would say that it’s still certainly a very clear focus for us. We are happy to see that the revenues were up and obviously that’s a start point to help us on that operating profit line. We have seen Asia for the last two quarters or three quarters do quite well on the revenue standpoint and I think we’re still looking at adjusting things from our SG&A so we can help that operating profit line. But it is a very clear focus for us.

Steve Chercover - D.A. Davidson

So if you’re losing a little more than $1 million quarter, I mean is it as simple as saying that you’ve got to get your revenues up by another $2 million before its satisfactory or is there a cost control element. I know you had some turnover years ago but and I know you are a patient company but how long do you tolerate it?

Karen Colonias

Yes, I think sales revenue will certainly help increase that bottom line and that’s really what we have our group focused on. As I mentioned they have only in probably the last nine months have these new products available for them to sell and we’re certainly seeing the introduction of those products is what had that sales increase. So it will take just a little more time to have even a larger penetration in that market with that product offering.

Steve Chercover - D.A. Davidson

Okay. And maybe I could ask one on the software as well. It’s unfortunate that you’ve missed the window for this year but it seems critical that you’ve got to be in those -- it's got to installed within your clients networks this fall. I mean is there like a Manhattan Project style urgency here? Can you throw more resources at it? We see other software updates that come so frequently. I was wondering why this has been such a problem?

Karen Colonias

I think when you look at our software, we’re not just creating a software update. We’re looking at really creating something that meets the specific customers’ needs. We’ve done quite a bit of research talking to the customers to really determine what are the factors they are looking for to make their rules and their jobs more efficient and those are the things that we’re looking at putting into our software. So it’s certainly not as simple as an update. We have put a new manager in place for that facility and that initiative and he has an extensive amount of background in software development in this customer base. So we believe we are putting significant resources and lot of effort to be able to meet the customers’ needs and get that software release out.

Steve Chercover - D.A. Davidson

Do you believe that your competition already has that software in place?

Karen Colonias

Yes they do. Let me -- sorry they have a software in place. Again I think it has -- as far as something that we’re working on differently to meet the customer needs, that’s a little bit different approach that we’re taking. But they clearly do have a software. They have a very large market share right now with their current software.

Steve Chercover - D.A. Davidson & Co.

Will your software be a me too kind of software or will your software be a step function better in terms of functionality.

Karen Colonias

We’re working on some things again that will meet the customers’ needs through our software.

Operator

(Operator Instructions). It appears we have no further questions at this time. So I’ll turn the program back over to our presenters for any closing remarks.

Tom Fitzmyers

Thanks very much everyone. Again we were delighted with our progress this quarter and look forward to talking to you next quarter. Onward and upward.

Operator

This concludes today’s program. Thank you for your participation. You may now disconnect at any time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!