Jul 25, 2014
Executives
Tom Fitzmyers - Vice Chairman Karen Colonias - Chief Executive Officer Brian Magstadt - Chief Financial Officer
Analysts
Arnie Ursaner - CJS Securities Min Cho - FBR Capital Markets Tim Wojs – Baird Steve Chercover – D.A. Davidson Barry Vogel - Barry Vogel & Associates
Operator
Good morning, ladies and gentlemen, and welcome to the Second 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 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 maybe recorded.
Now, I would like to turn the conference over to Tom Fitzmyers. Please proceed.
Tom Fitzmyers - Vice Chairman
Well, thanks everyone. Good morning, and welcome to the Simpson Manufacturing Company’s Second Quarter 2014 Earnings Call.
Our earnings press release was issued yesterday. It is available on our website at simpsonmfg.com.
Today’s call was 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. The Europe had a good sales quarter compared to last year as did North America despite some winter light conditions in some parts of the country that lasted into May.
Housing starts in the U.S. are up from this time last year and we are continuing to benefit from starts, but unlike lumber or other products that have a more direct correlation to starts, our products are used to a greater extent in code-based areas subjected to natural forces such as seismic or wind events and they also subject to sequential construction processes like the foundation first, then the walls and the roof systems.
As we mentioned before, we estimate that about 55% to 65% of our total company wood product sales are dependent on housing starts. Sales were up 6% in North America for the quarter due to increased home building activity in many parts of the region partly offset by a slight price decrease.
In Q2, the Home Center sales were down 10% for the quarter. The Home Center sales decrease is also partly based on early Q2 weather conditions.
We have recently seen increased volume in that channel. Sales in Europe were up about 9%.
North America operating profits were up $0.5 million due to increased sales volumes and reduced manufacturing costs. These are offset by a slight price decrease and increased operating expenses.
Also included in the North American operating profits was the recording of a union pension withdrawal expense and liability of nearly $3 million. Europe’s operating profits were $3.8 million, a $1.5 million increase over last Q2.
This was due primarily to increased gross profits offset by price decreases and a slight increase in operating expense. We continue to have a very strong financial position with over $220 million in cash at the end of the quarter, almost no debt and a $300 million unused line of credit, which gives us lots of flexibility and the capability of continuing to invest in our long run strategic plan.
I also wanted to tell you that our Board of Directors approved our quarterly dividend of $0.14 per share. Karen?
Karen Colonias - Chief Executive Officer
Thanks, Tom. Since 1956, Simpson Strong-Tie is designed, tested and manufactured safe, strong and innovative products for the construction industry.
We believe in doing what’s right for our people, customers and community. And as the trusted brand for the construction solutions, we are committed to adding value to our customers and exceeding their expectations with our promise of no equal performance.
We are committed to this goal for all of our product lines and are developing software, products and people to provide our customer system solution approaches to their building needs in both the wood products and concrete product to market. We are very pleased with the Q2 financial results for Europe and are focused on continued improvement in this region.
Our Asia-Pac market is seeing increased revenue with the recent introduction and sales focus on our concrete, repair and strengthening products, but they have ways to go to be profitable. We continue to look for strategic acquisitions whether to expand our product offering or to strengthen our position in different geographic regions.
To support our strategies we are hiring additional people and we will see incremental spending throughout the year. As always our people are a most important asset and we need to ensure they have the tools and resources necessary to support our customers.
We are dedicated to our entire product line and we work hard everyday to ensure that we continue to meet our customers’ needs with service, support and product availability. We will continue to monitor our operations around the world to strive for a long run returns that are acceptable both to us and our shareholders.
I would now like to turn it over to Brian for some additional financial information.
Brian Magstadt - Chief Financial Officer
Thanks Karen. As noted in the earnings release Q2 2014 gross margin was about 46%, up slightly from Q2 last year.
The union pension with drawl expense Tom noted was solely in cost of sales which accounted for approximately 1.4% of that gross margin and $0.036 per share net after tax. Sales of concrete products as a percent of the total was the same as last year, but the margin on those products was down, slightly hurting the total company gross margin.
The concrete product sales relative to the total was 15% this quarter and last, while the wood product sales were 85% for both periods. The margin differential of wood to concrete products is nearly 13 points this quarter compared to about 9% Q2 last year, but improved from 15% from Q1 of 2014 due primarily to the mix of concrete products sold.
As noted in the press release we believe the estimated gross margin will be in the 44% to 46% range for 2014, although depending on the rest of the year that may change. Total operating expenses as a percent of sales were about the same in the quarter compared to last year with certain compensation expenses that are based on performance such as commissions and cash profit sharing increased to $1 million in the quarter or 1.5% of net revenue.
For taxes we had better forward operations this quarter than last year and that beneficially affected the tax rate. The quarterly tax rate was 36.3% and we still believe the annual effective tax rate that will be in the range we estimated in the last annual report, which was between 37% and 39%, but we add that that could end on the lower end of that range.
Q2 2014 CapEx was about $5.1 million primarily for manufacturing equipment in the U.S. And we estimate total 2014 CapEx to be in the $20 million to $23 million range.
For 2014 depreciation and amortization is expected to total between $29 million and $30 million of which $21 million to $22 million is depreciation only. Before we turn it over to questions, I would like to remind you that if you would 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 we filed in August. We would like now open it up to your questions.
Operator
(Operator Instructions) We will go first to Arnie Ursaner with CJS Securities. Please go ahead.
Arnie Ursaner - CJS Securities
Hi, good morning. My first question relates I know you don’t want to get into specific geographies and regional differences in any detail and hopefully this won’t lead to that, but could you broadly comment, I know Florida was one area that had particular weakness in home starts, so maybe if you could speak about geographic or regional differences in a bigger picture, also you highlighted May weather a few times, maybe talk about the monthly pattern of revenue trends if you could?
Tom Fitzmyers
Arnie, this is Tom. Let me not talk about the housing starts by geographic region, but the weather.
So the weather really did impact our sales substantially particularly in the Northeast. And the first two months was significant.
And the third month was so and now what we see is trends going the other way. So Northeast is a pretty important part of the overall company sales particularly the home center areas and that certainly impacted this but it’s changed now and moving in the other direction.
Arnie Ursaner - CJS Securities
Tom, maybe you could be a little more specific, your sales in North America were up 5.5% in the quarter was – were April and May flattish and then June double-digit, that sort of color is what I am looking for?
Tom Fitzmyers
We are not going to tell you that, Arnie. But on average, that’s the way it works for the quarter.
Arnie Ursaner - CJS Securities
Okay. And then going back to your gross margin guidance and I am sure you will spend more time on the one-time item that impacted margin this quarter, but we are not for that, it would have been 49.5, almost 49.5 margin this quarter and well above that year-to-date?
What would cause the margin to decrease in the back half of the year other than just the seasonality in Q4?
Brian Magstadt
Arnie, this is Brian. One of the things also to remember in that in Q1 we did have a correction that led to bit of a pickup.
And so that the union pension charge in Q2 nearly offset that Q1 benefit. So, looking at our estimation for the year, primarily we are looking at variations in factory utilization that could – that would change that number, but that’s why we are thinking 44 to 46 for the entire year.
Arnie Ursaner - CJS Securities
Okay. Then one more technical question if I could, in North America, you used the word slightly lower average selling price and then in Europe lower average price maybe give us a little better feel for the difference between slightly and just lower?
Brian Magstadt
There is really no difference. I mean, they were as a percent about the same.
Arnie Ursaner - CJS Securities
Okay, thank you.
Brian Magstadt
Sure.
Operator
And we will go next to Min Cho with FBR Capital Markets. Please go ahead.
Min Cho - FBR Capital Markets
Great, thank you. I was wondering Karen if I can get an update on the trust software release and could you talk a little bit about the competitive environment there right now?
Karen Colonias
Sure. I think as you know this is a new market that we are very excited to get into, because it fits very well with our customer base and our product offering and certainly it fits very well with how our sales people are currently positioned to be able to support those customers.
We have a group in Boulder that’s working extremely diligently on our software release. And at the BCMC Show which I believe either late October or in September, I am not sure the exact date, anyway that will be when we will show our software update.
It still would be something that needs additional features and benefits to meet all our customer needs, but we are working on software elements from the service that we have taken on the customers that are using the trust software, what are the elements that they are really looking for, that can make their job easier and make them more efficient. And we are really focusing on those requests from our particular customers.
So, we are interested to see and looking forward to that BCMC Show, which is the Building Components Manufacturers Conference. That’s an annual show where we really focus on that trust industry.
And then the release will come a little bit later in the year.
Min Cho - FBR Capital Markets
Okay. And then I know across the board, it sounds like you have definitely gained some, well, I don’t – the volumes were up this quarter and you mentioned that pricing was a little bit lower.
Are you actually gaining share due to the lower price or were volumes kind of in line with the industry?
Karen Colonias
I think as we look in North America, the volumes are up pretty consistent with what we saw on housing starts. As we look at the European market, I think those volumes are based on maybe the economics are coming back a little bit better in Europe, but also our European director and our European managers have done an excellent job of being able to sell our connectors and the factors associated with that.
So little bit different strategy on how we went to Europe previously. Strategy is pretty much everything you need for wood, you can get from Simpson Strong-Tie.
So I think we are seeing results of that strategy change in Europe that’s helping us offset increased volume.
Min Cho - FBR Capital Markets
Okay. And then just two quick questions, the gross margin guidance 44% to 46%, you mentioned in your press release that steel prices to increase in the second half of this year, is that included in your gross margin guidance?
Brian Magstadt
No, not necessarily. So, we don’t know specifically what type of pricing we potentially might see, so, no it’s not.
Min Cho - FBR Capital Markets
Okay. And then can you give a headcount and kind of on a year-over-year basis, what the change was?
Brian Magstadt
Sure. So today, we’re about 2,400 employees, this time last year, we were just under 2,300 employees.
Min Cho - FBR Capital Markets
Okay, great. Thank you.
Brian Magstadt
You’re welcome.
Operator
And we’ll go next to Tim Wojs with Baird. Please go ahead.
Tim Wojs – Baird
Hi, guys, just touching on the steel prices, do you – how do you look at relative to the market, do you think if steel prices do increase that you will actually be able to go on in the market and offset those pricing increase, I guess how comfortable are you with that opportunity?
Karen Colonias
Hi, Tim. We obviously looked very carefully if anytime we’ve got increased from material cost and we have a very, very good purchasing person that helps us and certainly there is a lot of information out in the industry about steel.
So, we certainly if we got significant price increase from the material standpoint, we would need to work with our customers and put that through our product line in our distribution and again it’s what we’ve – it’s not a very – it’s a not fast decision, we look at many, many elements because we want to give our customers plenty of time. But it’s in fact there is a significant price increase in material we would need to work on passing that through.
Tim Wojs – Baird
Okay, and then I guess just on looking at the Home Center channel again I think sales were down, I think you mentioned 10% of your prepared remarks and things have gone better. Is that channel turned positive as you exited the quarter and gone into Q3 yet.
Brian Magstadt
This is Brian. I think it’s too early to tell that at this point.
Tim Wojs – Baird
Okay, okay, and then just any update on just your M&A pipeline and the opportunity to may be deploy your balance sheet a little bit towards M&A and possibly some sort of share buyback.
Karen Colonias
Let me take that from M&A first and then I’ll turn it over to Tom on the share buyback question. From an M&A standpoint, I think I mentioned we have some external M&A terms that are helping us with looking at companies both in North America as well as Europe.
We have a couple of people, Simpson employees were dedicated also in this space. And for us, we just want to – we want to be shared that as we look at companies that it is something that fits in our strategy and again that would be expanding this country area and working on our geographic footprint.
So, with those things in mind, we are very diligently looking, but today we don’t have anything coming to fruition at this point.
Tom Fitzmyers
As far as the stock buyback scope, we – as you probably know over the years or opportunistic about that and we evaluated all the time in the past, some of the buy backs that we made have been to offset dilution in the past that was primarily options recently we’ve gone to a RSU structure, which is much less dilutive. But it’s something that we look at all the time and if the stock got to a level where we thought it would be a good buy for the company.
We would think about proceeding with that. Last year, I think we bought around $10 million worth of stock back.
We have an authorization from the board to buy $50 million, but again we’re very opportunistic about that and it doesn’t look like that something we’ll be doing right now.
Tim Wojs – Baird
Okay, great, well, thanks for the time, I appreciate it.
Karen Colonias
Thanks, Tim.
Operator
And we’ll go next to Steve Chercover with D.A. Davidson.
Please go ahead.
Steve Chercover – D.A. Davidson
Good morning, everyone. First question, after the trust software in the product is actually ready for prime time.
Are there adjacent markets that you can address and can you talk a bit more about your strategy clearly you said it was concrete.
Karen Colonias
Yes, so, our strategy obviously is to be not so tight in North America housing starts. We are looking at products that are in the building industry that could be things in the concrete repair and restoration and expanding in that market space, it could be looking more as mentioned to you in Europe there is opportunities to grow from the connector standpoint.
It could be something that we are looking at from a fastener solution. So really looking to have things that are – can be specified and are differentiated.
And that’s one of our criteria. We are really trying to find something that our sales people can hang their hat on as differentiated whether it’s from the testing capabilities or some corrosion resistant capabilities.
And of course being a manufacturer, always searching for manufacturing companies, because we would like to be able to control not only the development of products, but the quality of products. So our strategy again is looking for things that are in the concrete repair, restoration space.
We are looking to expand on a geographic footprint. Concrete products are really engaging because they are not size specific as wood is, so products in the North America market could be sold into Europe and Asia and likewise.
For example a lot of our S&P products we are selling into Asia market right now which is why they are having some increased revenue there, so that’s the advantage of those products.
Steve Chercover – D.A. Davidson
Thanks. And given your expertise though with fasteners and with steel have you ever investigated industrial markets?
Karen Colonias
I think from the – as we have looked at products in the industrial markets, it hasn’t really been an attractive space for us to look at this point because we think there is more opportunities in this what we are calling residential and this like commercial market.
Steve Chercover – D.A. Davidson
Okay. And with respect to residential it appears that we might be seeing a bit of a transition towards more multifamily than the single families or even like McMansions, are you well positioned to participate if that shift does transpire?
Karen Colonias
Yes, for us multifamily is a great market and the reason is as we mentioned lot of the residential houses and our products which are put in residential houses are a function of sort of seismic and wind events. When you go to multifamily the codes are a little bit different, so we see more of our products that will go into multifamily and that could happen in any specific region.
So we have – again we have a lot of – we have a complete sales force that works on multifamily. We track those jobs.
We are on the jobs with both the specifiers and the contractors and building officials. And we have significant amount of our concrete anchoring, our fasteners and our connectors that go on multifamily jobs.
Steve Chercover – D.A. Davidson
Okay. One quick question on steel prices, why would they rise, is it due to the market clout of the producers or is it due an improving economy?
Karen Colonias
A couple of things, there are some concerns about some tariffs of steel that might be coming in outside of the U.S. – concerns from the market there.
Certainly the automotive market has greatly picked up and the agricultural market, those are some of the largest users of similar type of steel that we use. So a couple of those factors would be what we would see as the – as what the reason the market might see some steel price increasing.
Steve Chercover – D.A. Davidson
Got it. Okay.
And just finally without the pension hit you would have been more like $0.45 to $0.43, I think Brian said $0.035?
Brian Magstadt
I have calculated it at $0.038 net after tax applying the statutory tax rate.
Steve Chercover – D.A. Davidson
Great. Okay.
Thank you all.
Karen Colonias
Thanks Steve.
Brian Magstadt
Thank you.
Operator
(Operator Instructions) We will go next to Barry Vogel with Barry Vogel & Associates. Please go ahead.
Barry Vogel - Barry Vogel & Associates
Good morning ladies and gentleman.
Karen Colonias
Good morning Barry.
Brian Magstadt
Good morning Barry.
Barry Vogel - Barry Vogel & Associates
Okay. I have a question back on home centers again, this 10% decline in the quarter I would assume that it’s not including the changes because of low situation?
Brian Magstadt
Right.
Barry Vogel - Barry Vogel & Associates
In other words, you have anniversaried that?
Brian Magstadt
Yes.
Barry Vogel - Barry Vogel & Associates
Now, excluding that comment, the Home Center business – excluding Lowe’s situation for a moment, am I correct that the Home Center sales growth for you – is not kept at what it was in the past, excluding the Lowe’s situation?
Brian Magstadt
When I guess I just…
Barry Vogel - Barry Vogel & Associates
In other words, excluding Lowe’s.
Brian Magstadt
Right.
Barry Vogel - Barry Vogel & Associates
Your Home Center don’t seems to have not been participating in this recovery like it had in the past, am I correct or incorrect?
Brian Magstadt
Well, we are not really – the Home Center sales can swing a lot, just based on the magnitude of the inventory adjustments that they make.
Barry Vogel - Barry Vogel & Associates
Right.
Brian Magstadt
And so, it’s kind of hard to look at it from quarter-to-quarter I think and they have different strategies about how they are going to manage that. So, that’s one of the things.
We – just as an overview comment, we think our market share is Lowe’s is similar to what it has been. So, we don’t think we have lost market share there, but there have been a number of different things going on, including significant weather issues in the Northeast, which at this point in time I think we are saying that we think are trending the other way.
So, we will just have to see how this next quarter turns out, but that’s kind of our sense at this time.
Barry Vogel - Barry Vogel & Associates
And I have a question for Karen. Can you give us some color on your optimism in Europe for the balance of the year?
Karen Colonias
Sure. As I mentioned, I was very pleased with the results in Europe.
We have done a great job of doing a little bit of restructuring to help reduce the operating expenses. And I think we are now seeing that increase in sales with a little bit of a different focus on how they are going to market.
And so I would estimate that Europe will certainly be profitable for the year.
Barry Vogel - Barry Vogel & Associates
Well, that would be the minimum expectation, I mean, I know the weather affects different quarters, but the $3.8 million operating profit in the second quarter was a pretty good quarter?
Karen Colonias
Yes, it was a very good quarter.
Barry Vogel - Barry Vogel & Associates
Okay. So, Europe might be an area of growth once again once you straightened out the problems that you had in some of those operations?
Karen Colonias
Yes. I think we see Europe as an area of growth, not only from the things we have put in place, but also we are seeing, especially for example in the UK, we are seeing a pretty good upturn on the economic conditions there.
Barry Vogel - Barry Vogel & Associates
I have one last question about dividend increases it’s fine that you had a small dividend increase, but if one looks at your cash generation, your balance sheet everything, is it unfair to assume that the company will be looking at modest dividend increases every year if nothing untoward happened?
Brian Magstadt
Well, Barry, I – we look at dividend increase that issue every quarter with our board. So, it really depends on a lot of different things including where we are at from an acquisition standpoint, but as you saw, we have recently increased our dividend.
And as far as doing something on a programmatic basis, we are increasing on a very specific basis through time. We again evaluate that each quarter based on what we think the best use of our cash is our capital allocation.
And we have a lot of different things going on as Brian talked about our CapEx. We also spent a lot of money, which doesn’t necessarily appear as CapEx, but it’s not huge amounts of money, but it’s a lot for us and improving the capabilities of the company in a variety of different ways.
So, we are always looking at the capital allocation carefully, but it’s kind of a fuzzy answer, but it’s not – we maintain our dividend through difficult period of time. And we were very pleased to be able to do that.
And we liked as you know to have the flexibility and the resources to take advantage of opportunities that come our way. So, I think that we will consider it, but we have nothing in mind at this time.
Barry Vogel - Barry Vogel & Associates
Okay. And I have one last question for Karen.
Could you update us on the progress with the – in the trust area, trust area?
Karen Colonias
Sure. As I mentioned, the main thing from the trust standpoint is having software, which is meeting what the customers’ needs or and is making them more efficient at their role.
That’s something that we are working on every single day in our Boulder operation. We are looking to have to show some new features and benefits at the BCMC show.
And we will be having a new trust release sometime before the – close to end of the year. I think from the standpoint of what the people we have brought in from a sales standpoint, from a support standpoint are some of the tops in the industry and they are very anxious to be able to service that customer base.
Barry Vogel - Barry Vogel & Associates
When do you think you will start to have an income stream from that business?
Karen Colonias
Well, we certainly have opportunities, it’s very fairly large. I think we have mentioned about $500 million market opportunity, approximately a million housing starts maybe that might be a little bit better than that.
And we are seeing our revenue increase, and I would say that we would continue to see that as we release more and more features that are meeting the specifics of the customer needs.
Barry Vogel - Barry Vogel & Associates
So the revenue is growing – would you say the revenue is growing slowly?
Karen Colonias
Yes, and again when we look at the trust, it’s not a matter of having the trust plate, which we do have and as a matter of fact we just released a new product from a high strength trust plate. So it’s not a matter of having the plates.
We have the highest load capacity plates in the industry and completely code approved and in at least three different wood species, but it’s really a matter of making sure that our software is complementing that plate and really servicing our customers’ needs.
Barry Vogel - Barry Vogel & Associates
Thank you very much. Keep up the good work in your recovery.
Karen Colonias
Thanks Barry.
Operator
And we will go next to Arnie Ursaner with CJS Securities. Please go ahead.
Arnie Ursaner - CJS Securities
Hi, couple of follow-ups. You mentioned steel a few times, but typically in the past when you expect meaningful steel increases you bought product ahead of time, has that been the case this go around?
Karen Colonias
Yes, Arnie we – as I mentioned our Vice President of Purchasing certainly takes great care of Simpson in making sure that we are buying steel at the best opportunities. We always have some steel supply and inventory, because it takes a little while to get the steel specification and to be sure that’s delivered.
So it’s definitely not something we would ever do in a just in time manner. So we certainly have steel in our manufacturing facilities to help us as our projections are out through the year, as we forecast through out the year.
But again, it would be something if there are some price increases that would definitely impact us. Most likely not this year, but it could impact us going into next year.
Arnie Ursaner – CJS Securities
Okay. Barry highlighted Europe where it seems to be a turn, you might remind people last year the weather in Europe was extraordinarily weak so you had a very easy comparison in Europe, very difficult in North America, but very easy in Europe?
Brian Magstadt
That’s correct, Arnie, this is Brian yes.
Arnie Ursaner – CJS Securities
Okay.
Brian Magstadt
That’s a good point thank you.
Arnie Ursaner – CJS Securities
Shifting gears a little bit, you obviously spend to enhance growth, you have been doing that for 50 years or more, you used to talk about $10 million investment spend to make sure where you want to be, is that annualized number going up and more importantly when do you see an inflection point in that?
Tom Fitzmyers
Barry we are sitting here quizzically looking at each other. We don’t know what you mean by the $10 million spend?
Arnie Ursaner – CJS Securities
The incremental spend to develop the trust software and other spending, you have talked about…?
Tom Fitzmyers
Okay.
Arnie Ursaner – CJS Securities
And it’s Arnie not Barry, please…
Tom Fitzmyers
I’m sorry Arnie.
Arnie Ursaner – CJS Securities
I would almost view that as insulting comment.
Tom Fitzmyers
I think that number is about right Arnie. We don’t see any significant variation from that.
Arnie Ursaner – CJS Securities
Okay. And then shifting gears a little bit about margin profile, what is your current factory utilization and maybe give us some feel for your view for incremental gross margin.
And then more importantly your expenses, your operating expenses are growing even faster than revenues, how should we think about operating margin and when they get more aligned with overall spend?
Karen Colonias
So Arnie I will pick the factory utilization and then I will turn the second half of your question over to Brian. So, as I mentioned our factories, again, we are probably running around 60%, 65% utilization.
We certainly have the flexibilities in our shifts to be able to produce and meet our customers’ needs. And as you know, that’s really what we have – one of the things, elements we have built this company on is to have that product available to our customers.
And so from the factory utilization again, we look at our forecast constantly. We are always trying to be sure that the product is at the right location for their customer and being produced at the right branch, but we have certainly room to take into account manufacturing when we hopefully at some point get backup to 1.2 to 1.5.
It’s not that we would need to increase any manufacturing facilities. We would certainly just take advantage of getting some additional shift changes and advantage of our press capabilities.
So, Brian?
Brian Magstadt
And on the operating income side, yes the dollars were up largely in line with the increase in revenue, but as we have mentioned, we are investing in initiatives such as the trust software that we are not really getting that incremental revenue yet today. So, I wouldn’t expect that spending to be increasing at the same incremental rate as revenue once we are further along in the development of some of the initiatives such as the trust software.
Arnie Ursaner - CJS Securities
Again, what I am trying to get a feel for is if your gross margin should be improving with better utilization and you have gotten negative leverage on operating expenses at some point in the manufacturing business, you should be getting very positive trends. Again, I know you don’t give guidance, but as you look out to ‘15 and ‘16 shouldn’t we be expecting 100 to 200 basis points of operating margin improvement once you get that leverage?
Brian Magstadt
I don’t know that I would be specific to those specific numbers, but in general yes, we agree that the operating expenses should not be rising at the same level as sales or gross profits, because we are largely investing in those initiatives today that would not necessarily need to grow with those incremental sales.
Arnie Ursaner - CJS Securities
Okay. And then….
Brian Magstadt
So, we generally yes, we agreed with that as you described it, but not necessarily with those specific numbers.
Arnie Ursaner - CJS Securities
Okay. And then on fiber-reinforced polymers in S&P Clever, in North America, you incurred $800,000 in professional fees indicating mostly for patent development and product testing.
My understanding is you almost have to be the defining entity for regulation in FRP, at what point do we actually see a meaningful change in the reduction in that spend?
Brian Magstadt
I don’t know, this is Brian, I don’t know that, that patent spending was necessarily related to FRP. I mean, we have got that in just in our business in general throughout all product lines.
So that I think is more ongoing as it relates to the overall business.
Arnie Ursaner - CJS Securities
Okay. And then going back to the atypical pension charge that you did – you had the benefit obviously that impacted you this quarter, are there offsetting expenses in the future related to that?
Is there some….
Brian Magstadt
No. What happened there was we withdrew from a multi-employer pension plan.
And when we do that, we calculate the annual amount we need to pay to the pension trustee and then we present value that cash flow. So, that’s what contributed to that $2.9 million.
So, the – we had always been contributing to the pension as a period cost. Here on withdrawal, we basically had to present value those future payments, but they are on an annual basis are not significant.
Arnie Ursaner - CJS Securities
Thank you very much.
Brian Magstadt
You’re welcome.
Operator
And we will go next to Min Cho with FBR Capital Markets. Please go ahead.
Min Cho - FBR Capital Markets
Great, thank you. Just one more question, I know Asia is obviously still a very small part of your business, but can you provide any update on that market?
I know that revenues are up which is good. Margins remained negative.
At one point, are you going to start taking out some SG&A and do you still expect 2015 to be profitable on an operating basis?
Karen Colonias
Again we are seeing some nice success from the revenue standpoint and really that’s been a function of these new concrete repair restoration products that have been brought into that market. So just to iterate, we don’t sell wood products into the Asian market that is really our concrete products.
Many of those products are coming from S&P and the sales force there is now focused on avenues, which we can use those particular products. We’ve really only in completely engaged in this probably in the last six months and that was because we had to train the sales force, we had to be able to get the product, we have to get it in Chinese literature and we also had to adjust our software.
There is software associated with that. So, that was meeting the Chinese specification.
So, there were several steps that had to be put in place before we could really go out and start pushing that. We are looking at doing some things from a material cost standpoint to help some gross margins on those particular products and I think we’ll start to see those become more apparent within the next few months, but China is definitely a very, very tough market as far as the competition there and really being able to differentiate your product in such a manner that is not completely based on price, it is – that push and I think our sales force is doing a really nice job and our manager there is really got them focused on these particular market areas.
For 215, I don’t believe we’ve ever said that China would be profitable or breakeven in 215. I think its little bit longer pool for us.
Min Cho - FBR Capital Markets
Okay, thank you.
Karen Colonias
Thank you.
Operator
(Operator Instructions) It appears we have no further questions at this time.
Karen Colonias - Chief Executive Officer
Great, thank you.
Brian Magstadt - Chief Financial Officer
Thank you.
Operator
This concludes today’s conference. You may now disconnect and have a wonderful day.