Simpson Manufacturing Co., Inc. (SSD) Q1 2012 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the First Quarter 2012 Simpson Manufacturing Co., Inc. Earnings Conference Call. In this conference call, the company may discuss forward-looking statements, such as future plans and events. Forward-looking statements, like any prediction of future events, are subject to factors which may vary, and actual results might differ materially from these statements. Some of such factors are -- and the cautionary statements are discussed in the company's public filings and reports. Those reports are either available on the SEC's or the company's website. Please note that today's call may be recorded. Now I would like to turn the conference over to Mr. Tom Fitzmyers, the company's Chairman. Please proceed.

Thanks, everyone, and good morning and welcome to the Simpson Manufacturing Co., Inc's. First Quarter 2012 Earnings Call. Our earnings press release was issued yesterday. It's available on our website at simpsonmfg.com. Today's call is also being webcast, and that webcast will be available on our website, as will a replay of this call. Joining me in Pleasanton for today's call are Karen Colonias, Simpson's Chief Executive Officer; and Brian Magstadt, Simpson's Chief Financial Officer. I will lead off, followed by Karen and Brian, and then we will be delighted to take your questions. Revenue for the quarter was up in most areas where the company operates. We think we benefited from some relatively nice weather in many parts of our operations, but mostly from the outstanding efforts of our people. First quarter sales increased 19.8% for the company, with sales increasing throughout our operations. Total U.S., up 23%; California, up 15%; the west, excluding California, up 20%; the Midwest, up 33%; south -- southeast, up 23%; Northeast, up 22%. Total international was up 10%; Canada, up 9%; Europe was up 10%; Asia-Pacific, which is China, Australia and New Zealand, is up 26%. By the way, China sales increased, but we still lost some money in China. As a percent of sales, Q1 international sales were 79% -- I mean, 27% versus 29% last year. In actual dollars, international sales increased, but because there was a larger U.S. increase, the relative international percentage amount decreased. Our home center sales were up 7%, and our largest customer was flat for the quarter. Net income for the quarter was $7.2 million compared to $7.1 million net income last year. Operating income by segment for the first quarter was as follows: North America, which includes U.S. and Canada, $17.9 million profit, which was an increase of 18% compared to the same quarter last year; Europe, $2.4 million loss compared to $1.5 million loss last year. The change was due primarily to integration costs, increased intangible amortization expenses and fair value adjustments of the inventory; Asia-Pacific had a $0.7 million operating loss, which was flat compared to the prior year. From a production standpoint, our manufacturing plant in China is producing both imperial- and metric-sized anchors now and is supplying the company's operations worldwide. The operating environment we are in continues to be very challenging, but our branches are excited about the prospects we see in front of us. Every day, we face competitors that are trying, and sometimes succeeding, in taking away our customers with price. We continue to work every day to earn our customer's business and our products -- with our products and excellent customer service. And we look forward to updating you with the progress we are making to that end. With that, I'll turn the call over to Karen, who will discuss some of those new opportunities and the progress of our latest acquisitions, all of which are focused on our long-term strategy. Karen?

Thanks, Tom. In addition to the 3 acquisitions that we completed in December and early January, we recently acquired CarbonWrap, a small U.S.-based business in the fiber-reinforced polymer market. Like Fox Industries and S&P Clever, CarbonWrap has products for concrete repair and strengthening for the infrastructure, commercial and industrial markets. These businesses fit our long-term strategy of moving the company to be less dependent on U.S. housing. In addition, these products are highly specified. They have worldwide applications. The acquisitions included their management teams, and we are excited about the market knowledge and product experience they bring to Simpson. We are also excited about the prospects of the new plated truss business. We currently sell our core product to this customer base. Automatic Stamping has a new facility, which we acquired in the deal, and the seller has a long history in the truss business. We are working on a truss design software needed to accompany these plate sales. As with many newly acquired businesses, we are spending considerable time and resources to integrate these operations. This process is never easy, but we have a strong belief that these additions will add long-term value for the company and help us meet our strategic objectives. Now I'd like to discuss Liebig for a moment before I turn the call over to Brian. We have mentioned in the past that we are looking at the operations. We have a facility in Ireland that manufactures high-capacity mechanical anchors for the European market. We have taken some cost out of the manufacturing facility, but ultimately, we need sales to cover the overhead, and we're not currently there. In Q1, the Ireland facility had a small loss. The questions we face today is where do we source these products? We need to consider raw material needs, manufacturing capabilities, tariffs, duties and antidumping restrictions. It's not an easy question to answer. However, we do want you to know that we are committed to have a mechanical anchor product offering in Europe to complement our adhesive and epoxy anchor products. I'd like to turn the call over to Brian, who'll share some of the financial information.

All right. So first, let me start with the fourth quarter tax rate and some explanation as to why it was nearly 47%. There were some nondeductible acquisition costs related to the S&P transaction, which resulted in an increase in our effective tax rate of approximately 6.5%. We also had some losses in foreign countries with lower tax rates. Without these items, the effective tax rate for the quarter would have been about 39%. Continuing forward into 2012, we expect the annual effective tax rate for the year to be about 42%, which is higher than the 40% 2012 annual rate that I estimated for the year -- when I estimated it last quarter. The change is due to those reasons I just mentioned. 2012 CapEx is expected to be about $27 million, and depreciation, amortization is expected to be $26 million, which is -- $19 million of which is depreciation. The amortization amount is up due to the recently acquired intangible assets, which are included in other noncurrent assets on the balance sheet presented in the press release. Amortization expense in the quarter increased by nearly $800,000 compared to the prior year, which is all-in admin expense. Q1 2012 gross margin was 43.7% compared to about 43% last year. Our factories were busier with the sales volume increase. And as Tom mentioned, we benefited from nicer weather this year compared to last, and that had a positive effect on revenues and volumes, offsetting higher variable production costs, labor and material. Also, we move our Southern California manufacturing facility in Q1 2011, so that contributed to higher spending and lower gross margin last year. A few other items that were atypical in the quarter were the expensing of some tooling equipment at Automatic Stamping for $500,000, and that was in cost of sales; inventory that was stepped up at S&P was expensed for $750,000, also in cost of sales; and we paid professional fees related to the acquisitions in the quarter of about $1.4 million. Stock compensation, which includes stock options and restricted stock, was $3.2 million in Q1 2012 versus $1.5 million last year. The increase is due to having another year of grants expensed, as the awards vest over multiple years. So if the company meets its operating target, so I would expect grants in the following years to have a similar effect on expense until we reach the point where as we add a grant to expense, an earlier grant will fall off. When the company does well, our employees do well, and the company's cash profit sharing increased as a result of increased operating profit. The amount of the increase included in operating expenses was about $700,000. We finally sold the San Leandro property in Q1, but in doing so, recognized a loss of about $500,000. Before we turn it over to questions, I'd like to remind you that if you have -- if you'd like further information, please contact Tom at the phone number listed on the press release, and also look for our Form 10-Q to be filed in early May. We'd like to now open it up to your questions.

[Operator Instructions] Our first question comes from Trey Grooms with Stephens Inc.

This is actually B.G. Dickey sitting in for Trey this morning. Tom, I want to -- I had a question, first off, on gross margins. Looks like they came in a little bit better than what you guys have talked about on the last call. Just kind of wanted to see if we could dive into kind of what the drivers were there. Was it just better utilization, or what was going on there?

I think that's correct. Why doesn't Brian answer that question? I think he started on it earlier.

So, B.G., good question. So we benefited from increased volumes running through the factories. So we were able to absorb a little bit more overhead. So looking at Q1 2012 versus last year, like we mentioned, we had significantly better weather this year than last year. So with our factories this year, we're able to absorb a little bit more cost.

Okay. And then just kind of building on that, do you have a similar expectation -- or kind of what's your outlook for the next quarter as far as gross margins?

So looking in the -- to the 2 busier quarters that we're coming into, I mean, traditionally, those quarters are higher than Q1 and Q4. Mid-40s, 45%, 46%, would be pretty good estimate now. We're seeing some pricing pressure, and then also we're also seeing some increased manufacturing costs.

Okay, that's helpful. And then if we look at operating expenses, I believe last year op expenses outpaced top line growth. And just kind of given the recent acquisition that you guys have made, I was curious if you could kind of speak to how we should think about that pace of operating expense growth or op margins in 2012?

Sure, this is Brian. I'll take that one also. So we're seeing some increased costs with integrating the recently acquired businesses, and we did have some atypical costs in the quarter. So I would expect that run rate on operating expenses to potentially lighten up a bit as we get past some of these integration costs.

Okay, that's helpful. And you mentioned a few minutes ago that weather, favorable weather, obviously had an impact on you guys in the quarter. Is there any concern that that's created a pull-forward of demand and that back half could be somewhat tepid?

That's definitely a concern. We're not seeing that yet. I mean, April is looking comparable to what we have last year. But your concern is definitely shared amongst us as well.

Okay, great. And then my last question is just on M&A pipeline. Seems like you guys are getting more active. Do you have anything that you're close on? Or kind of what should we think about in terms of deals going forward?

This is Karen. We are continually looking for acquisitions. As we've mentioned, our strategy is to be less tied to U.S. housing starts, and we certainly think there's some opportunity to build on our ICI business model that we're looking at, and that's that infrastructure, commercial and industrial. So we're still looking for opportunities out there. We have a couple of dedicated people who search for companies that fit within the model we're looking. Currently, we don't have anything that's too far along at this point.

Our next question comes from the site of Arnie Ursaner with CJS Securities.

My first question is, I know you highlighted or mentioned a couple of atypical items, but there sure seem to be several others you didn't highlight. So the first one I have on that regard is in the R&D expense, you had $2.4 million of professional fees. That certainly sounds like a onetime. Could you expand on that, please?

I think, Arnie, that Brian would be best to answer that question.

Sure, Arnie. So part of what's in that line or a significant amount of what's in that increase is some costs that we are experiencing related to some software design. In the truss industry, we feel that we need to have a really solid software offering to accompany our truss plate sales, and a significant amount of work is going towards like getting the Keymark software ready for what we want to be able to offer our customers here later in the year. So a significant amount of software development costs are running through that R&D line, more than half of that increase.

So my question again is of the $2.4 million you incurred in Q1, similar level in Q2, half that level?

I would say between half and 2/3.

Okay. So at least, call it roughly $700,000, $800,000's, at least, onetime in your thinking?

Yes.

Okay. And then you went through some numbers very quickly on Europe. You mentioned you lost $2.4 million. You cited 3 items that, again, sounded very onetime. Again, I can't -- couldn't quite follow as fast as you were going through them. But were it not for those onetimes, would you have been profitable in Europe?

Not quite. So we had -- in Europe, we had a professional finder's fee for the S&P acquisition, and we stepped up inventory and ran that through cost of sales. Those 2 items were about $1.5 million. So those would be the atypical. We would not have those going forward, assuming there are no other acquisitions. But related to that particular one, those we would not expect to see again.

Okay. And my final question is you mentioned the positive weather in the States, but Europe had extraordinarily poor weather. Did you feel that impacted you at all?

We did. You're right. Europe had increased -- I think increased frost in the early part of the year, and it was down. And that's why the international sales increases lagged what was going on in North America.

The next question comes from the site of Garik Shmois with Longbow Research.

Just first question, a follow-up on Europe. Just wondering if maybe you could strip out the performance in Clever and discuss what the European business sales growth looked like on a like-for-like basis year-over-year.

Yes. For S&P Clever, certainly, as we mentioned earlier, we're in a integration mode. Their sales were pretty flat compared to where they were last year. But again, we are adding some costs to that acquisition right now as we work on adding more sales force, some accounting personnel and certainly looking at some of their operations so they tie a little bit closer into our operations.

Okay. And then you mentioned some pricing pressure here. Is this a relatively new development that you're seeing? Or is it consistent with some of the competitive pressures that you've been facing over the course over the last several years? It sounds like, potentially, a fairly new development, and just wondering if you can comment on that a little bit.

Garik, this is Tom. We've faced pricing pressure forever. Our prices tend to be somewhat higher because of the value that we provide, and that seems to be the primary tool that our competitors use to try to take business away from us. So it's a very consistent practice. It's just gone on for many years.

So it hasn't -- you haven't seen an incremental change in the competitive dynamics here recently?

Well, I think we have, to some extent, because MiTek bought USP. And so they have generally not done well against us historically, and I think maybe they've ramped up their pricing strategy somewhat. But we have experienced that from time to time in the past to that -- to the same extent. So it's not something new, and it's not something that we typically work with. And it also is a factor in trying to acquire customers. I think in our New York presentation, we talked about one of the accounts that we worked on in Europe for 9 years before we were able to get it. It's just a great account in an area that was really important to us. But it did take us 9 years to do it, because the pricing differential was really great. But in the long run, we seemed to work it out, and they appreciated the value of our offering.

Okay, that makes sense. And I guess with steel costs moving up in the quarter and expected to stay at current levels, given that you're seeing some competition out there from MiTek, would that limit your ability to pass through price increases this year to offset raw material costs inflation? Or do you think that you're in a position at this point that you don't need a price increase to offset?

Well, we would not be able to forecast that very well, because the steel market is pretty volatile. But we pay very close attention to that, and we think that we are adequately protected from a steel price increase. But if substantial prices in steel did occur, then there is certainly a question about being able to pass it along. However, that's relevant for everybody, because everyone would experience the same steel price increases.

Okay. My last question is on the balance sheet. I notice you took out some debt in the quarter. Just wondered what that was related to and what your strategy is with respect to potentially taking on more debt in the quarter. And maybe just third part of that question, would you look to take on some more debt to lessen the tax burden?

All right. So this is Brian. I'll take that one. So the debt was in relation to some acquired debt that S&P Clever had that we would take a look at, but in all likelihood, probably pay that down if the situation were -- called for it. But we're always looking to evaluate the mix, if you will, debt/equity. And as you know, we've traditionally shied away from debt. Very -- we're a very conservative company. We've got really strong balance sheet. And if we've got the cash on hand, we'd rather not pay interest. But if the situation were -- if there were an opportunity to take a look at that, we certainly would. But there's no plan today to take on any additional debt for any particular reason, and tax reason would be included in that.

The next question comes from the site of Peter Lisnic with Robert W Baird.

This is Josh Chan filling in for Pete. When you guys talked about price pressure, would you classify that as being isolated to that single competitor that you mentioned, or would you say it's more broad-based than that?

We've experienced it over the years from everyone. It was not a new phenomenon for us at all.

Okay. But so nothing new from, I guess, the rest of the competitive base?

Well, they tend to be -- that's their primary weapon, we think, is price and trying to compete with us because of our specifications and broad product range that we had and superior service. So that's a differentiator they use, but it's just -- it's been with us for as long as we can all remember.

All right, that makes sense. And if I look at the pace of acquisitions, that has certainly picked up in recent months. Could you give us a little bit of a sense of how you typically think about improving the acquired businesses under your ownership compared to when they were standalone companies? Do you target a certain percent of sales increase because you have stronger marketing, or do you look to consolidate capacity? How do you typically approach that?

Josh, this is Karen. Usually, when we look at companies, we're always looking at where there's addition, we want to be able to take advantage of some of Simpson's strengths. So as we look at companies to acquire, we're looking for their products, is it something that can be highly specified, have they got a sales market that we're interested in, does it fit within our strategic objectives. Once we find those companies, we certainly have some of our quality policies and quality issues that we put in. We look at their manufacturing and things that maybe we can do to help efficiencies in manufacturing. One of the biggest things we offer is our sales force and our distribution footprint. Typically, that's something that really helps grow those products and grow that market size. But there's always, during the integration, some expenses associated with trying to get to those things, and some of those could be accounting principles that we need to be sure that we meet our public company obligations. So those are some of the things that we will be working on again in the first 3 to 6 months of the integration. But to make them grow, we certainly hope from our specification standpoint, our engineering, our testing and our sales, sales marketing, manufacturing, we bring expertise into all of those areas. I would add, however, that of the companies that we acquired, all of them have some very good expertise in various areas.

Okay. Right, that definitely makes sense. And then last question. I think Brian mentioned that April sales were comparable to last year. Did I hear you correctly? Because you were up 20% in the first quarter or so. Did you mean to say that sales slowed, or was it at the same pace?

So when I gave a little color on April, it's -- April this year is tracking pretty much in line with April of last year.

[Operator Instructions] Our next question comes from the site of Gene Pavlenko with D.A. Davidson.

Most of my questions have been answered. But one additional question is would you expect Europe to be profitable in 2012? And if not, would it be a bigger drag on earnings this year versus last?

I think we would expect Europe to be profitable. I don't think it would be as big a drag as it was last year.

Okay. And same question for China.

Similar. China, one of the key issues there is volume increasing sales. And as we continue to establish offices throughout the region, keep good, trained, quality salespeople and manufacturing people, we think that as volume goes, so that will help our operating situation there. So I would expect -- I guess it's a little too early to tell on that one.

Okay, fair enough. And you guys are expecting better fixed overhead absorption with greater volumes, but we're also seeing pickup in steel prices. Would the absorption more than offset the higher cost of goods sold in the coming quarters?

That's a great question. I don't know that, that would be the case. I mean, like I mentioned earlier, Q2, Q3 are always a bit busier. Our factories are producing more products. But I -- incrementally, I don't know that it would be -- I don't think it will be as good as last year.

You mean the gross margin?

Correct. Right.

The next question comes from the site of Robert Kelly with Sidoti.

If you could, what did acquisitions contribute to sales during 1Q?

Robert, it's Brian. I'll take that one. So it was about 3% of the growth, or just a little less than $5 million.

$5 million. And then you talked about incremental costs in the release related to acquisition integration. Can you ballpark what that number was?

It -- I don't know that -- I don't have that number offhand. Sorry.

Okay. Was it less than $5 million? I'm just trying to get a sense of what the organic business is doing in 1Q.

I think that would be a correct statement.

Okay. I'm just trying to follow some of the commentary, because coming out of last quarter, you expected some drags in the gross margin related to acquisition and underutilization. It didn't come to pass in 4Q. You're talking about sales being roughly even through April with the year ago. And that was actually a tough comp for you, given how poor the first quarter was with weather, being negative and whatnot. The gross margin guidance to mid-40s just seems a little bit conservative, considering what you've done here in 1Q. Could you just walk us through the puts and takes of a mid-40 gross margin for the middle part of 2012?

Well, I think if we're looking at -- this is Brian. So if we're looking at production volumes on par with where we were last year, we would probably see some pressure from labor and material going into that gross margin number.

Okay. Fair enough.

The thing that we benefited from in Q1 was we had some nice volume that we ran through the factory, and that contributed to the increase. I'd love to say that we would see similar increases in Q2, Q3, but we're just not sure of that yet.

I understand. Based on the commentary coming out of the builders, and I know you're trying to shrink your exposure there, but sentiment seems to be picking up, at least in the North American market, as it relates to building, whether it be remodel or new construction. Can you just comment on your plan for the year? I know you talked during the last quarter about a flattish-type year for 2012 vis-à-vis 2011. Has that expectation changed a little bit with what the builders are saying coming out of 1Q and into April?

Well, not really. First of all, I'd like to say that we're not interested in reducing our footprint with the builders, because we view all that business and related business we have as core product business, and we're doing a lot of different things, particularly from our product development standpoint, to continue to really ensure that we have that business. But what we're trying to do is expand in non-residential areas and also non-U.S. areas, so that the impact of a downturn isn't as great. But we're certainly not diminishing our efforts to service that sector of the business that we have really effectively. It's difficult to tell -- forecasting forward for the year. We do have some positive input from our builders, and we also have some positive input from some of the customer base that we enjoy. And there are some enthusiasm there. But as somebody asked the question earlier is this related to built-up demand that somehow was nonexistent before and they're filling the pipeline or not, and we're just uncertain about that. And just recent times, the orders that we got were almost always directly related to a sale, and these days, I think there's more interest in trying to build up inventory to be more effective at serving what appears to be an uptick. But we're just not sure at this time.

[Operator Instructions] Our next question comes from the site of Barry Vogel with Barry Vogel and Associates.

I have a couple of questions for Brian.

Yes.

I would like some color on -- more color than we have on the Fox Industries operation, which you acquired last year's fourth quarter, your Automatic Stamping operation and S&P Clever, which you acquired in this quarter. And so if you can give reasonable color on the operating profits or losses for each of those operations in the quarter as well as the sales, that would be question number one.

Okay. So the -- Barry, I would really like to give you that information in total for all of those. Just because it's something that we're working on those integrations today, and...

I understand that.

But -- so we mentioned that sales for each of those for Q1, it was slightly less than $5 million. So that contributed -- of the total growth of the company, it was about 3%. As a group, at the operating profit line, it did not make money due to a lot of the factors that we've mentioned before, some of those atypical costs, some of the integration costs and such. But as a group, they were not profitable.

How much did they lose as a group?

I'd rather not say at this -- today, if you don't mind.

Well, it's a group, so we're not talking about identifying any one of them. And like the other questioner asked, he wants to see what happened to the organic business. I think it's a fair question.

All right. So I could say that it was -- it's about $5 million.

Okay, that's great. That's very helpful. And as far as that $5 million group effect of those 3 recent acquisitions, is it likely that, that number's going to go down in the second quarter?

It should, because we had some of those atypical costs. We had the inventory step-up at S&P of about $500,000 -- or I'm sorry, yes, S&P step-up, $750,000, sorry, and some finder fees. The -- so it should -- that loss should -- I would expect that to decrease.

Now would that $5 million include everything that has to do with acquisition costs and step-ups and all that, all of this inclusive?

Yes. Although there are some folks that are working on the integrations that are from other parts of the company that we don't necessarily identify to those particular items, so there is some general costs that are blended in through the rest of the operation. But most of those costs are identified to those acquisitions.

Now in one of the paragraphs in your press release, you talked about professional fees of $2.4 million. Would those $2.4 million fees all be in that $5 million number?

No.

So would they -- would any of that be in the $5 million number?

About half.

Okay. Okay. Now you gave us some new tables last year on the 10-Qs, which gave us North American sales, operating profit, and you gave European sales quarterly and an operating profit and the same with Asia-Pacific. And you did give us operating profits on all 3 of them. Could you give us the net sales for North America in the quarter, Europe in the quarter and Asia-Pacific?

Sure. So net sales in North America was $128 million. In Europe, it was about $28 million; Asia-Pacific, about $2.4 million.

Okay. And -- okay, that's helpful. Now are you going to continue filing in your Qs the same methodologies you did last year quarterly?

Yes.

Okay. And one last question. What were the net proceeds on the sale of San Leandro?

San Leandro was, just a moment, please, bear with me, about $6.3 million.

And I missed the California increase when Tom was rattling off sales gains by region.

Barry, that increase was 15%.

There are no more questions at this time.

Okay. Well, thanks very much. And if anybody has further questions, please give me a call.

Thank you.

Bye.

This concludes today's conference call. You may now disconnect.