Jul 24, 2015
Executives
Tom Fitzmyers - Vice Chairman Karen Colonias - Chief Executive Officer Brian Magstadt - Chief Financial Officer
Analysts
Daniel Moore - CJS Securities Garik Shmois - Longbow Research Josh Chan - Baird Barry Vogel - Barry Vogel & Associates Min Cho - FBR Capital Markets
Operator
Good morning, ladies and gentlemen. And welcome to the Second 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 factors or 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 Mr. Tom Fitzmyers.
Please proceed.
Tom Fitzmyers
Thanks, everyone. Good morning.
And welcome to the Simpson Manufacturing Co., Inc.’ s second 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 9% compared to last year based on an increase in housing starts and construction activity in many parts of the region, even though parts of the U.S.
hurt by rain. European and Canadian sales were down due to foreign exchange effects and on average were up modestly in local currencies.
As we’ve 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 up $5 million or 17% due to increased gross profit offset by a slight increase in operating expenses as noted in the press release.
Europe’s operating profit was $3.3 million, down $400,000 over last Q2, due primarily to lower gross margin. Gross margin in Europe was lower overall 39.1% this quarter versus 40.5% last year.
We continue to have a very strong financial position, which gives us flexible and a capability to continue investing in our long-term strategy. In June, we announced that we bought back about 250,000 shares at an average price of $33.24 for a total of $8.5 million.
Finally, the quarterly dividend again is $0.16 per share. Karen?
Karen Colonias
Thank you, Tom. In the second quarter we released our truss software to a select group of customers.
We believe we have positioned to pursue a one-third of this estimated $500 million market at today’s starts, with this software release our sales team and our manufacturing capabilities. We will use the next few months to review additional customer needs and to ensure we have the necessary technical and implementation support teams in place.
A general release of the software is scheduled for Q4. In the Q1 conference call, we discussed additional capital spending.
We’ve signed a contract by $175,000 square-foot building in West Chicago. This will be our new North America chemical manufacturing plant.
We will combine our Addison, Illinois and Baltimore, Maryland locations into this facility. This will allow us to more cost-effectively manufacture products for the concrete construction market.
This facility will also be our research and development center for expanding our line of concrete products and solutions. In March, we announced the closure of our sales offices in Asia.
That process is well underway and should be substantially completed by the end of the year. The company-wide future financial show we've made some positive steps in our SG&A as a percent of sales.
At 29.2% we’ve continued to monitor our operations and SG&A expenses, striving for long run returns that are acceptable to us and our shareholders. I would now like to turn it over to Brian to share some additional financial information.
Brian Magstadt
Thanks, Karen and good morning to all. As Tom mentioned, exchange rates had a significant negative effect on quarterly sales, which we estimates to be about $7 million of the dollar strengthened, primarily against European and Canadian currencies.
We estimate the negative effect of foreign exchange on operating income was about $900,000 for the quarter. The margin differential on wood to concrete products is about 50 points this quarter compared to 13 Q2 last year.
With lower -- with lowered margins on increased concrete product sales and wood product margins slightly down on increased sales. In Q2 2015 gross margin was 45.4% down from Q2 last year.
As noted in the press release, we still believe the estimated gross margin will be in the 44% to 46% range for 2015, with the usual caveat that is depends on the rest of the year. Total operating expenses as the percent of sales were down 1.5% in the quarter compared to last year.
In regard to taxes, the tax rate of 38.5% is up compared to last year Q2 due to about $2 million in losses subject to valuation allowances. Most of those losses incurred -- occurring in Asia as we wind up sales offices there.
We believe the annual effective tax rate will be between 37% to 39% up slightly from our prior estimate last quarter and that’s due primarily to a better estimate on the closing cost in Asia for the remainder of the year. Q2 2015 CapEx was about $7.2 million, primarily from manufacturing equipment in software in the U.S.
We estimate total 2015 CapEx to be in the $30 million to $33 million range, excluding software. And we have the additional real estate project in West Chicago that would add to that amount of another $12 million to $15 million this year with $7 million to $10 million estimated to be added for 2016 to complete that project.
In this project, we are combining operations at two chemical facilities and the one facility is Karen noted earlier. And we are currently renting those two chemical facilities.
The amount of CApEx estimated for 2016 for that facility would be for improvements in equipments. For 2015, depreciation and amortization expense is expected to be $29 million to $31 million, of which $23 million to $25 million is depreciation, consistent with our prior quarter estimate.
That new facility should not have a significant impact this year on depreciation. 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 listed on the press release.
Also look for our quarterly report on Form 10-Q to be filed in early August. We’d like to now open it up to your questions.
Operator
[Operator Instructions] We’ll take our first question from Daniel Moore with CJS Securities. Please go ahead.
Daniel Moore
Good morning.
Brian Magstadt
Good morning.
Karen Colonias
Good morning, Dan.
Daniel Moore
Brian, you mentioned the gross margins, obviously nice improvements sequentially. Maybe just digging a little deeper on key drivers, update us on your outlook for steel.
And are those types of things hold for those levels that we saw in Q2 sustainable for the remainder of the year?
Brian Magstadt
Regarding the levels we saw in Q2, I think we would -- we would believe those would be sustainable. But one note about steel is we believe there is a lot of uncertainty in that market.
As we noted in the release, some of the antidumping trade issues have been filed by the U.S. steelmakers.
So I think that’s leading to a fair amount of uncertainty but getting back to the overall guidance, we’re still comfortable with that particular range.
Daniel Moore
And I presume, based on the pricing pressures that you had been seeing going back to year or two, continue to abate generally speaking?
Karen Colonias
Yeah. This is Karen, Dan.
I thinking from the pricing pressures again as the housing market become stronger, there's a little bit less focus on the pricing pressures. We are seeing some cases where some of our larger customers are jumping into a different tier from a rebate level.
And that’s just because we're seeing that increase in that sales volume. As the housing continues to be strong, there is less emphasis on the pricing pressures and much more emphasis on availability and service.
Daniel Moore
Okay. Great.
And then switching gears one more, Karen, you gave us good detail. Thank you on the truss software initiative.
Any additional color you’re willing to share just about kind of nuances of customers with which you’re beta testing, the pluses and minuses, what they are seeing, feedback they're giving you and confidence around the expectations for broader rollout in Q4?
Karen Colonias
Yeah. Just a little bit different approach on how we went into this software market for truss, which was really looking at the customer needs and the things that they were looking to have to be more efficient.
I think we've provided some of those elements into the software. I would caution everybody as software never stops improving.
There is always requests for more enhancements and really what we want to ensure is now that we had some positive feedbacks from the customers as we look to have the technical support in the implementation. We want to be sure that we don't falter in that space.
And that’s why we send a little bit more of a selective release on the current version and are looking to be sure that we’ve got that support in place before we do a full release.
Daniel Moore
Okay. And then forgive me, if I missed this but did you give the CapEx expected for the new facility in Chicago?
Brian Magstadt
Yes, Dan that was -- for this year, we’re expecting, it's going to be in the $12 million to $15 million range. And then next year, another $7 million to $10 million depending on the timing on when things -- when we acquire the facility and then when we are able to start making the improvements necessary for the chemical facility.
Daniel Moore
Okay. I will jump back in queue.
Thank you.
Brian Magstadt
You’re welcome.
Karen Colonias
Thank you.
Operator
And we’ll take our next question from Garik Shmois with Longbow Research. Please go ahead.
Garik Shmois
Hi. Thank you.
First question, follow-up on the truss market opportunity. You talked about capturing potentially a third of the $500 million available market.
Just wondering in certainly one of the early stages here, but can you provide any sort of timeframe parameters around when you might be able to get up to a full ramp in capturing the total available revenues?
Karen Colonias
Yeah. So let me really just clarify.
It would be great if we capture a third. The third of the market I believe will be the opportunity available to us based on the feature set of this software.
So really there is this specific customer base that we are looking to be able to offer this truss software to that will have them meet their needs. So as far as the timing, it takes a while for people to convert.
We will certainly be working when we have the releasing into the first quarter on converting some of these customers over. There is a window of time to convert before they get into the truss busy season again.
So, we really have to work on this early first quarter and into early second quarter on those conversions and that’s why we are really wanting to ensure that from an implementation standpoint and that technical support we are prepared.
Garik Shmois
Okay. Thanks for the clarification.
Switching to the new facilities in Chicago, is there any sort of quantifiable rationalizations savings or charges that you will be seeing through closing the two facilities and really get into one, the one in Maryland and the other one in Illinois? And then secondly, how should we think about R&D spend now that the R&D will be held at the new Chicago facilities?
Brian Magstadt
Hi. This is Brian.
So the quantifiable numbers, obviously, we are expecting some savings there. It’s too early to come out with those but we view, we do expect greater efficiencies in our operation and the like as far as chemical manufacturing facilities.
But I think it’s a little too early right now to come out with those specific numbers. On the R&D spend, it is not necessarily going to significantly add to R&D spend.
It’s really just going to consolidate a couple of labs and offices, so that will be happening in one location as opposed to multiple locations today. So incremental spend, I don’t think it would be significant but again, I think we would look to greater efficiencies in the R&D area as we look to come out with new products and test those products, test existing products and the like.
Garik Shmois
Okay. That’s helpful.
And then I guess just a follow-up to that, we have to move the R&D staff. It sounds like you will from the multiple facilities to the one consolidated location and are you anticipating any sort of attrition there?
Brian Magstadt
Yeah. We are looking at of course and we’ve been talking with both groups.
One group is already in the vicinity, Addison and West Chicago. Obviously, the Baltimore, folks have different move and we are looking at that.
But we hope to retain as many of the folks as we can. But of course a move of that distance, it may be difficult to do that.
However, we fully intend to try to keep as many of the folks as we can.
Garik Shmois
Okay. Make sense.
Lastly, I will ask the weather question. You did cited some rain in certain parts of the U.S.
in the quarter. Just wondering if there was any meaningful impact to the revenue growth that you saw in the United States and if so, are you seeing a catch-up at all here in the third quarter?
Brian Magstadt
We saw fair amount in the Southeast area that had a bit of an impact here. Although looking back to last year Q2, I recall there were still parts of -- many parts of the country that still had a fair amount of snow.
So from a cost basis to Q2 last year, I’m not sure there was a significant impact. And of course, we are going to try to catch-up as much of that rain impacted businesses we can and we are working on that.
I think it’s a little too early to tell right now on that.
Garik Shmois
Okay. Thanks and best of luck.
Karen Colonias
Thank you.
Operator
[Operator Instructions] And we will go next to Josh Chan with Baird. Please go ahead.
Josh Chan
Hi. Good morning.
Just focusing on the North America business, as you kind of went through the quarter in April, May and June, can you talk about kind of the pace of demand you saw, whether you saw any acceleration or slowdown as you progress through the quarter?
Karen Colonias
Hi, Josh. This is Karen.
I think as Brian mentioned, really in sort of the May timeframe, the Southeast market was substantially hit by weather. We have seen a little bit of an increase or an uptick in the June, kind of coming out of that weather condition.
Josh Chan
Okay. And then switching to gross margin, did the topline was up fairly meaningful at least in North America, but we’re little surprised to see gross margin step backwards?
Could you kind of explain what were the drivers there? I know volume probably helped, but what was the offset?
Brian Magstadt
I will start, maybe Karen will add a little bit here. But she had noted that, as certain customers, as their sales pick up, they may enter into a new rebate here, so we saw a bit of that.
And that’s kind of pretty much a dollar for dollar impact on gross profit. There is also a mix issue too.
So as sales are up and both concrete and wood products on a relative similar basis, concrete has got less margin than wood. So you see a bit of a mix issue there on gross margin.
Josh Chan
Okay. And it looks like the concrete margins themselves step back compared to last year, was there any particular issue going on there with the concrete size?
Brian Magstadt
No, nothing really to point out, I think that as we’ve seen over the last few quarters ebbs and flows depending on the specific type of products in that particular mix. But I don’t know that we’ve got anything particular that we would point to.
Josh Chan
Okay. And then last question for me is, on Asia, are we expecting the losses to kind of dissipate as you work through the office transition, and when do you think that will be completed?
Brian Magstadt
Sure. For Asia, we would expect closure-related expenses on the Asia sales offices.
At this time, we are estimating it about a $1 million through the rest of the year and that has to do with administrative staff winding down operations or winding down the offices and the sites. We’ve got fair amount of facilities that we’re renting today that were either going to exit or not, so there could be some rent expense there as rent expense built into that number and that may accelerate if we’re able to exit an office early.
But for the balance of the year, our estimate today is $1 million.
Josh Chan
Okay. And then we go into next year, does that show up basically with the high new right?
Brian Magstadt
Correct.
Josh Chan
Okay. Great.
Thanks for the color. And best of luck in the second half.
Brian Magstadt
Thanks, Josh.
Operator
And we will take our next question from Barry Vogel with Barry Vogel & Associates. Please begin.
Barry Vogel
Good morning, ladies and gentlemen.
Brian Magstadt
Hi, Barry.
Barry Vogel
My first question has to do with the home center sales which you usually give us some indication of what’s happening there, and again seen on your largest customer, which we’ve done with you on the conference calls for many years that would be helpful?
Brian Magstadt
Barry, it’s Brian. So home centers were up low-single digits for the quarter.
Barry Vogel
What is it like, 4%, 5%?
Brian Magstadt
Right, little less than that. And largest customer was up mid-single digits.
Barry Vogel
Okay. And as far as capital allocation and I guess Brian you can answer this because you’re the Chief Financial Officer.
Obviously these dividend increases, these stock buybacks and these growth investments. Is there any reason why all of a sudden you bought 254,000 shares where you hadn’t really done anything there?
That’s the first question.
Brian Magstadt
Okay. So that’s the great question.
And as we look at capital allocation, our first preferred option would be to grow the business, improve operations and the like. However, as cash balances grow, we want to make sure if we’re not able to do an acquisition or the like, and we are looking -- as Karen has often mentioned, we’re always looking at opportunities to improve our businesses.
However, if we’re not -- if we don’t have anything in the immediate pipeline, then we look at other capital allocation strategy. So we tried to opportunistically look at buybacks and add some of those shares via the buyback at opportunistic times.
As you may know, we’ve got certain times in the year where we’re open to go into the market and trade and make those buybacks. So we tried to do that.
And again, we have an internal target that we discuss as far as the price and if we’re seeing it in that space or in that range, we opportunistically buy back. So we are always looking and discussing with our Board capital allocation strategies.
We -- not this quarter but last quarter, we’ve raised the dividend, although only $0.02, it was about a 14% increase or so. We’re looking at various capital allocation strategies.
Again, preferred would be to profitably grow the business, next would be to then look at buybacks or dividends and the like.
Barry Vogel
And the reason I raised it, this is the first time in a while where you’ve taken action on several fronts, which will lead me to believe that you’re more optimistic in making changes than you might have been in the last couple of years. Is that probably true?
I mean you’re moving finally into the truss market after a lot of work. You’re consolidating chemical facilities.
You’re pulling back an Asia-Pacific. You’re buying stock.
You’re trying to increase dividend. And so you haven’t been this active on so many fronts in a while.
Karen Colonias
Hi, Barry. This is Karen.
I think as Brian mentioned, we’re obviously always looking for ways to grow the company and certainly look from the shareholders standpoint as the best things to do from a capital allocation. We are, as you mentioned, have been working very hard on our truss initiatives and we are starting to see that kind of get to the point where we would be able to generate some revenue to offset some of those expenses we put in place, so we are excited about that.
And the chemical facility is something that we're always looking at from a plant standpoint, how to be the most cost-efficient manufacturing. Certainly, both of those chemical facilities came from acquisitions.
And so, the one in Addison was our Ackerman-Johnson which we acquired probably…
Brian Magstadt
20.
Karen Colonias
….20 years ago and then bringing this Baltimore acquisition, really kind of tied in the opportunity to consolidate this two. So, we’re always looking at what we can do from that standpoint.
So, I think the timing of things are just -- you’re seeing a lot of activity. Some of those have been in place for a while and they’re just really starting to come to the forefront of being affective for us from a revenue standpoint.
Barry Vogel
But that’s good answer. Thank you very much.
Karen Colonias
Thank you.
Operator
[Operator Instructions] And we’ll take our next question from Min Cho with FBR Capital Markets. Please go ahead.
Min Cho
Great. Thank you.
Just a couple of quick questions. On the last conference call, you mentioned that you’re supposed to release your U.S.
code, the FRP line in the quarter. I want to know if that has gone through, if you have any updates on it?
Karen Colonias
Yeah. So the FRP is one of our concrete strengthening products, it is fiber-reinforced polymers, so it’s our carbon material.
And we have received our ICC, which is the national code acceptance. We’ve received our number.
We’re starting to market that product and we're working very heavily with our sales force in the third quarter to really start marketing that product. We are starting to see some work with our pacifiers.
That will be a product that's really going to be sort of job-based. So, we don’t really have a leading indicator that’s going to help us look at where estimates would be because it will be a job-based product, but we are out with our sales force selling that product.
Min Cho
Okay. And is that a higher margin kind of concrete line?
Karen Colonias
It is. Again, it’s a carbon laminate product and a carbon cross product.
And as we’ve mentioned before in that FRP space, margins typically are around north of 55%.
Min Cho
Okay. And then just finally, are you continuing to look at M&A, kind of targets or should we expect that to be sidelined a little bit until the chemical facility is further along?
Karen Colonias
No. We are very aggressively looking at M&A.
And as we mentioned from a capital allocation standpoint, doing things with combining perception facilities to make it more cost effective and the work there, but the second, really would be looking to do some acquisitions. We are heavily looking at some of our growth areas, which is I've mentioned before, in the faster area, we think there is lots of opportunities, also in this concrete strengthening area.
So, we are still very heavily looking for at acquisitions, which will fit within our strategy, which is really to grow into this, more into these building materials and not quite be so tight to the residential. So, we are constantly looking for opportunities.
Min Cho
Okay. Great.
Thank you.
Operator
Okay. And it appears we have no further questions at this time.
Karen Colonias
Thank you.
Brian Magstadt
Thanks, everybody.
Tom Fitzmyers
Thanks.
Operator
Okay. This does conclude today’s conference.
You may disconnect at anytime. And thank you for your participation.