Oct 24, 2014
Executives
Thomas J Fitzmyers – Vice Chairman Karen Colonias – Chief Executive Officer and President Brian Magstadt – Chief Financial Officer, Treasurer and Secretary
Analysts
Garik S. Shmois – Longbow Research LLC Josh Chan – Robert W.
Baird & Co. Min Cho – FBR Capital Markets Barry Vogel – Barry Vogel & Associates Arnie Ursaner – CJS Securities
Operator
Good morning, ladies and gentlemen, and welcome to the Third Quarter 2014 Simpson’s 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 predictions of further 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 websites. Please note today’s call may be recorded.
Now I’d like to turn the conference over to Tom Fitzmyers. Please proceed.
Thomas J. Fitzmyers
Thanks everyone. Good morning, and welcome to the Simpson Manufacturing Company’s third quarter 2014 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 compared to last year and sales in Europe, although they’re up, are seeing effects of the continuing tough economic environment.
Sales were up nearly 9% in North America for the quarter due to increased home building activity in many parts of the region. The Home Depot was up nearly 15% in the quarter.
Housing starts in the U.S. are up from this time last year and we are continuing to benefit from these starts.
But unlike lumber or other products that have a more direct correlation to the starts, our products are used to a greater extent in code-based areas subjected to natural forces such as seismic or wind events. As we mentioned before, we estimate that about 55% to 65% of our total wood company sales, products are dependent on housing starts.
North America’s operating profits were up $1.3 million due to increased sales volumes and they were offset by increased manufacturing and operating expenses. Europe’s operating profits were $3.4 million, a $200,000 decrease over last Q3, due primarily to flat gross profits and a slight increase in operating expense.
We continue to a have very strong finance position with $258 million cash at the end of the quarter, very little debt, and a $300,000 million unused line of credit, which gives us flexibility and the capability of continuing to invest in our long run strategic plan. I also wanted to note that we did buyback about $3 million worth of shares during the quarter, and we may buyback more in Q4.
Karen?
Karen Colonias
Thank you, Tom. As we’ve stated previously, we have been hiring people to support our core connector business as well as our new business initiatives in the wood truss, concrete repair, and strengthening markets.
We believe that these are large market opportunities in which we need engineering, marketing, manufacturing, sales, and customer support. These initiatives encompass all of the elements that our brand was built on, and that differentiates Simpson Strong-Tie from our competition.
Our people are our most important asset, and we need to ensure they have the tools and resources necessary to support our customers. As always, we’re dedicated to our entire product line and we work hard every day to ensure that we continue to meet our customers’ needs for service, support, and product availability.
We will continue to monitor our operations and SG&A expenses around the world to strive for a long run returns for us and our shareholders. I’ll now like to turn this over to Brian for some more financial updates.
Brian Magstadt
All right, thank you. So as noted in the earnings release, Q3 2014 gross margin was 45.6%, down slightly from Q3 of last year.
The margin differential of wood to concrete products is about 12% points this quarter compared to about 13% points Q3 last year. With concrete products up slightly and wood products down slightly.
As noted in the press release we believe the estimated gross margin will be in the 45% to 46% range for the entire year 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 $500,000 in the quarter or slightly less than 1.5% of net revenue.
The tax rate of 36% is comparable to last year Q3 although the foreign operations had slightly higher loss to the subject to valuation allowances this year compared to last year. We still believe the annual effective tax rate will be in the range we previously estimated, which was between 37% and 39%, but could end on the lower end of that range for the year.
Q3 2014 CapEx was about $8.2 million primarily for manufacturing equipment and software in the U.S. We estimate total 2014 CapEx to be in the $21 million to $23 million range.
For 2014, the year depreciation and amortization is expected to be $29 million to $30 million of which $21 million to $22 million is depreciation, no changes in those estimates from last quarter. Before we turn it over to questions, I’d like to remind you that if you’d 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 in early November. We’d like now open it up to your questions.
Operator
(Operator Instructions) And we will take our first question from Garik Shmois from Longbow Research.
Garik S. Shmois – Longbow Research LLC
Hi, thanks. Just have a question on, in North America you had indicated in the release, production volumes were flat against the 9% sales increase.
Just wondering if you could talk about the production schedules in the quarter presumably worked out inventories, or inventories where you need them to be and what’s the outlook for the fourth quarter with respect to production rates as supposed to expected sales?
Karen Colonias
Hi Garik, this is Karen. I think as you are where our biggest volumes are always occurring in third and fourth quarter a little bit consistent with how production and weather condition.
So you’re correct, we burned down some of our inventories that we had built in the second quarter to meet our third quarter sales. Typically we would build a little less inventory in fourth quarter as again that’s the typically as for the timeframe for us.
Garik S. Shmois – Longbow Research LLC
Okay, makes sense. And then, can you just comment a little bit, your sales to you discussed it was 15% in the quarter.
Can you may be pass out how much of that you think might have been this channel fill into them versus how much organic sale through they are actually seeing.
Karen Colonias
Sure. And let me just correct one thing.
I think I said something incorrect there. Our largest sales are in Q2 and Q3, I think, I’ve said Q4.
So Q2 and Q3 are largest sales, Q1 and Q4 typically small and so that’s why we see that difference in production. As far as our largest customer on that 15% increase.
As we reported in both Q1 and Q2, net sales were a little bit lower than certainly we would have anticipated. I think some of that were still in the channel and we’re now seeing them running about last year’s sales levels with this 15% increase in Q3.
Garik S. Shmois – Longbow Research LLC
Brian Magstadt
Garik its Brian. I think it’s primarily the latter the weaker economic environment there.
I mean they had a really good Q1 from a weather perspective compared to last year. But they are definitely not seeing the same growth in the latter quarters as we did in that first quarter.
So – but primarily, that weaker economic activity.
Garik S. Shmois – Longbow Research LLC
Okay. Thanks so much, best of luck.
Brian Magstadt
Thank you.
Operator
And we’ll take the next call – the next question from Arnie Ursaner from CJS Securities. Go ahead sir, you line is open.
Unidentified Analyst
Good morning. This is (indiscernible) on for Arnie Ursaner.
You just presented at the BCMC Trade Show, can you update us on how that went?
Thomas J. Fitzmyers
Sure, Robert. To just refresh everybody, the BCMC is the Building Component Manufacturers Conference.
It’s an annual show held every year where we really have the opportunity to talk about some of the things on our trust initiative. There is equipment shown and software shown and that’s really the big annual show.
We have a very good show, lot of people and lot of customers interested in some of our enhancements that we’ve made and some improvements on our software. I think they’re pleased that we’re listening to the customer request as we develop our software and they’re certainly seeing that in some of the demonstrations that we showed them.
So, overall a good show for us and we’re making some very good progress as we look at our truss software, which of course is the main element needed to really engage and be able to sell both truss software and plates into that market space.
Unidentified Analyst
Okay, great. Thank you.
Thomas J. Fitzmyers
You’re welcome.
Operator
And the next question, Josh Chan from Baird. Go ahead.
Josh Chan – Robert W. Baird & Co.
Hi, good morning. Thanks for taking my question.
The first question is on gross margin. As you look into 2015, balancing what you see in terms of volume and pricing and raw material cost, is there any reason why gross margin shouldn’t expand next year?
Brian Magstadt
Hi, Josh, this is Brian. So to the extent that we’re utilizing our factories more and running more production through there, we could benefit from increased overhead absorption.
Other than that, the other elements would be just speculation. So I would say that to the extent that volumes increase, we see little bit of a benefit there, but other than that I don’t know that there would be any other significant changes.
Josh Chan – Robert W. Baird & Co.
Okay. And then on foreign currency, the US dollar has strengthened pretty significantly recently.
And so, is there any way to ballpark what sort of impact it might have on your operating profit line? Do have a lot of local costs or how significant should we think about that impact being?
Brian Magstadt
For the quarter on operating income, I think it had less than $1 million impact. So a lot of our operations are operating in their local currency, but the FX in the quarter at the operating income line was less than $1 million.
Josh Chan – Robert W. Baird & Co.
Okay, okay. That’s good.
And then lastly, you mentioned repurchasing some shares during the quarter. Given kind of the stock movements recently, is there any expectation to purchase more shares?
I guess, the question being what determines the amount of shares that you buy on a quarterly basis?
Thomas J. Fitzmyers
Hi, this is Tom. We are pretty opportunistic about buying shares, and when we buy them we’re looking at whether it’s a good investment for the company and also reflects the confidence that we have going forward.
We have a $50 million Board-approved stock acquisition program. And we bought about $3 million under that as we said recently this last quarter, and we’ll just continue to look at it.
It just depends really on circumstances as we go forward, but it’s – when it’s an attractive opportunity for us we will tend to buy that. We review our position with the Board every quarter.
Josh Chan – Robert W. Baird & Co.
Okay, great. Thank you so much for your time.
Operator
(Operator Instructions) And we’re going to go next to Min Cho, FBR Capital Markets.
Min Cho – FBR Capital Markets
Great, thank you. It’s even in the press release that there is no comment about pricing in North America.
So, first, I’m wondering if we’re going to assuming that it was flat and was that kind of a positive blip in the quarter or are we starting to see some positive pricing trends emerging with the increased demand?
Brian Magstadt
Hi, Min, this is Brian. So there wasn’t any significant effect to the revenue line, the pricing.
So it didn’t have an impact. I don’t know that we’re able to say that it’s significant changes ahead there, but there were no impacts, no significant impacts in the quarter.
Min Cho – FBR Capital Markets
Okay. Can you discuss some of your year-over-year growth trends in the foundation products or the products they consider foundation products?
Karen Colonia
You’re talking about from the concrete area?
Min Cho – FBR Capital Markets
Well, in your 10-Q you talk about how foundation products are leading indicators for your construction-related products. I’m assuming that’s mostly concrete related and you do talk about kind of your year-over-year growth.
So I was just wondering if have that information.
Brian Magstadt
Actually those are more embedded products, which are actually part of our wood connector line. And I don’t have that data.
We don’t have that data in front of us. Sorry.
So I don’t have any information to tell you there.
Min Cho – FBR Capital Markets
Okay. Also, are there any significant line reviews coming up at Home Depot?
Karen Colonia
We are constantly looking at our mix of products and things to ensure that Home Depot has the churns that they’re looking for and certainly we’re providing that service for them. And so we do not have as I am aware of any line reviews currently and that were required for Home Depot at this time.
Min Cho – FBR Capital Markets
Okay. And then my final question has to do with your the revenues in Asia, they were obviously down year-over-year, even with the relatively new concrete products that are online now.
Can you provide a little more detail about which geographies are a little bit stronger or weaker was this mix issue of show, or just anything on the Asia front?
Karen Colonias
One of the things that impacted Asia was the products that we were providing a mechanical anchor when we owned [Lebic] (ph) and it was peak popular products for subway areas and we sold off those assets. So that was a little bit of a negative for them as far as being able to get some of those subway jobs and that wasn’t just that anchor itself that was a key anchor in a combination of products needed.
So we saw a little bit of downturn in our subway business because of that one.
Min Cho – FBR Capital Markets
Okay. And so that was the biggest reason there.
I’m sorry, one more question, did you hire additional people in the third quarter, if you can just tell me what your current headcount is?
Brian Magstadt
Hang on for just a second. In the quarter, we hired about 30 people throughout the entire company.
Min Cho – FBR Capital Markets
Okay, great thank you.
Brian Magstadt
You’re welcome.
Operator
And we’ll go next to Barry Vogel from Barry Vogel & Associates. Go ahead sir.
Barry Vogel – Barry Vogel & Associates
Good morning, ladies and gentlemen.
Brian Magstadt
Good morning Barry.
Karen Colonias
Good morning Barry.
Barry Vogel – Barry Vogel & Associates
I have a couple of questions for Karen. First of all, could you give us a little bit more detail in terms of your progress that you see as the trust business has been developed versus a couple of comments about the BCMC Show?
Karen Colonias
Sure, I think we’re still a very small percentage of the market. As we said the software that we currently have with some of our customers has limited capabilities and so we have not been actively out, presuming additional trust customers because we know we would not have software that would allow them to be more efficient at their jobs.
So the small business that we currently have again is maintaining our customers that were on the legacy software from the acquisition. Those customers as well as other customers are certainly seeing the strives we’re making in getting a new software program out that will in fact make the customers job much more efficient and therefore be a value to them.
So we’ve seen a little bit of growth this year over last year. I think we would see a little bit of growth next year.
But we’re still not ready to the point where we can make a full push, on all the trust business. We will be looking next year really pushing at may be another additional small segment of the market that doesn’t have extremely complicated both trust designs and where we are actually providing the whole package of trust wall panel and score systems, which is some of the things that competitors product will currently do.
Barry Vogel – Barry Vogel & Associates
Can you give some idea of the annual operating losses that the truss business is resulting in?
Brian Magstadt
Barry Vogel – Barry Vogel & Associates
So how much is that amount? I don’t recall writing that down in my notes of approximately.
Brian Magstadt
Looks like it’s about $3 million in the quarter.
Barry Vogel – Barry Vogel & Associates
The operating loss of $3 million per quarter is the effect of the truss business?
Brian Magstadt
That was what it was this quarter.
Barry Vogel – Barry Vogel & Associates
Okay, so that’s in the third quarter and how about the other two quarters?
Brian Magstadt
I don’t have that Barry sorry.
Barry Vogel – Barry Vogel & Associates
Would it be sort of similar range?
Brian Magstadt
No, I mean, we’ve been – may be its up a little bit but…
Barry Vogel – Barry Vogel & Associates
Okay.
Brian Magstadt
It’s fairly comparable.
Barry Vogel – Barry Vogel & Associates
Okay, because I know you were spending money there and it’s a slow start up and there’s lot of opportunities. And it’s obviously affecting the North American operating profits.
Brian Magstadt
Correct.
Barry Vogel – Barry Vogel & Associates
Okay. Now as far your balance sheet you continue to have this, great balance sheet with $258 million in cash.
It seems that your D&A this year, for example, is more than your capital expenditures. So absenting anything, serious happening in your business conditions, you’re going to continue accumulating more liquidity in your balance sheet.
If you have a look today, at the use of your capital, going forward in terms of the first, the four areas where he can use our capital how would you rank them today?
Thomas J. Fitzmyers
Barry this is Tom good morning.
Barry Vogel – Barry Vogel & Associates
Good morning.
Thomas J. Fitzmyers
Couple of facts about thoughts about that. We review our capital allocation opportunities all the time and specifically every quarter, and as you know not too long-ago, we increased our dividend some and we were pleased we could maintain our dividends through a difficult period from 2008 on.
So we review that all the time. As far as stock buybacks go, again we’re very opportunistic about that.
The rest of the capital allocation issues that Karen is going to talk about.
Karen Colonias
Yes, I would say that when we prioritize, so we’re still actively looking for some acquisitions and that would be what we would really like to use that cash for. The concept of organic growth in this concrete restoration area is a pretty slow process.
As I mentioned previously, we would really like to find some acquisitions that can help us to have not only a bigger footprints in there, but certainly have some additional product line. So we have not only people here at Simpson who that is their role to actively search and find some companies that will fit into the model we’re looking for as well as we have a couple M&A firms engaged helping us to look in both Europe and in the U.S.
Barry Vogel – Barry Vogel & Associates
So in order of preference acquisitions will be number one?
Karen Colonias
Yes.
Barry Vogel – Barry Vogel & Associates
And where would you rank dividend in future – additional dividend increases in share buybacks?
Karen Colonias
Well, as Tom mentioned that certainly something that we’re constantly looking at. So I don’t think we really sort of put them in a ranking.
We certainly review those constantly on a quarterly basis and review them with our board also.
Barry Vogel – Barry Vogel & Associates
Okay, thank you very much.
Karen Colonias
Thank you, Barry.
Operator
And we’ll take our next question from Arnie from CJS Securities. Go ahead, sir.
Arnie Ursaner – CJS Securities
You actually now have Arnie. Good morning.
Sorry, I have two calls at the same time. So I apologize if you may have answered this.
Housing starts are improving. We had $1 million this month.
We’ve had four months above $1 million. Can you remind us of the operating leverage in your business once we get above $1 million and your capacity utilization at this point?
Brian Magstadt
Arnie, it is Brain. So from capacity utilization, I believe we’ve been noting that we’re 65% to 70% in our factory.
So we have capability to push a lot more products through those factories today. As far as an operating leverage perspective, we don’t specifically have a number per se I mean to be able to specifically address that.
We’ve seen starts obviously higher this year compared to last year and that’s benefiting our North America operations there. So some of the added sales are definitely attributed to that with the improved building activity, but a specific leverage number we don’t have.
Arnie Ursaner – CJS Securities
And working capital and steel, could you comment on the inventories you’re carrying and your view of steel in the upcoming couple of quarters?
Karen Colonias
Yes, Arnie, this is Karen. Obviously, we’re always looking at making and ensuring that we bought the raw material necessary to meet the upcoming demands.
So we have a very good purchasing employee that works on purchasing and she does an excellent job of ensuring that we’re trying to buy steel at the best price. So we are very comfortable with where our current steel position is taking a look at where we think forecasted win for the year and also, again, potentially going into the first part of the year.
Arnie Ursaner – CJS Securities
Okay. I’ll jump back in queue.
Thank you.
Karen Colonias
Thank you.
Operator
And we have no further questions at this time.
Karen Colonias
Great. Thank you, everyone.
Thomas J. Fitzmyers
Thanks very much everyone.
Operator
And thank you for your participation. You may disconnect at any time.