Feb 8, 2008
Executives
Barclay Simpson - Chairman Mike Herbert – CFO
Analysts
Arny Ursaner – CJS Securities Barry Vogle – Barry Vogle Steve Chercover – D.A. Davidson Timothy Jones – [Unknown Firm] Keith Johnson – Morgan, Keegan Tom Zeifang – Lucrum Capital Robert Kelly – Sidoti Jason Yellin – WRA Investments Garrick Schmoies – Longbow Research Jim Wilson – JMP Securities
Operator
Please stand by, your conference is about to begin. Good day and welcome to the Simpson Manufacturing 2007 fourth quarter and yearend earnings conference call.
I would like to turn the meeting over to your Chairman, Mr. Barclay Simpson, please go ahead sir.
Barclay Simpson
Good morning and thanks to all of you for joining our CFO Mike Herbert and myself despite our company or maybe because our company having a lousy fourth quarter in earnings, partially due of course to one time charges. And in addition to those charges, we had others that were part of spending for the future of the company.
But before going into any detail let me make our lawyers happy by saying that we will not say anything that we do not believe. I know you’ll be surprised to hear that we do make mistakes.
There were a couple of charges that occurred last year in the fourth quarter that had a significant effect on reported earnings. The goodwill write off for the planned closing of a Canadian plant was $10.66 million and a slow moving inventory write off of $2.2 million and a onetime amortization on the Swan purchase of $660,000 plus continuing Swan write offs of $1.3 million.
But even without these onetime charges, the fourth quarter was not a good one in terms of earnings per share. Housing starts in the US as well as sales of existing housing do not appear to be showing any signs of improving.
In fact, just the opposite and although we’re unhappy about short term profits being down, last year, of course was the first year in the 13 since we went public that they’ve been down. We’re much more interested in the long range future of Simpson Manufacturing than in short term profits.
Consequently, such costs as internal development of new products, merchandising and going after new markets geographically and by acquisition are going up rather than down and we are somewhat slow to lay people off, although our total number of employees has gone down in our structural connector manufacturing plants, but not enough to prevent a reduction in sales per employee. And our goal has always been just the opposite.
So we’re not too happy about things right now. One number that went down substantially last year, 24% was our quarterly cash profit sharing for our own people and our people were unhappy about that, it’s the way that they make a lot of money and they’re working hard to make that number go up again, regardless of what happens to US housing starts.
And these are the people who’ve made this company so successful, they came here for a career, not as a bus stop, because they know this company is not for sale. New products are a major way that we’ve built the company, those developed internally and those by acquisition.
Internally in the past year we’ve developed quite a few that will help earnings in 08. Last year, Swan Secure was our only acquisition, but it’s going to contribute to profits this year despite the amortization charges.
We acquired a bunch of products that are an excellent fit as well as the people who made Swan so successful. Currently we’re looking at several acquisitions that look promising.
No acquisition is a sure thing though until all the papers are signed, but one or two look likely within the next few months. As most of you have heard, that surplus cash that we have is to grow the company by acquisitions.
Also, as we have for several years, we use a bit of the cash to prevent dilution because of internally granted stock options. But as our options are based on profits, there won’t be many granted for last year.
Sales in Europe were up 14% last year, 14.6 to be exact and we made money despite substantial costs in restructuring German and Denmark operations. Reports on Western European economies are not especially optimistic but we do expect sales to be up with perhaps some help in Eastern Europe from our Polish operation.
With sales offices now in Beijing and Hong Kong, and a 170,000 square foot factory on 8 acres 50 miles from Shanghai, which we’re planning to be in operation in early 09, we feel that China will be a major part of our future. And while we expect China to become profitable quicker than did Europe, it’s unlikely to become so for at least a year and perhaps longer.
But this year, our major objective is to find out what products we can manufacture in China for that market and for elsewhere in Asia. Our Hong Kong sales force will cover India, Japan and Korea and anywhere else that looks promising.
So, what are the prospects for Simpson Dura-vent? Better than in several years.
Our analysis shows that closing the Vicksburg operation in the next year and a half should add to future profits, although in the short run there may be some onetime charges. In the fourth quarter, Dura-vent showed a slight profit and is expected to add rather than reduce SSD’s profits this year.
Relations with Home Depot are excellent. We were honored by being named building materials vendor of the year last year and sales were up 5%.
While we’re working on making Europe and Asia, especially China a much more important part of our future, this year we still have too much dependence on US housing starts and the US economy and neither looks especially healthy either of course, I don’t have to tell you all that. So if you are buying or holding our stock, you do so because you have confidence in the ability of our people, aided by a strong balance sheet to again do what they have for the first 12 of the past 13 years since we went public.
The odds that it will happen this year though are no good but we are really excited about the future. Questions.
Operator
At this time, if you’d like to ask a question please press the star and one on your touchtone phone. You may remove your question from the queue by pressing the pound sign.
Once again to ask a question, please press the star and one on your touchtone phone. Our first question comes from Arny Ursaner from CJS Securities, your line is now open.
Arny Ursaner – CJS Securities
Good morning Barclay Simpson, how are you today. First a quick question on international sales, you mentioned Europe for the year was up 14.6%, what was it up for Q4 and what is it as a percent of your total sales please?
Barclay Simpson
Okay, let’s see, Europe in Q4 was up 12.9% and it was 13.8% of our total. What was your other?
Arny Ursaner – CJS Securities
Well that’s a lot lower than what you’ve been having as a percent of your total.
Barclay Simpson
Oh no, not for Europe.
Arny Ursaner – CJS Securities
I thought international though was 20% of your sales last quarter.
Barclay Simpson
Oh international, I thought you were asking about Europe.
Arny Ursaner – CJS Securities
No I was trying to get a feel for…
Barclay Simpson
Oh international?
Arny Ursaner – CJS Securities
Right.
Barclay Simpson
Oh okay, international was 20.9% in the quarter and for the year, god it’s hard to read, is that 19.6? Yes, 19.6%.
And both those are up substantially from the prior year.
Arny Ursaner – CJS Securities
My second question relates to the whole facility you’re building in China, can you give us some feel for what you think it will cost you in terms of cap ex, what you think your 09 revenues might be and you mentioned you didn’t expect it to be profitable for perhaps a year, I’m assuming you mean a year after you started up?
Barclay Simpson
Well it’s, at this point, any estimate of when it’s going to be profitable really doesn’t mean much. All I can say is that we’re pushing hard and we’ll get it that way as soon as we can but we’ve got to find out a lot of things about that market first.
And Mike what’s the cost?
Mike Herbert
In 2008 our projected capital is $23 million. In that is $9.2 million for the China plant.
Arny Ursaner – CJS Securities
And I guess my final question, I’ll give some others a chance Barc, obviously last year was the first year you had down earnings since you’ve been public. I know you don’t give formal guidance but what is your general view about 08 relative to positive or negative versus 07?
Barclay Simpson
Well I can’t see from everything I read where 08. Two things, one is that the housing market in the US is kind of in the tank and it doesn’t look like it’s going to get better.
Now you people can guess that probably better than I can but it just doesn’t look good and all the things we’re doing in China, Asia, Europe acquisitions et cetera, I just can’t see that balancing off the big drop in housing. I think we’re going to be down some this year and how much, I don’t know because any estimate I made wouldn’t be based on much.
All I can tell you is that I feel great and our people do about what we’re doing for the long run. The short run though is not going to be good.
Arny Ursaner – CJS Securities
Thank you very much for your answers.
Operator
Our next questions comes from Barry Vogle with Barry Vogle, please go ahead sir.
Barry Vogle – Barry Vogle
Good morning gentlemen, Mike I have a quick question for you on the breakdown of operating profits from connectors and venting products in the quarter.
Mike Herbert
Alright, for the quarter, for income from operations, connectors $5.7 million, venting products $0.1 million and administrative and other, negative $0.7 million.
Barry Vogle – Barry Vogle
Now did you add into, is that $5.7 after adding $10.7 million of goodwill write downs?
Mike Herbert
That’s reflective of the good will write down.
Barry Vogle – Barry Vogle
Alright so it’s $10.7 and how about those severance charges, are that’s included in there?
Mike Herbert
Correct.
Barry Vogle – Barry Vogle
So is that about a million?
Mike Herbert
That’s correct.
Barry Vogle – Barry Vogle
Okay, Barc, could you give us the percentage changes for the quarter in the different geographic regions starting out with the West excluding California, California, South Southeast, Midwest and Northeast.
Barclay Simpson
Okay California was down 19% in the quarter. And the West was pretty flat.
It was down 1%. The Midwest was up 11%.
And the South Southeast was down 15.5, 16% call it. And the Northeast was up 18%.
A real mix.
Barry Vogle – Barry Vogle
How do you have an increase in sales in the Northeast and the Midwest in this environment?
Barclay Simpson
I haven’t got the details on that, but I do know that apparently, well, of course, housing has not tanked in those areas like it has in the West and in Florida.
Barry Vogle – Barry Vogle
Okay and in the quarter can you tell us the percentage change or the actual dollars in the anchoring systems and shear walls and I know Europe maybe you can repeat the European sales in the quarter.
Barclay Simpson
What you didn’t have your pencil ready?
Barry Vogle – Barry Vogle
I have a pen I don’t use pencil.
Barclay Simpson
Okay, alright let’s see, you’re looking for the quarter on quick drive?
Barry Vogle – Barry Vogle
No anchoring systems first.
Barclay Simpson
Okay, anchoring systems was down, is that a, a this is clearer. Okay, anchoring systems was down 6.5%.
Barry Vogle – Barry Vogle
Shear wall or strong wall, whatever you want to call it.
Barclay Simpson
Well the shear walls were down 27% but that was a mix by far the big down was in the wood shear wall, largely wood. Our metal was up.
The sales of the metal shear wall I believe were up, let me have a look at that. We’ve got that separated but I think it was.
Barry Vogle – Barry Vogle
But the shear walls group was down 27%?
Barclay Simpson
Yes that’s right and the problem there of course is that these shear walls all go into housing.
Barry Vogle – Barry Vogle
Right alright and I think you said Europe was up 14.6%?
Barclay Simpson
That doesn’t sound right.
Barry Vogle – Barry Vogle
You said it before I just wanted to make sure.
Barclay Simpson
Okay Europe in the quarter was up 12.9%.
Barry Vogle – Barry Vogle
Okay and quick drive?
Barclay Simpson
And quick drive, quick drive was down 5.5% for the quarter.
Barry Vogle – Barry Vogle
Okay and now in terms of your closure of the Canadian mechanical anchor production to be sourced in China, was all of your mechanical anchoring production in, was that all in Canada?
Barclay Simpson
Yes it was.
Barry Vogle – Barry Vogle
And alright so they were shipping into North America. Where else were they shipping from Canada?
Barclay Simpson
Well they were shipping to China but the sales in China, but we were losing money on em. So that’s why we’re flipping the production into China.
Barry Vogle – Barry Vogle
Now will the Chinese plant handle worldwide production for mechanical anchoring systems going forward?
Barclay Simpson
No decision on that yet.
Barry Vogle – Barry Vogle
Okay and as far as, Mike on Swan Secure, Barclay made some comments about some charges. One he said was amortization of $660,000 and one was Swan write offs of $1.3 million, could you explain what the amortization is?
Mike Herbert
The amortization was when we wrote up the inventory after we acquired them and this will be the last quarter of that.
Barry Vogle – Barry Vogle
Okay and what was it in the third quarter?
Mike Herbert
It was approximately two-thirds of that number.
Barry Vogle – Barry Vogle
Alright so let’s say half a million dollars. And the Swan write offs of $1.3 million, what was that?
Mike Herbert
Going forward that was the write off of the money that we’ve attributed to the Swan name and to customer relationships.
Barry Vogle – Barry Vogle
Alright so, did you have any of that stuff in the third quarter?
Mike Herbert
Yes we did.
Barry Vogle – Barry Vogle
How much was in the third quarter?
Mike Herbert
It’s going to be two-twelfths of the $1.3 million.
Barry Vogle – Barry Vogle
Alright so let’s call it $200,000 just for argument purposes. Alright so is it fair to add those together, we would get about a million in amortization and about $1.5 million in write offs, so that’s $2.5 million and that’s directly in your P&L?
Mike Herbert
That’s correct.
Barry Vogle – Barry Vogle
Alright and so for 2008 is that going to disappear?
Mike Herbert
We will continue to have $1.3 million.
Barry Vogle – Barry Vogle
Okay, okay. Now as far as the sale of the San Leandro property, where are you in that process?
Mike Herbert
As you may remember, we put that property for sale, we had a little bit of contamination that we had to clean up, approximately $300,000. That work is ongoing and we would hope to put that property back on the market in the next few months.
Barry Vogle – Barry Vogle
Is there any indication that you should be able to sell it in 2008?
Mike Herbert
We hope so but you never know.
Barry Vogle – Barry Vogle
Okay, now Barclay on the Vicksburg facility’s closing, I know that you’ve had problems with turnover at that plant for a couple years now and I know there was a major management change that was a positive. Could you tell us if Vicksburg in totality in the P&L affected you negatively last year?
Barclay Simpson
No.
Barry Vogle – Barry Vogle
And could you talk to us a little bit about your savings in 2008 because of the closure versus 2007?
Barclay Simpson
It’s too early to go into that Barry. Anything I’d told you wouldn’t be based on enough fact.
All I can tell you is that the very careful research that our manager did on that, I don’t think there’s any question but what it is going to be a real plus to profits.
Barry Vogle – Barry Vogle
Okay now you mentioned Home Depot was up 5% in sales for the year, was that for the year?
Barclay Simpson
Yes.
Barry Vogle – Barry Vogle
And what about the other home center business, how much was that up for the year?
Barclay Simpson
I haven’t got that separated out yet.
Barry Vogle – Barry Vogle
Okay, thanks very much, I’ll go back in the queue.
Operator
Our next question comes from Steve Chercover with D.A. Davidson, your line is now open.
Steve Chercover – D.A. Davidson
Good morning, how are you, thanks for taking my question. First one, over the past couple years you’ve been trying to migrate some of your exposure into industrial and non residential markets.
How is that going and how do you feel perhaps at risk if the next shoe to drop in US construction hits the industrial commercial enterprises?
Barclay Simpson
Well I think we’re doing especially considering the market itself, we’re doing very well in Europe and the manager there has made some major changes which should be a real plus for the future, particularly in Germany, the biggest market.
Steve Chercover – D.A. Davidson
Well and it’s good to see that you’re getting strong growth in Canada and modest growth elsewhere.
Barclay Simpson
Oh Canada’s doing very well.
Steve Chercover – D.A. Davidson
But is that enough to move the needle, I mean if Canada was up 20% in the quarter and the year is that a penny or can you quantify that?
Barclay Simpson
Sure, just one moment. I’ve got it separated out here.
Lot of papers here. Give us a minute.
Mike Herbert
Canada is approximately $0.03 a year.
Steve Chercover – D.A. Davidson
$0.03 a year, okay. Thank you for that and my other quick question is if you were to look at and I know it’s a broad index, but your content per start, structural connectors is the category, it’s up way over 2007.
I mean clearly the denominator has almost fallen in half. How do you, do you attribute that to Swan Secure or you know obviously shear walls aren’t responsible for it.
Are you getting a lot of new SKUs into each house?
Barclay Simpson
We really don’t have an answer based on fact for that question. It’s a good question Steve but we just don’t have a decent answer for it.
Steve Chercover – D.A. Davidson
Well I know [those] are always striving to sell more product regardless of what the market is doing and that innovation is the way that you achieve that [overlay].
Barclay Simpson
Absolutely and we constantly work on getting more dollars per unit.
Steve Chercover – D.A. Davidson
And I know it’s just rough arithmetic but you’re doing it so I’m just wondering how you’re doing it. Would you attribute that to Swan Secure or?
Barclay Simpson
Well there’s a little bit of it, Swan Secure is let’s see something like 4-4.5% of our sales.
Steve Chercover – D.A. Davidson
But your sales were down a couple percent last year and housing was down 25% so you must be gaining share or content per start. You know maybe I’ll just leave that as a compliment but as a question I’d love to know how you’re doing it.
Barclay Simpson
Well and it’s new products also. We spend as I mentioned, we’re not reducing our expenses on such things as development of new products and I don’t have numbers on just what they add but I know that they added quite a few million dollars last year and will this year also.
Steve Chercover – D.A. Davidson
Great, well thanks guys, appreciate it.
Operator
Our next question comes from Timothy Jones, please go ahead sir.
Timothy Jones – [Unknown Firm]
Hi Barclay, how are you? You sound wonderful as usual.
Anyways a couple questions please. First of all you said you expected -- given the economy and housing and so forth -- of course completions will be tough no matter what as of starts to be down.
When you said [in] your earnings, were you talking pre all these write offs as you’ve taken especially the goodwill charge?
Barclay Simpson
Yes.
Timothy Jones – [Unknown Firm]
I thought you were, just wanted to clarify that. Secondly, I remember when you were disappointed with Vicksburg and I remember when you changed management and how pleased you were and I remember also that you put a fair amount of money into that plant and when business was better than it is now, you were very upbeat about a year ago or a little bit more about the Vicksburg operations.
What is the change, has it been the operations or is it just been that you just are not getting enough demand on the Dura-vent to support the two plants?
Barclay Simpson
Well that’s it, demand is a large item there but also you know we didn’t have any sales force out of Vicksburg and it was run from Vacaville, California. And the efficiency there was not nearly what it was in Vacaville and adding up the whole thing and considering that the market had gone down, why it just made sense to take it out of there and we’re in process of figuring out how we’re going to handle markets where the warehouse being in the south there met some markets, we’ll have to do something to take care of that, probably set up a warehouse here and there.
Timothy Jones – [Unknown Firm]
And will you have enough capacity in California to handle the additional work from Mississippi and do you have the ability to add capacity at the plant?
Barclay Simpson
Yes, absolutely.
Timothy Jones – [Unknown Firm]
Could you give me, [overlay].
Barclay Simpson
It’s not going to be a problem.
Timothy Jones – [Unknown Firm]
Could you add 50% capacity if you had to if the market turned around?
Mike Herbert
We are moving all of the equipment from Mississippi to California.
Timothy Jones – [Unknown Firm]
Oh you are? Okay.
Mike Herbert
And remember that we did and expansion there of that building approximately a year ago and we do have the room there.
Timothy Jones – [Unknown Firm]
Lastly, why didn’t you set up a sales force out of Mississippi?
Barclay Simpson
No we don’t, we didn’t have any sales force.
Timothy Jones – [Unknown Firm]
I know, why didn’t you have one?
Barclay Simpson
Why not?
Timothy Jones – [Unknown Firm]
Yeah, when you were running it you know, obviously now I understand.
Barclay Simpson
We just figured it wouldn’t be efficient, nearly as efficient to do it that way as to do it out of Vacaville and the same thing is true now of the plant.
Timothy Jones – [Unknown Firm]
It seems logical, thank you.
Operator
Our next question comes from Keith Johnson with Morgan, Keegan, your line is now open.
Keith Johnson – Morgan, Keegan
Good morning, couple questions, I was just trying to get a better understanding on the gross margin line. I guess the fourth quarter came in around 33.8% and that has several charges I guess rolled up in it.
Just to make sure that I’m looking at it correctly, could you just go over those charges one more time and hit the cost of sales line in the quarter?
Mike Herbert
We had the $2 million, slightly over $2 million slow moving inventory charge. We saw higher freight costs, basically cost of fuel.
Same for shipping cost. The Canada severance packages.
We had a little bit of impact of currency, so adding a little bit of a pressure from steel, a little bit of pressure as volume has slowed down, we’ve had our factory, the [presses] slowing down, some of that overhead also [splits] into the P&L.
Keith Johnson – Morgan, Keegan
Okay. What about any of the Swan charges, were those getting into the costs of sales line just to make sure I’m looking at it right.
Mike Herbert
Approximately half a million dollars.
Keith Johnson – Morgan, Keegan
Okay and so if you were kind of clean all that out for the onetime charges, would that put the gross margin somewhere back in the 35-35.5% range?
Mike Herbert
It would be in that range, yes.
Keith Johnson – Morgan, Keegan
Okay and then kind of looking at it sequentially as we dropped off from the third quarter where you guys did about 37.4% down to the adjusted number in the December quarter, what were the main drivers kind of pushing that margin down?
Mike Herbert
Primarily the reduction in volume.
Keith Johnson – Morgan, Keegan
Okay and as you I think you mentioned cap ex guidance for 2008 around $23 million, could we get an idea on depreciation and amortization and your tax rate?
Mike Herbert
39% for the tax rate and $31.5 million for depreciation and amortization.
Keith Johnson – Morgan, Keegan
Okay and I noticed I guess on the selling expense line as you’ve come through 2007, looks like you’ve been noting your press release, continued additions I guess since or personnel type spending. Will you continue at that pace as you look into 2008, are you getting to a staffing level or size that looks like it’ll be kind of stable as you go into 2008?
Barclay Simpson
Well we’ve probably will be going up again because of Asia. And also perhaps because of Europe.
Keith Johnson – Morgan, Keegan
Okay, great, I’ll jump back in the queue, thanks.
Operator
Our next question comes from Tom Zeifang with Lucrum Capital, your line is now open.
Tom Zeifang – Lucrum Capital
Morning guys, hey I don’t think I got the Home Depot for the quarter, I got it for the year, what was the growth? Or that channel if you can give it to me that way.
Barclay Simpson
Let’s see. You mean the home centers?
Tom Zeifang – Lucrum Capital
Yeah.
Barclay Simpson
Oh, okay. Home centers in the quarter were all home centers down 2.4%.
Tom Zeifang – Lucrum Capital
And then once again on the international I think I heard you say it’s 20.9% of total revenues, what was total international growth?
Barclay Simpson
Total in the quarter, international grew 16.7%.
Tom Zeifang – Lucrum Capital
And then what was the impact from currency on the company? Both revenues and profit, if there was one at all.
Mike Herbert
From currency we gained approximately $3 million and on net income we lost approximately $1.6 million.
Tom Zeifang – Lucrum Capital
Okay great and then on the international because what we’re hearing out of Europe seems like they’re a little behind us. Could you give us a sense of what’s going on the last six weeks versus the previous quarter?
Barclay Simpson
In Europe?
Tom Zeifang – Lucrum Capital
Yes.
Barclay Simpson
Flat. Pretty flat.
Tom Zeifang – Lucrum Capital
Year over year, correct?
Barclay Simpson
Yes.
Tom Zeifang – Lucrum Capital
Okay and then on the steel prices, on your inventory is a vast majority of it raw materials or is a vast majority of it finished goods?
Mike Herbert
It’s approximately a little under 50% in raw materials.
Tom Zeifang – Lucrum Capital
And where has that been historically?
Barclay Simpson
It’s not too different.
Tom Zeifang – Lucrum Capital
Do you continue to buy steel at these levels or are you trying to, it sounds like you’re not guiding down but you’re looking towards a tough 08. Is it safe to say that you’re not going to buy steel at these levels?
Barclay Simpson
I really don’t want to go into that.
Tom Zeifang – Lucrum Capital
Okay and then, what was the last question I had here? On Canada, just so I had the number right, up 20% in the quarter and at the current run rate that [inaudible] about $0.03 a year?
Barclay Simpson
Canada is, let’s see, last year our sales in Canada were around $44 million. And that was up for the year, that was up 16%.
Mike Herbert
[Overlay] using Canada [unintelligible] we moved the plant and that number, the $0.03 will go up.
Tom Zeifang – Lucrum Capital
Okay and then can I get a comment on the shear wall being wood materially worse, metal materially better. Is it safe to say the metal is more industrial commercial?
Barclay Simpson
No, it goes into housing.
Tom Zeifang – Lucrum Capital
It does go into housing?
Barclay Simpson
Yes.
Tom Zeifang – Lucrum Capital
Is there any way you could give us a sense of what you believe your exposure is to commercial and industrial versus residential?
Barclay Simpson
Well residential in the past year and right now the exposure is a great deal more than commercial but it is changing a little because commercial isn’t in the tank like housing is.
Tom Zeifang – Lucrum Capital
Yes so I guess what I’m getting at is I’m trying to get a sense of how bad it could be if commercial and industrial gets soft from this point forward, at the very point when residential doesn’t see an uptick.
Barclay Simpson
Well our problem is that our distributors, most of them sell to everybody and we don’t have numbers that you can count on. I can tell you though that in the past three years, because housing boomed so much, the percentage that went into housing compared to what went into commercial just changed drastically.
I think it’s changing back the other way now.
Tom Zeifang – Lucrum Capital
And so you won’t even venture a guess of your mix in residential and commercial?
Barclay Simpson
No, it wouldn’t be worth enough. But I’ll give you this that I think that probably 50%, we got so maybe 50% of our business was based on US housing.
And that’s our fault that we let it get that way and we’re working hard to change that.
Tom Zeifang – Lucrum Capital
Understood, okay, thank you.
Operator
Our next question comes from Robert Kelly with Sidoti, your line is now open.
Robert Kelly – Sidoti
Hey good morning Barc, thanks for taking my questions. Just quickly on the 4Q margin erosion, is there also a mix issue here, some of your maybe higher margin stuff going into the residential with that being weak?
Barclay Simpson
No I don’t think so.
Robert Kelly – Sidoti
I don’t know if you’ve covered this already, maybe like orders of magnitude as far as the margin decline in 4Q between volume, raw materials [overlay]. Is volume the biggest driver?
Barclay Simpson
Well volume, yes.
Robert Kelly – Sidoti
Alright and then secondly on the China initiative, the facility based out of Canada, is the production there, is that like enough to base load China? How do you think about that?
Barclay Simpson
Well right now it’s any guesses we made on what we’re going to make there wouldn’t be based on enough fact because we just established in Beijing, we just established that office at the end of last year. And so we’ve got sales people now out all through China and let a few months go by and we’ll figure out what we need to make there for that market and it may be personally I think that market is going to boom and it’s going to be a major part of this company in a few years.
Robert Kelly – Sidoti
I understand that but, the way I understand the Canada production, that’s not going away that’s eventually going to be shifted out to Asia, is that correct?
Barclay Simpson
Well we’ve got another plant in Canada and that plant will be operating. It’s the anchor systems products, mechanical anchors that is being, that plants closed and those products are being made now, will be made first part of next year in China.
But the question is we’re building 170,000 square foot plant and it isn’t just mechanical anchors that we’re going to be making there, but as yet. You know we’ve got a rough idea but that’s all it is, as to just what products we need to make for that market.
Robert Kelly – Sidoti
Okay great and then just one final one, you know in the release you talked about some competitive and pricing pressures, is that just confined to residential or is that pretty much across the board at this point?
Barclay Simpson
It’s pretty much across the board I think. Residential is the worst.
Robert Kelly – Sidoti
Right, alright sir, thanks, thanks for your time.
Operator
Our next question comes from Jason Yellin with WRA Investments.
Jason Yellin – WRA Investments
Hi Barc, how are you, thanks for taking my call, just real quickly if I could on steel prices. Is it fair to say that you’re seeing most of the pressure since the beginning of the year and it wasn’t a big contributor, high steel prices were not a big contributor in the fourth quarter.
Barclay Simpson
I think that’s correct, yes.
Jason Yellin – WRA Investments
And then what exactly are you seeing, is it getting harder to find the steel or you just have to pay more for it? What exactly is the issue?
Barclay Simpson
Well the steel companies are I think they’re doing a great job for themselves by making the capacity such that the demand increases and so they can force higher prices and we think that this year they’re going up. Price of steel is going up and we will have some price increases that we’ll have to make.
Jason Yellin – WRA Investments
And then roughly Barc if I just could, since the end of the year, have you seen steel prices go up 5%? 10%?
Is there any sort of metric we could use?
Barclay Simpson
No. I really don’t want to go into that.
Jason Yellin – WRA Investments
That’s fair, thanks for your time.
Operator
Our next question comes from Barry Vogle of Barry Vogle and Associates, your line is now open.
Barry Vogle – Barry Vogle
Mike I have a question on Swan Secure, based on your comment in the press release it implies that they did about $7 million in sales in the fourth quarter. Can you tell us what they did in the third quarter as well and then can you tell us what was the net overall impact to profitability because of Swan Secure in 2007.
Mike Herbert
They did approximately $6.5 million in Q3 in sales. And for overall profitability I mean it’s just slightly, slightly dilutive.
Barry Vogle – Barry Vogle
Okay so you would expect for the full year of 2008 that they would be adding to profits of the company?
Mike Herbert
Definitely.
Barry Vogle – Barry Vogle
Okay and Barclay can you give us a little bit of color on the acquisition front as to what is happening in the marketplace in terms of what you’re finding in terms of deal flow and the odds on doing something constructive for the shareholders in 08.
Barclay Simpson
Well I have learned Barry over the years that until an acquisition actually occurs, there’s not much use talking about it because they will look close and then you’ll find something and we’re careful. We’re not gonna just go out there and feel we have to have acquisitions.
We’re going to work hard on it but we’re going to make sure that just generally after a year’s time that they contribute to our profits. And we’re looking at a bunch right now, but I don’t want to go into specifics on any one.
Barry Vogle – Barry Vogle
Okay, thank you.
Operator
Our next question comes from Garrick Schmoies with Longbow Research, your line is now open.
Garrick Schmoies – Longbow Research
Hi, good morning, thanks for taking my question. I was just wondering if you could touch upon pricing a little bit more.
You talked about the possibility of raising prices due to rising steel costs and could you just talk about prior cycles, your ability to be able to pass along pricing when housing clearly is so weak.
Barclay Simpson
Well, generally when the cost of steel goes up which of course is our major material component, why we can raise the prices because so does everybody else’s and I don’t think any competitor has a better position with steel mills than we do. You know we’ve been buying the stuff for 50 years and when we make a commitment we keep it and we pay the bills on time so our costs do not go up any more, certainly than anybody else’s and sometimes less.
So, right now, probably the pressure to keep the raise low is larger than I ever remember it and the major thing is that housing starts are way down. Sales are way down.
The big builders are losing money rather than making a ton of money which they have and so they’re putting a lot of pressure on suppliers. And they will make an extra effort to not have to use the product unless it lowers their cost of construction then of course that’s the major reason they use them as well as fear.
So generally I think that we will be able to raise our prices. How much?
I don’t know.
Garrick Schmoies – Longbow Research
Okay, thank you for the detail and good luck.
Operator
Our next question comes from Jim Wilson with JMP Securities, your line is now open.
Jim Wilson – JMP Securities
Thanks, good morning Barc, how are you. Was wondering, I know it’s a bit hard to tell even in the US certainly but as you look in Europe and then in Asia, what is your feel as to your mix of business between residential and commercial in your overseas markets?
Barclay Simpson
Boy that is a very good question to which I don’t have a good answer. I think that in China from all I hear from our people in Reed that the commercial is a much higher percentage than the residential in relation to America.
Now Europe, I don’t know, do you have any feel for Europe on that one Mike?
Mike Herbert
I believe the majority of our sales in Europe are residential.
Jim Wilson – JMP Securities
Okay and then how much of Europe give or take is the UK?
Barclay Simpson
It’s about a quarter, a little more than that.
Jim Wilson – JMP Securities
Okay, so reasonably well spread in Europe. Okay, that’s great, that’s helpful, thanks Barc.
Operator
Our next question comes from Arny Ursaner from CJS Securities, your line is now open.
Barclay Simpson
He got your name close that time.
Arny Ursaner – CJS Securities
In my next life Barc I’m coming back with an easier name. Simple question on your inventories, you basically had flat inventories year over year but the price of steel during the course of the year rose quite a bit.
Again I know you don’t want to drill down too much but should we assume you have the volume of inventory has dropped pretty materially? And if so, can you give us some sense of how much of that is finished goods versus inventory, raw material inventory.
Barclay Simpson
Well let’s see, we can give you a rough estimate as how much is raw material and how much is finished goods, I think yes, what have you got there Mike?
Mike Herbert
Well from raw material as I said before, it’s slightly under half.
Arny Ursaner – CJS Securities
And those are up or down year over year in terms of quantity, volume?
Mike Herbert
Overall our steel inventory is down slightly from a volume standpoint.
Arny Ursaner – CJS Securities
Okay and finished goods?
Mike Herbert
It’s relatively flat.
Arny Ursaner – CJS Securities
Okay, just a technical question, I’m assuming there were no bonus accrual reversals. In other words I think you do that each quarter, marking it to the quarter, is that correct?
Barclay Simpson
Yes you mean cash profit sharing?
Arny Ursaner – CJS Securities
Correct.
Barclay Simpson
Yes, that’s quarterly and it’s down substantially.
Arny Ursaner – CJS Securities
Okay but again there wouldn’t have been any reversals or changes of accruals?
Barclay Simpson
You mean in methodology?
Arny Ursaner – CJS Securities
No, no, no, in other words, the number in Q4, you hadn’t been accruing for annualized numbers and then reversed those?
Mike Herbert
No, our bonuses are paid, earned in Q4, paid in Q4.
Arny Ursaner – CJS Securities
Okay and can you give us a little bit more on the costs and margin impact you would expect from Vicksburg, again I’m not assuming you’ll give us exact details of severance and other costs but can you give us a feel for, you mentioned 18-24 months in terms of time, you mentioned you’ll have to move some equipment. So what sort of negative margin hit might Vicksburg be for let’s say the first, for this year perhaps.
Mike Herbert
We are going to incur some costs in moving the equipment and with the transfer of people and re-staffing here in California. It’ll probably have approximately a $0.02 impact for the year.
Arny Ursaner – CJS Securities
Okay, my final question relates again whether you try never to use it as an excuse, but last year in March and April California had some of its wettest weather in history, what I guess I’m trying to get a feel for is how easy the comparisons might be in March and April in that market if you could comment on that.
Barclay Simpson
Well generally in the market in California has really tanked. It’s gone down a lot and yes we’ve had some pretty heavy rains recently but it isn’t, that isn’t the major cause.
Arny Ursaner – CJS Securities
No where I was going, last year Barc, you had some of the rainiest weather, it had a severe impact on both March and April results. So the comparison this year from a weather point of view should be much easier.
Barclay Simpson
Well I think it will be but that’s going to be more than balanced by the lack of starts.
Arny Ursaner – CJS Securities
Final question I have for Mike, if I can, is you mentioned some of the charges like some of the amortization expense related to Swan as ongoing. I’m trying to get a feel for which of the expense we talked about this quarter are truly one time.
I would think things like the Disney are one time. But some of them appear as though they may be more ongoing.
Can you try to perhaps help us separate out the true onetimes from the more ongoing expenses we’re likely to see.
Mike Herbert
Well the Disney was a onetime expense as you mentioned. The hopefully the slow moving inventory is a onetime expense.
Additionally, the amortization of the Swan inventory markup is a onetime expense. The Canada severance cost is a onetime expense.
Those are the things that come to mind.
Arny Ursaner – CJS Securities
Well the tax rate of 92% is also an $0.08 onetime hit as well, just as you think about things. I guess where I’m heading with this is to the extent the normalized gross margin in the quarter was 35-35.5, that’s still materially lower than what you’ve done historically.
And I know you don’t give specific guidance but are we seeing a more permanent meaning for the next year or so reduction in gross margin.
Mike Herbert
Well the challenge is as business slows down you have less inventory absorption and that becomes a big issue in the G&L at that point, you tie it loss of revenue. To clarify one point that you mentioned on the tax rate, if we did not have the impairment, our earnings per share instead of being $0.01 hypothetically would have, going back, that would have been $0.21.
Arny Ursaner – CJS Securities
As I say, well, okay, we’ve created a chart that has a $0.28 adjusted number but maybe we could follow up perhaps offline and maybe I’m double counting something.
Mike Herbert
[Unintelligible] just of the, our pretax profit instead of being $6.7 million would have been $17.4 million. Currently we have our income tax expense at $6.2 million.
It would have been $7 million because so little of the goodwill we got a tax benefit from the write off. And that was caused by, we bought MGA a few years ago and that was a share purchase and that’s not, that’s deductible.
Arny Ursaner – CJS Securities
Okay, thank you.
Operator
Our next question comes from Robert Kelly with Sidoti, your line is now open.
Robert Kelly – Sidoti
Hey, just a quick follow on. It seems like the magnitude of steel price increases across the board here from the mills.
Does it give you any confidence that because it’s such a big increase you’ll be able to pass it on?
Barclay Simpson
Oh yeah, I think we’ll be able to pass on quite a bit. Now whether we’ll pass on the whole thing or not is another story.
Robert Kelly – Sidoti
So it’s a question of how much you’re able to pass on at this point?
Barclay Simpson
Yeah I can’t answer that.
Robert Kelly – Sidoti
Okay, great, thanks Barc.
Operator
Once again if you’d like to ask a question please press the star and one on your touchtone phone. Our next question comes from Timothy Jones, your line is now open.
Timothy Jones – [Unknown Firm]
Hi again, a follow up, I just missed when you started, the first thing you talked about, you talked about some of the extraordinary items, the first number you gave was the plant closing of $10.8, the second number you gave was a $2.2 number, what did that reflect?
Barclay Simpson
That was an inventory charge.
Timothy Jones – [Unknown Firm]
And how did that come about?
Mike Herbert
It was caused by the slowdown in sales and rebalancing our inventory.
Timothy Jones – [Unknown Firm]
Okay so that is one of your onetime deals too?
Mike Herbert
Hopefully yes.
Timothy Jones – [Unknown Firm]
Hopefully, okay, thank you.
Operator
At this time we have no further questions sir.
Barclay Simpson
Alright, well thank you all and thank you Curtis.