Barclay Simpson - Chairman Mike Herbert - CFO

Arnie Ursaner - CJS Securities Garik Shmois - Longbow Research Alan Robinson - RBC Barry Vogel - Barry Vogel & Associates Steve Chercover - D.A. Davidson Robert Kelley - Sidoti & Company Scott Macke - Add Capital Tom Zeifang - Lucrum Capital Keith Johnson - Morgan Keegan Jon Locker - Tiger Global Harvey Hannerfeld - West Creek Capital

Good morning, everybody, and thanks for your interest in our Company. Mike Herbert, our CFO, and I will try to bring you up to date.

Was the second quarter a good one? Well, no and yes.

On the no side, we never are happy if our sales and earnings do not beat the prior years, and that's due to both pride and greed. We're winners, and we plan to remain so.

Plus, the Company making large profits is the only way that our people make a lot of money themselves. On the yes side, sales were down but only 5.2%, a small fraction of the decline in U.S.

housing starts. So, it looks like our program to reduce our dependency on them is making some progress.

Profits down 28% certainly is a no. On the yes side, we still made a reasonably good return, despite putting substantial sums behind our long-range investment in China and Asia, which we feel to be a vital part of the future of this Company.

Our 15-person sales office in Beijing is charged with discovering what products we need to manufacture in our new 175,000-square-foot plant near Shanghai. We expect to have the plant up and running in the first quarter of '09 and at an estimated cost of about $8 million.

There's no question but what we need to become more and more of an international company, and we'll spend whatever is necessary to get there. In that connection, Europe is a plus.

Sales went up 18% to $36.6 million, and it was profitable. Germany's sales were up 23% and profitable.

So the expensive personnel change there in Germany, they're starting to pay off. A negative was the U.K., where we could not offset a tough economy.

France, the home territory of our European manager, continues to do well, and Denmark was up also. Currently on the negative side is Dura-Vent.

Sales in the quarter were down 10%, and the loss was $1.8 million. Obviously, this kind of performance cannot continue.

The Vicksburg operation should stop being a drag by the end of this year, and the Protech acquisition adds products that provide superior venting for green, new products such as tankless water heaters. Will the last half of the year see Dura-Vent get ready to make money next year?

Well, there are no sure things, but we think so. Canada came on strong, with sales up 30% and an excellent profit margin.

In the second quarter, our sales outside of the U.S. went from 19% of total company sales to 23.8%.

Home center sales were down 6% in the quarter, but Home Depot was up 3%. And that's, you may recall, quite a change from being down 19% in the first quarter.

The increase may have been helped some by an innovative merchandising program. In May, we set up samples of collapsed decks and how to prevent such disasters in front of Home Depot stores in Seattle, Chicago, Atlanta, and New York.

And two decks in Seattle collapsed during the time that we had our display up there, lots of free publicity. I suspect that Home Depot's 3% sales increase may have been partially due to more sales of deck connections.

On a more general subject, I often get the question as to how have we been able to get such a high percentage of the market for structural connectors in the U.S. and now, have we become number one in Western Europe.

And why do we think we can do the same thing in China? That's really not too bad a question.

The major reason is that the culture of our Company enables us to attract and keep the best people. We're not a bus stop.

People come here for a career to be part of a winner and one that is not for sale. And it's made clear to everyone that none of us has a job without a customer.

And that feeling and our skills in marketing, engineering, manufacturing, sales, especially responding quickly to the needs of specifiers, distributors, and users, these skills have been developed and enhanced for over 50 years. And in the recent past, as software skills have become vital, so has our level of knowledge and creativity become enhanced.

We believe, and our leading positions in both the U.S. and Europe seem to confirm it, that trust is a key item.

The majority of our products still are structural connectors. Architects, engineers, and contractors need to trust the numbers in our catalogs.

These connectors are crucial to putting a structure together, so it will not be leveled by strong winds, seismic forces, or other pressures. Our test facilities are by far the best in the industry, and that's a critical factor in developing trust in the solutions that we provide.

Our total number of employees has varied some, and now it's back to about the same as a year ago, despite us having to lay off roughly 200 people. The acquisitions of Swan, Liebig, and Protech practically balanced the layoffs.

So, questions?

How are you Arnie?

Barc, how are you? Good morning.

Good.

The first question I have is, you indicated in your press release that you changed your compensation method a little bit of a shift away from the cash profit sharing to more salaried levels. And I guess, I'm trying to understand the accounting treatment of that, because, if I were to add that back into gross profit, your gross margin would have been well north of 40%.

Mike, can you perhaps help us on the accounting treatment of that?

There's really no difference in the accounting treatment. The person's salary and bonus is reflected in the appropriate category, and so you cannot-- there's nothing to consider there.

Well, do you have it in SG&A, for example, because these seem to be more operating expenses for the manufacturing?

I guess a good way to explain it is, if a person was making $80,000 and they now currently make $100,000, that $5,000 per quarter used to be part of CPS, cash profit sharing. That cash profit sharing also was reflected in admin.

So, there's no difference.

Okay. My second question, if I can, is on -- Barc, I know you've had a lot of industrial initiatives to try to offset the weakness in U.S.

housing. Could you update us on, perhaps, some of the successes you're having in the industrial area?

No. Unfortunately, I don't have late information on that.

But I do know we've been making progress. Now, exactly where and how I'm not sure.

I'm sorry, Arnie. I will attempt to get some stuff together on that.

That would be great. The final question I have is on the two small acquisitions you've made.

I know they're more strategically important than the numbers would indicate, but can you give us a feel for what goals would have to be met to achieve the earn-outs in both of those?

Well, our goal is always that, within a year or, at the absolute most, two years that any acquisition contributes to our profits and also is making a good return on our investment.

Right. But, specifically on Protech, there's a $2.25 million earn-out if certain performance targets are met.

Can you share with us what those targets would be?

It's based on revenue growth.

Of what sort of level, Mike?

We're not going to disclose that.

Okay. Thank you very much.

Okay.

I'm just wondering, first off, in Europe, you're still seeing strong demand on the continent. What's your visibility going forward?

Are you still expecting to see it through the balance of this year and maybe even out into '09? If you could talk about what you're seeing over there and just how sustainable the strong demand is out there --

Well, I think that it's the same reasons that we've succeeded here. We now have built a brand name.

And the definition there is, my definition is that you can get somebody to specify and/or use your product, even though it costs a little more, because it's worth more to them. They make money off it.

And we are succeeding in that. It's not easy.

It's not easy because each country is somewhat different in the products they use. And the volumes are not equivalent to the population like they are in the States because Western Europe does not have problems, except for Italy.

Italy has seismic problems. But the rest of Western Europe, they don't have seismic problems.

They don't have high winds. So, you don't have enforced codes to really help you in most places.

So, we've had to do that. It's taken us longer.

But we now are getting there, and now we're headed into Eastern Europe. That's the goal of our manager there to get significant business in Eastern Europe.

And I think that's going to be a long-range future of the Company's sales.

Is there a timetable to getting in and expanding Eastern Europe?

No. There is -- it's kind of, you know, when you set [for see] has goals, our manager there.

And the Company always has goals. However, timetables depend a great deal on what happens in a particular country.

Like, in the U.K. our objectives there aren't being met right now because the U.K.

economy is not in good shape. So, you have to change your short-term goals.

You don't change your long-term goals. And we have long-term goals that we don't publish.

Thank you for that. And can you just talk about pricing trends in the quarter?

I know you had a price increase announced. Can you just talk about the success of that?

And in the press release, you mentioned the possibility for additional steel price increases. Can you just --?

Yes, the price of steel has gone up substantially. If our costs go up, why, so do everybody else's.

And some go up more than ours do. We have very good relations with the steel mills -- have had for a long time.

And so, we can get it back. We don't like to.

And we don't raise prices unless our costs go up, because we have an excellent margin already. So, generally, we are constantly increasing our efficiency of manufacturing.

And because of that, usually, we don't have to raise quite as much as our costs go up in relation to the raw material. In this case, that's true.

We didn't quite raise it as much as our cost of raw material went up. And right now, no homebuilder wants to see any cost of his go up.

So, any increases aren't welcome. And we have to justify them.

Well, thank you for the answer, and good luck.

Thank you.

Good morning Alan.

Good morning. I wonder if you could provide a little more detail regarding your gross margin improvement sequentially.

Clearly, it's on much higher volume. But I wonder if you could sort of drill down into what caused the -- what were the main components of that improvement, whether you could discuss mix, pricing, operational improvements or whether it was just volume.

Volume did have a big impact based on, as sales were up, we did take some advantage of the efficiency there. We were able to recover costs because of a price increase in June.

That also helped. Those are the two primary components.

We did see a little bit of pressure in the shipping area based on the cost of fuel.

And in terms, again, regarding the price increase in June, can you discuss the way that orders fell during the quarter? Did you get a large bolus of orders in the final month?

How did that pan out? Can you give us some color there perhaps?

No. It was surprisingly made -- surprisingly little difference

Okay.

Less than unusual.

Okay. And then, just finally, with the three acquisitions you announced in the press release, Protech, the Ventinox product, and Ahorn, could you give us an idea of the sort of revenue run rate you expect from the combination of those three acquisitions?

Not yet.

That's all I have.

The next conference call, we'll have that.

Okay. Thank you.

It's too early yet.

How are you Barry?

How are you Barc?

Good.

Okay. The first question, can you give us the percentage changes, which I usually ask you, for the West, excluding California, California, the South, Southeast, Midwest, and Northeast?

Well, we had -- for the wrong reasons, California is becoming less and less of our sales. It actually you will see -- in the quarter, California sales went down 20%.

And they're now down to 20.4% of our total in that quarter.

And the West, excluding California?

Well, the West went down 20.6%.

And the South/Southeast?

South/Southeast was minus 7.5%, and the Northeast was up 17.9%.

And the Midwest?

The Midwest was practically flat; it was up 1.9%.

And how about Texas and Florida, which have been very -- well, Florida's been very difficult, along with California.

Well, we had a switch between Texas and Florida. Texas now is second.

Were they up in the quarter?

No. They're both down.

Okay. And could you tell us roughly what the sales change or what the sales were of Strong-Wall anchoring systems?

Well let see, the Strong-Wall, because it depends on new housing, was down shear walls 35%.

And how about anchoring systems?

Anchor systems was up a fraction -- a small fraction.

Okay. Now, when you talked about Europe being $36 million in revenues on your introduction, you did acquire Liebig in April.

Did they contribute to that $36 million?

Let me check here. $1 million.

That's it?

Yes.

Okay. And Mike, I have a couple of questions to you.

Where are you in the sale of the property in San Leandro?

We are still doing environmental remediation. We originally estimated that was going to cost us $300,000.

Based on some further analysis, that's now going to cost $600,000. That remediation should take place in Q3 and Q4, and we are still actively marketing the property.

So, until the -- do you have to wait for the remediation to be finalized before you can sell the property?

Not necessarily. The contamination issue is not really serious.

Okay. And I have a couple more questions to you, Mike.

What was the operating rate in your U.S. plants in the quarter?

I don't understand your question.

The operating rate -- rate of utilization of capacity in the United States in the connector plants in the quarter?

I do not have that data.

You don't have that data. All right.

And, Barc talked about an $8 million cost for China. Could you elaborate on that?

Is that $8 million for the purchase of facilities?

No. That's what it will cost to build it.

Okay, so you're building a facility. Okay.

And as far as the acquisitions you announced on the press release, what will be produced in the Chinese plant of that company that I can't pronounce?

We don't know yet. We haven't really taken it apart, which we shall do here shortly.

Okay, so why did you buy it?

Why?

Yeah.

Well, because the products fit right in. It's the same reason, Barry, as almost any acquisition.

Those products just work.

Okay. Thanks.

I'll go back in queue. Thank you, Barclay.

All right. Just one correction here.

I made a mistake. Texas actually was up a little bit.

How much?

About 10%.

That's pretty good.

Yeah.

All right. Thanks.

Hello Steve.

Good morning, thank you. Two quick questions; first of all, with respect to steel prices, which you said are still going up.

Is your philosophy to lay in abundant steel, in effect?

Well, that changes day-to-day. So, there is not a general philosophy because your estimate -- our steel buyer is very sharp and has very close connections with the steel mills.

And yet, day-by-day, you get a different view as to what's going to happen. So, you either lay it in, or you don't.

Sure. With a lot of commodity prices rolling over and, I guess, with the build for the Chinese Olympics now done, is there any sense that steel prices might roll over in the not-too-distant future?

Any sense that we gave you would not be as good as what you read.

Okay.

We're not experts on that.

Second question, the production capacity that came along with Ahorn -- for only an $8.5 million investment, are you actually getting plants in the Czech Republic and China, or is it some sort of contract manufacturing?

We are getting production facilities in the Czech Republic and in China.

So they must be rather small, I would expect.

Quite small.

And will you, for instance, roll in the Chinese production capacity that you're buying now into what you're building in Shanghai once it's operational?

It's too soon to analyze that because, until, I think it's going to be the end of the year before our 15-person sales office in Beijing really knows what looks like it will sell and what we should make in that plant. And we just don't have that information yet.

The last question, I hope it's not silly. But are they being told to curtail their activities in the lead up to the Olympics?

Say that again.

Are they being told to curtail their activities? I realize they're not manufacturing or creating pollution.

No. We're a long ways from Beijing.

Anyhow, we're not manufacturing.

Okay. Thanks, Barc.

Okay.

Hi Bob.

Hi good morning, thanks for taking my question. Just, if you would, the total price increase that you guys have put through year to date, on the whole?

We don't discuss it.

Okay. Is it in the single digits?

The cost of steel is up…

Bob, we don't talk about it.

I'm with you. Okay.

The inventory gain, 6.5%, is that due to the acquisition acquired new products? A little help there.

It is partially due to the acquisition and partially due to higher prices.

Of your raw material?

Yes.

So what is the lag between, is there a lag between when you're buying your steel and raw materials and getting the increases, or is that also dynamic?

We carry enough inventory that we are able to decide when we need to raise prices, because of our large inventory.

Okay.

A basic principle of this Company has always been don't run out of inventory.

Excellent. Thanks, guys.

Hello Scott.

Hi good morning gentlemen, thanks as always for taking my call.

All right.

Just to follow up on that, is there anything different in the way you purchase steel that would change that cycle time relative to what we would suspect just looking at inventory turnover; i.e., are you agreeing on steel prices ahead of when you're actually purchasing them?

Sometimes and sometimes not.

I mean, is it a common practice, or is it…

They're all over the place.

Okay. Can you remind us; are you on LIFO or FIFO?

Say that again.

FIFO.

FIFO accounting? Okay.

Thank you very much. Just then to follow up quickly on the earn-outs, what specific metrics are the earn-outs based on?

We base our earn-outs on revenue growth, on new product introductions, acquisition integration. There are numerous factors.

Okay. Are there any that are predominantly more important within that list?

No, it depends on the acquisition.

Fair enough. And you gave us the Liebig contribution as about $1 million.

Did I catch that on the call?

That was the revenue.

The revenue? Thanks.

They did not contribute to earnings in the quarter.

Okay. And then, just given the fluctuations up and then, now, down in residential construction, can you just take a step back, if there is such a thing as a normal year, just to kind of walk us through seasonality?

Is the second quarter? Would that normally be your seasonally strongest quarter as people stock ahead of the peak construction season?

Or is there something different to seasonality than we might otherwise expect?

Well, the second and the third quarters are, by far, our biggest quarters.

Guys, thank you very much for your time. Much appreciated.

Okay.

Yes sir.

Good morning.

Good morning.

Can you give us some sense of what's going on in July in Canada and continental Europe?

Well, they look pretty good.

Since the second quarter, they're continuing the same trends?

Yes. Actually, I've been a little surprised at our sales being -- they're not down, they're kind of flat.

And that's really considering the market, it's quite good.

You mean flat sequentially or flat year-over-year?

Flat year-to-year.

Okay. Thank you.

Hello Keith.

Hi, how are you guys?

Good.

I apologize if I'm duplicating questions you may have already answered; I got in on the call a little late. On the Dura-Vent segment, you guys are still going through the process of closing and moving product from Vicksburg to California.

Is that correct?

Yes.

How much of a cost was that during the quarter?

Oh, boy, have you got that separated Mike?

We don't have it separated.

I am sorry, we don't have it separated but it certainly has something to do with that large loss.

Okay. I missed that earlier.

What was the loss in Dura-Vent for the quarter operating?

$1.8. That's the after-tax loss.

Okay. And is that process about completed with Vicksburg, or will that kind of continue for the third quarter?

It will continue some. But certainly, by the end of the year, it's going to be done.

And our manager there has a goal ahead of that. But these things usually take a little longer than it looks like it will.

I guess, kind of looking at the other initiatives that you guys have underway with China, and you may have already said this earlier, but how much did those initiatives cost you on the quarter as far as kind of a bottom-line earnings per share or a dollar amount?

We got a number on that.

It cost us approximately $0.01.

Okay. And Swan, did they contribute to the bottom line?

Swan did very well. Swan is an unusual acquisition in that, immediately, it contributed to profits.

Okay.

And they're tough to integrate, for the best reason. They've been so successful all by themselves, this small company, and we don't want to break up anything that's been reasons for their success.

So, integrating their sales into our branches is a more difficult process than usual, for the best reason.

Okay. So then, I guess what you're saying is, where you stand now with Swan, there's still a good bit to go as far as integrating that product line throughout your distribution systems in the U.S.?

Well, we're starting to get it integrated.

Okay.

And integrating doesn't necessarily mean that we take away from Swan what you usually take away from an acquisition because they aren't doing it well.

Okay. Could you give a little color on your markets exposed to non-residential construction in the U.S.

and what kind of trends you may have seen kind of through the quarter?

I really don't have that information.

Okay.

We know we're doing a better merchandising job and a better sales job, and we think we're getting a larger share of the market in non-residential as well as residential. And we certainly expect that anchor systems, you know, those products are used in road building and high-rise.

Right.

Where our products, our structural connectors are not. It looks like anchor systems is going to become a more important part of our future, also, because of Asia.

Okay. All right.

Well, that's all I had.

Okay.

Good morning Jon.

Good morning. Thanks for taking my call.

Just a couple of quick questions. Can you breakout inventory in terms of raw materials in process and finished products?

Do you have those numbers?

I haven't got them. Sorry.

Okay. And in terms of inventory management, you mentioned earlier that you're on LIFO.

Is that true for steel as well, or is steel average cost?

FIFO.

FIFO. So steel is FIFO as well?

Yes.

Okay. Thank you.

That's all I've got.

Mike, could you give us a breakdown of your uses of cash during the quarter, please?

No, it will take just a second. I don't have that easily available.

We'll provide that in the 10-Q.

Okay.

Hi Tom.

Hi. Can you give us a sense of the FIFO layers or how the math's going to work on your cost of goods with gross margin, because if you're first-in/first-out, I have to assume that you're eating into all those layers and we're going to see gross margin pressure in the short run.

Well, we turn our inventory not as much as other companies, but we turn ours within six months. So, it's not going to have any significant impact.

Can you give us some sense of margin hit if prices stay at the same trend rate on steel?

We'll have those offset by price increases.

Okay. Thank you.

Good morning Harvery.

Good morning, thanks for taking my call. I had a quick question on something I read in your press release yesterday evening, and I was hopeful you could elaborate and explain what it means.

I'll just read it. It's one little part of a sentence.

It says, "and a shift begun in the second quarter of 2008 of some of the compensation of U.S.-based salaried employees from cash profit sharing to salary." Could you explain what that means?

Historically, we've had low salaries in the Company, and so we made a shift to move some of the cash profit sharing to the people's base salaries, and we use that cash profit sharing bonus. So, in the case of Q2, people, on a dollar-for-dollar basis if someone was supposed to get a bonus of $10,000 and they received a $4,000 raise for the quarter, their bonus is now $6,000.

So, it's giving the employees a little bit more certainty and enabling them to make sure they can pay their Pacific Gas and Electric bill.

So, just so I understand, people are getting paid the same, irrespective of the profitability of the Company?

No. No.

It's still, the only way that our people make a lot of money is if their branch makes a lot of profit. But we were concerned because we've been so profitable over the years.

You know, every single year, except last year, every single year since we went public in 1994, we've been up in sales and earnings. So, they are used to making considerable money.

And we felt that we had to make a little adjustment not a big one, but a little adjustment to help in these temporary down times.

Okay. So it's not a change in philosophy in compensation.

No, it is not.

Thank you very much.

Mike, can you tell us what your capital expenditures look like now for the year and your depreciation and amortization?

For our capital, we expect to spend $21 million for the year. Depreciation and amortization is going to be around $31 million.

Does that $21 million include your expenditures to build the plant in China?

It does.

So that $8 million, is that going to be spent, do you think, in '08?

We spent approximately $3.2 million of that, and we look to spend the rest of it before the end of the year.

So, basically, out of the $21 million, $8 million of it would be China.

That's correct.

Thank you very much.

Okay. Thank you, Chris.