Apr 24, 2015
Executives
Thomas Fitzmyers – Vice Chairman Karen Colonias – Chief Executive Officer Brian Magstadt – Chief Financial Officer
Analysts
Daniel Moore – CJS Securities Garik Shmois – Longbow Research Steve Chercover – D.A. Davidson Barry Vogel – Barry Vogel & Associates Joshua Chan – Robert W.
Baird & Co.
Operator
Good morning, ladies and gentlemen, and welcome to the First Quarter 2015 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 these factors and cautionary statements 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.
Thomas Fitzmyers
Thanks, everyone. Good morning, and welcome to the Simpson Manufacturing Co., Inc.’
s, first quarter 2015 earnings call. Our earnings press release was issued yesterday.
It is 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.
North America had a good sales quarter up nearly 10% compared to last year based on an increase in housing starts and construction activity in many parts of the region. Although many areas of the U.S.
had a tough winter, we don’t believe it was as bad as last year’s winter. Europe’s sales were down due to foreign exchange effects and we’re seeing impacts of a continuing tough economic environment there.
Total net revenue there was essentially down slightly in local currency even with Q1 being an exceptional quarter last year for Europe. As we mentioned before we estimate that about 55% to 65% of our total company wood product sales are dependent on housing starts.
North America operating profits were down $2 million or 9% due to reduced gross profits and increased operating expenses as noted in the press release. Europe’s operating loss was $1.6 million worse by $700,000 over last Q1 and this was due primarily to lower gross profits.
Gross margin in Europe however was higher 38.2% this quarter versus 35.3% last year. We continued to have a very strong financial position, $230 million in cash at the end of the quarter, no debt and a $300 million unused line of credit which gives us flexibility and a capability of continuing to invest in our long-term strategic plan.
Before I turn the call over to Karen, I also wanted to mention that our Board of Directors has just increased our quarterly dividend to $0.16 per share, that’s an increase of 14%. Karen?
Karen Colonias
Thank you, Tom. We continue to make strides in the development of our new design software for truss manufacturers and this project remains on track for a Q2 release.
This is a large market, we estimate it to be over $500 million at today’s housing starts. We believe we are positioned to meet the needs of about a third of that market with this new software release, our experienced sales teams and our manufacturing capabilities.
With regards to our customers serving the residential builders and home center markets, we continue to supply those customers with our no equal service, support and inventory. Our sales teams, engineers and inside sales support take customer services to levels that are unmatched in our industry.
All our customers and users of our products benefit from our continuous and obsessive focus on meeting customer needs when it comes to supplying and supporting our many product lines including connectors, lateral systems, fasteners and anchor products. We’re also on track for a Q2 release of our new U.S.
code listed FRP, Fiber Reinforced Polymer, product line which is used to strengthen concrete projects. In March we announced that we’re closing our sales offices in Asia.
This was not an easy decision as we have many good employees in this region. We had continued losses in those Asia sales offices and decided that we could no longer continue down this path.
Those losses averaged in excess of $2 million annually over the last four years on revenues that have grown from over $4 million in 2011 to just over $9 million in 2014. We will continue to manufacture mechanical anchors in our plant near Shanghai as well as maintain our sourcing and support service offices in Asia, and we remain committed to our sales strategy in Australia, New Zealand and South Africa markets.
As always we’re dedicated to our entire product line, we work hard every day to ensure that we continue to meet our customer’s needs, for service, support and product availability. We’ll continue to monitor our operations and SG&A expenses around the world to strive for long run returns that are acceptable to us and our shareholders.
I’d now like to turn the call over to Brian, to share some additional financial information.
Brian Magstadt
Thanks, Karen. As noted in the earnings release, Q1 2015 gross margin was 43.9% down from Q1 last year, primarily due to the workers’ comp credit adjustment last year.
The margin differential of wood to concrete products is about 17 percent points this quarter compared to 15% Q1 last year, with concrete products down – and wood products just down slightly. As noted in the press release we believe the estimated gross margin will be in the 44% to 46% range for 2015, although depending on the rest of the year that may change.
Total operating expenses as a percent of sales were up a fraction of 1% in the quarter compared to last year. Regarding taxes, the tax rate of 38.1% is down slightly compared to last year Q1 and we still believe the annual effective tax rate will be in the range we estimated in the last annual report which was between 36% and 38%.
Q1 2015 CapEx was about $6.4 million primarily for manufacturing equipment and software in the U.S. We estimate total 2015 CapEx to be in the $30 million to $33 million range excluding software.
Although we’re looking at some additional spending which may help our long-term prospects which were not included in that amount. For 2015, depreciation and amortization expense is expected to be between $29 million and $31 million of which depreciation is $23 million to $25 million for the year.
We did make an acquisition in our European concrete products business where we acquired a previous distributor which we believe we can grow beyond what they were previously doing with our products. The cash paid was less than $1 million [plus as a smaller amount] [ph].
Before we turn it over to questions, I’d like to remind you that if you 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 early May.
We’d like to now open it up to your questions.
Operator
Thank you. [Operator Instructions] First we’ll move to Daniel Moore with CJS Securities.
Please go ahead, your line is open.
Daniel Moore
Good morning and thank you for taking the questions.
Brian Magstadt
Good morning.
Karen Colonias
Good morning.
Daniel Moore
Obviously 10% revenue growth pretty solid in North America. Tom you talked about weather, how much of a benefit was weather year-over-year and maybe just a little bit of detail on where you’re experiencing pockets of strength either by geography or end markets in North America?
Karen Colonias
The – this is Karen. Certainly in the Northeast we still had a very tough winter, as a matter of fact I think there are areas that are still under snow.
But when we look at the rest of the region, we were not limited by rain in certainly the western parts of the country. We are seeing good growth in the western states, we’re seeing good growth again in some of the areas in the Southeast.
So I think overall as we look at housing starts coming back, they’re tracking very similar to - is in those larger population areas.
Daniel Moore
I guess I’m trying to get a sense of, do you feel like Q1 was a beneficiary, weather was beneficiary or the trends that we saw sustainable - that kind of high single digit to approaching low double digit growth, is that sustainable as we look forward?
Karen Colonias
Yeah, I think the weather was not as big an impact as we – as you would normally think for Q1, so I think it starts to stay where they are that we would see that being more of a sustainable growth.
Daniel Moore
Excellent. And fall volume, what was pricing like during the quarter?
Karen Colonias
Yeah, pricing – there were no pricing anomalies, pricing was flat during the quarter.
Daniel Moore
Okay. And then just one follow-up on the gross margin or COGS, gross margins in North America little lighter than we had anticipated.
What were some of the key cost factors pressuring margins and do you anticipate any material change in those for the balance of the year?
Brian Magstadt
Daniel, it’s Brian. Some of the issues there were product mix, as you see that the differential between the wood and the concrete products expanded a little bit and as I mentioned in the prepared remarks.
Although wood was down slightly, concrete was down little bit more there. And as wood sales – the wood sales as noted in the release were up 5%, the concrete was up 6%, so a bit of a mix.
So bit more sales on the lower margin concrete products affected a little bit of that margin, in addition to that workers’ comp credit there.
Daniel Moore
Lastly, and then I’ll jump back in queue, on the concrete side is it cost pressure, is it sort of pricing competitive, what’s driving the little bit of margin pressure there?
Brian Magstadt
I don’t know…
Karen Colonias
Yeah, let me – would like to take that one. The concrete products that’s – in some of these markets is a newer product line for us.
And so we are working on the cost side of that gross margin as well as the differentiating our product to be able to deserve the higher price but we’re definitely seeing improvement in that gross margin in the positive direction on our entire concrete product line.
Daniel Moore
Very helpful. I’ll jump back in queue, thank you.
Brian Magstadt
Thanks.
Operator
Thank you. Next we’ll move to Garik Shmois with Longbow Research.
Please go ahead, your line is open.
Garik Shmois
Thank you. Just a follow-up to the last question with respect to the wood and concrete spread, I think that spread was narrowing as you moved through 2014 and you did touch upon this to why that started a reversal a bit here in the first quarter.
And can you touch upon your visibility with respect to the gross margin spread as you look out to the remainder of 2015, will you anticipate as some of these newer concrete products mature that the spread will narrow again or conversely as the residential market supposedly picks up. Do you think the spread might end up widening?
Just some perspective would be great.
Brian Magstadt
Garik, it’s Brian. I think that we’re estimating – I don’t, I wouldn’t anticipate a significant change either way.
I think obviously there is a bit of seasonality in – on the wood side with construction activity there. So I don’t think we’re expecting any significant anomalies there but – well Karen you’re get anything you’d like to add there?
Karen Colonias
No, I mean I think as I mentioned we have some fairly new concrete products that we’re still working on putting things together. I mentioned we have a new code listed report coming out in the second quarter that will help us differentiate our product and give our sales guys some tools to go and talk to specifiers.
Anytime we’re able to put features and benefits behind our product, systems approach, code reports that allows us to work on that higher price point. And we’re always working on the operations from the standpoint of the cost.
So again, I think we’ll see the gross margins on our concrete lines as we put these things in place creep up, but as Brian mentioned, I’m not sure we would see some significant difference in the spreads.
Garik Shmois
Okay, thanks. Switching on to Asia with the actions that you’ve taken, can you provide a little bit more color on your meeting total interim plans for that market, it doesn’t sound like you’re exiting it completely given you have a manufacturing presence, but are you now no longer focused on the wider Asian market and you’re narrowing your approach, is that correct?
And then I guess secondly, what is the long-term goal with respect to the Asian market and profitability there?
Karen Colonias
Right. So Garik, just to reiterate, we closed our Asia sales offices.
I think our teams in Asia are – our managing director there did an excellent job of trying to search out opportunities for our products in that sales market. As we’ve mentioned many times that is a very, very difficult market from a sales standpoint, difficult from the standpoint of differentiating your product and being able to not have to sell on price.
And when we look at the Simpson model and as we look at all of our product lines, we are always trying to, again give a product that allows us to differentiate, give our sales people the tool because we don’t want to become a commoditized product. And as we spent some years there in China it became fairly clear that even as we would bring new products into that market they would very quickly be commoditized.
So from a sales standpoint, we have completely removed ourselves from that market. We do have an excellent manufacturing facility just south of Shanghai that provides most of our mechanical anchors, the majority of that product has always been shipped and manufactured back to the U.S .market.
So this change from the sales aspect in China will not impact – very slight impact on the manufacturing. We also have excellent sourcing offices that help us in buying some of our fastener products and our mechanical anchors and of course we have some other resources there.
So we will continue to use those support facilities. They support – and this manufacturing facility because they do support the rest of our operations but we will not continue to sell products in the China market with our sales force.
Garik Shmois
Okay, thanks for that color. And I guess just lastly, if you could touch up on the priorities for cash moving forward as you’re raising the dividend today, there is a very small acquisition that you’ve announced.
Could you talk about where will you – you would rank order on the cash priority scale? From this point forward, the acquisition pipeline as opposed to how you think about the buyback?
Thomas Fitzmyers
Well – yeah this is Tom. We evaluate this continuously and certainly probably with our board and that’s where we increased the dividend 14%.
We think a lot about the dividends because we certainly don’t want to go backward on regional dividends and we’re in a cyclical business and I think it’s really important for us to have flexibility in managing what we do. I think Brian has estimated and I think you’ve said this in the past that it’s in the neighborhood of maybe a $100 million plus that we have offshore when we’re running our businesses.
So, we have $230 million on the cash today which we’re delighted to have. We’re thinking about acquisitions that would fit as Karen has talked about in the past, could be in the fastening area or a chemical area.
And Brian had indicated that our CapEx is possible because if some things that we’re thinking about might go up to some extent. So whole that’s being factored into the cash that we have and the priorities which I think we’ve outlined and as far as the buybacks go, when the price of the stock is in the area that it’s in today we’re opportunistic buyers and we just don’t feel that that’s quite the right price for us, as we’ve been given the green light for $50 million in buyback by our board of directors, last year we bought back about $3 million.
This year we haven’t bought back any, and that’s because of the pricing but we would certainly be prepared to seriously look at that if the price of the stock declined in the area that we purchased last year which I think was 32-33, 31-32 in that range. We think that’s a good investment for the company and kind of reflects our continuing confidence in the company overall, but that’s opportunistic.
So we’re evaluating at all the time though.
Garik Shmois
Okay, thanks for the help.
Operator
Thank you. Next we’ll move to Steve Chercover with D.A.
Davidson. Please go ahead, your line is open.
Steve Chercover
Thank you, good morning. My first question is perhaps a little neck picky but how do you incur $35,000 in interest expense when you’re debt free?
At year end you had $18,000 in debt so your interest was two times debt and we’re not even talking about the $260 million in cash.
Brian Magstadt
Steve, it’s Brian, it’s a great question. It’s not necessarily interest expense, it’s bank fees and other various items like that that going about line but that’s – you had a good point there that not necessarily interest expense on debt.
Steve Chercover
Okay, so it’s for the privilege of having access to cash when you need it?
Brian Magstadt
Part of our line of credit is we’ve got it, annual maintenance fees those go in there as well.
Steve Chercover
Okay, thanks. I mean I know it’s not a needle mover but it just seem odd.
Brian Magstadt
No, you’re good.
Steve Chercover
Okay. And then switching gears, obviously we know what you said that the winter 2015 was generally less severe than 2014 perhaps fastener would might differ.
But if we see a seasonal snapback and then it starts, it can hit $1.1 million. Do you think we can still see some earnings moment into your order files or backlogs to port this?
Brian Magstadt
Steve, it’s Brian, I’ll start off on that one. I think I would say, we would believe so but as we’ve indicated in the past it does really matter where starts are for us in the country.
I mean obviously starts in certain parts of the U.S. have less product in them than say your coastal areas, you’re seismic for high wind.
So starts really do matter and I think we’re seeing strength in certain parts of the country, Southeast I think has been strong for the last couple of years. I think the west is picking up little bit there and when you see starts for example California they’re going to be bigger dollar impact to us because more of our product goes into a structure or a start in California for example than the middle of the country.
So a mix of starts in the locations do impact that but in general, I’d say as starts are increasing in those regions we are to see that momentum.
Steve Chercover
Okay, thank you Brian. And then final question, so deal with China, how is it that products becomes commoditized, is it because competitors reverse engineer your product or is the market simply not willing to paying an appropriate price for what you sell?
Karen Colonias
Steve, its Karen. What really happens there is when the products becomes very new to the market you can demand a higher price premium, but as other local manufacturers duplicate that product you very rapidly lose that price premium.
Steve Chercover
So it is a function of copycatting and I guess it’s not strong enough for pattern protection along those lines?
Karen Colonias
Well, it’s not only maybe strong enough pattern protection but also the stringent requirements that you would have from the specification of a product to the actual product getting to the job is not as strong in that China market as it is in the U.S. and the European market.
So even though you could get some specifications, and I’m not saying that the products don’t meet capacity, it’s very hard to get from specification to the product actually used on the job site because basically lowest cost is what then becomes the element to get that product to the job site.
Steve Chercover
Okay, thank you.
Operator
Thank you. [Operator Instructions] Meanwhile we’ll move to the side of Barry Vogel with Barry Vogel & Associates.
Please go ahead, your line is open.
Barry Vogel
Good morning ladies and gentlemen.
Brian Magstadt
Good morning, Barry.
Karen Colonias
Good morning.
Barry Vogel
I want to go back firstly to the capital allocation issue. If we look at – and I just want to quantify the $233 million of cash on the balance sheet, you said something about offshore, what is that a $100 million of that is offshore?
Brian Magstadt
Approximately and as we all know, when it’s in a country, I mean there are to be significant tax ramifications by repatriating that cash. So it’s somewhat locked in country.
Barry Vogel
Okay. So Karen and Brian, if we look at capital allocation, and notwithstanding that you’ve been asked this question at infinite item and your balance sheet continuous to get stronger and stronger and stronger.
If we look at the fact that business conditions generally in your mix of business has not been great the last couple of years and you’re sitting here not only with a $300 million unused credit line and $232 million in cash including $100 million as offshore, but if we look at this year in 2015 and we look at possibilities of cash generation and that includes your small dividend increase, you could possibly generate depending on your inventory levels and your receivable levels $50 million a year in cash, despite everything. So, don’t you think that it maybe you’re overly conservative, I know you’re cautious but if you never do anything it’s never going to happen in terms of taking advantage of this [indiscernible] balance sheet and cash flow balance – cash flow situation?
Karen Colonias
So I’ll just address from the acquisition standpoint and then I’ll let Tom follow-up with the other opportunity to what we can do with the cash. As I’ve mentioned in the past, we are continuingly looking for acquisitions to grow in couple of market spaces, and then we’ve specifically talked about the fastener market and the concrete repairs.
I think I’ve mentioned I think the concrete repair is about a $3.5 billion market space. We have small part of that market so we are very actively looking at opportunities to grow from acquisition in that space and very similarly in the fastener market.
We have several M&A firms working for us, we have two people on staff that this a 100% of their job. So I want to assure you that we are looking to ways to use that cash from an acquisition standpoint to continue to grow to some type.
And I’ll let Tom, go ahead.
Thomas Fitzmyers
Well, thanks Karen. Also with respect to acquisitions it’s not always the case that you can buy something and have it be immediately accretive regardless of the size and I think that’s also a strong focus that the company has and in many cases, the valuation hasn’t changed too much from former times.
Also we are in a cyclical business and I think in the early period we were happy to be able to have the flexibility to manage our business, the way that we did because we have the cash and low debt that helps us a good deal. So thinking about that, thinking about our acquisitions we increased our dividend, we’re delighted to be able to do that.
We think that we have some interesting opportunities maybe in the CapEx area to improve the company overall, we’ll just have to see that could be substantial amount of money that we would spend on that and we’re really opportunistic about buying the stock back. So it’s something that we continuously evaluated and there is not necessarily a specific priority associated with that but if you [indiscernible] acquisition that was substantial and accretive that could use a lot of the cash that we have maybe in front of the line, credit percentages don’t.
Barry Vogel
Okay, and I know everything you said is valid except as far as acquisitions, we all know that the past track record over the kind of 15 year period on a net basis has risk as well as we know. And so acquisitions is not always necessarily the panacea for all this tremendous financial strength, again, basically on a risk factor just like you’re talking about risk in other ways.
And then Karen, I want to ask you something about this new software release, we haven’t had much information recently about how that’s – how the truss situation is going but how long would it take to see progress with the new truss software release if it was successful?
Karen Colonias
Well, as I mentioned to you, we’re invaded with several customers right now on this software release and we’re looking to do a general release in second quarter. I think as with anything it’s not flipping a switch overnight especially when you’re asking customers to change their software program.
So we have a pretty extensive target list and plan on how we would convert those customers and certainly supply them support. I would anticipate that you wouldn’t see a huge fact but some gradual growth in these markets and then maybe a little bit more opportunity going into 2016.
We also have to keep in mind that based on the cycle of business there is really certain window of opportunity for some of these manufacturers to take a look at our software and potentially change. So it’s not the 12 month window for you, there is a little bit narrower window.
Barry Vogel
Okay, and I had one last question. As far as home center revenues which is a very important end user market for you guys, what percentage was it up in the first quarter and what percentage was your largest customer up or not up, or flat or down?
Brian Magstadt
Barry, its Brian. So home centers as a category were up high single digits and I would say largest customers a bit less than 10% of total sales today I believe their growth was consistent with category.
Barry Vogel
Thank you very much. I appreciate it, keep up the good work.
Brian Magstadt
Thank you.
Karen Colonias
Thanks Barry.
Thomas Fitzmyers
Thanks Barry.
Operator
Thank you. Next we’ll move to Josh Chan with Baird.
Please go ahead, your line is open.
Joshua Chan
Hi, good morning. I just have a question about capacity utilization.
Where do you think you’ll add in terms of utilizing a capacity, I think Tom mentioned that potential to kind of increase CapEx substantially. I was wondering if that’s kind of the intension or whether you’re close to having to make more capital investments?
Brian Magstadt
Josh, I’ll start, this is Brian. So, capacity – so the things that we’re looking at that Tom mentioned would not necessarily be to increase capacity in our primary wood product manufacturing facilities.
We believe we’ve got a proper footprint there, although we – to be able to handle additional capacity. We work with our customers to let them know they understand that we can handle their needs if they were to take a bit of a jump.
So it’s not necessarily adding capacity there, it’s just in general it would be in different areas.
Joshua Chan
Okay, so would it be on the concrete side then?
Brian Magstadt
Too early to tell at this point.
Joshua Chan
Okay, okay.
Brian Magstadt
And I believe we’ve mentioned in the past our capital – capacity utilization just in general. And Karen what do you we’re around that?
Karen Colonias
We’re still around that probably 60%, 65%.
Brian Magstadt
Right.
Joshua Chan
Okay, okay. So that’s still – you still got lot of room.
And then my second question, I apologize if this was asked earlier, but your gross margin guidance for the full year is 44% to 46% and you already said 44% in the first quarter and that’s typically a seasonally weak quarter for margin. So why shouldn’t gross margin be better than the low end of the range that you provided there?
Brian Magstadt
Well, we didn’t necessarily say that would be coming in at the low end of the range but with one quarter under our belt that’s why we’ve got that 44 to 46 band. So it’s – we’ll see where we end or as we go through the year obviously we’re going to get better inside into the entire year but…
Joshua Chan
Okay, so maybe you’re being a little cautious just having only one quarter under the belt?
Brian Magstadt
That’s a good characterization.
Joshua Chan
Okay, great. Yeah, thanks for your time.
Karen Colonias
Thanks, Josh.
Brian Magstadt
You’re welcome, Josh.
Operator
Thank you. Next we have a follow-up from Daniel Moore.
Please go ahead, your line is open.
Daniel Moore
Thank you, again. I’ll try although I think based on the last answer you may want to give a lot of detail but the CapEx, you’re contemplating additional opportunities beyond the $30 million, $35 million - $33 million, just wondering if you would provide any color?
And then second, just curious Brian, given the closure of the sales offices where you continue to breakout Asia as a separate segment going forward?
Brian Magstadt
Daniel, great questions. So, let’s start from the second one first here.
So, we’re looking at that I mean there is specific accounting guidance on what makes up the company’s reportable segment. So we look at that, I mean obviously it’s going to take something that had small revenues and make it even smaller.
So, I don’t have any answer for you on that one today. On the first question regarding CapEx, we really don’t want to say at this point, we’re just contemplating some things that are not necessarily part of that that normal annual spend that we’re looking at.
Daniel Moore
Okay, thank you again.
Brian Magstadt
You’re welcome.
Karen Colonias
Thank you.
Operator
Thank you. And at this time we have no further questions.
Brian Magstadt
Great. Thank you everybody very much, appreciate it.
Karen Colonias
Thank you.
Operator
Thank you. This does conclude today’s conference.
You may disconnect at anytime, and have a great day.