Feb 6, 2015
Executives
Tom Fitzmyers - Vice Chairman of Board Karen Colonias - CEO Brian Magstadt - CFO
Analysts
Tim Wojs - Baird Steve Chercover - D.A. Davidson Alex Rygiel - FBR Barry Vogel - Barry Vogel & Associates Daniel Moore - CJS
Operator
Good morning, ladies and gentlemen, and welcome to the Fourth 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 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 Web sites. Please note today’s call may be recorded.
Now I would like to turn the conference over to Tom Fitzmyers. Please proceed.
Tom Fitzmyers
Thanks everyone. Good morning, and welcome to the Simpson Manufacturing Company Inc's fourth quarter 2014 earnings call.
Our earnings press release was issued yesterday. It is available on our Web site at simpsonmfg.com.
Today’s call is also being webcast and a replay of that webcast will be available on our Web site. 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 based on an increase in housing start.
Sales were up 7% in North America for the quarter due to increased home building activity in many parts of the region. 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 that are subjected to natural forces such as seismic or wind events.
Europe sales were down primarily due to foreign exchange effect and we are seeing the effects of a continuing economic environment there. 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 986,000 or 9% due to increased sales volumes. These were offset by increased manufacturing expenses.
Europe’s operating loss was 1.3 million worse by an 800,000 over last Q4 due primarily to lower gross profits. We continue to have a very strong finance position with 260 million in cash at the end of the quarter, very little debt, and a $300,000 million unused line of credit, which gives us a lot of flexibility and the capability of continuing to invest in our long run strategic plan.
Karen?
Karen Colonias
Thanks, Tom. I attended the International Builders Show in Las Vegas last month and the builders seem to be enthusiastic about the 2015 housing outlook.
We are prepared for a sales support and inventory standpoint to meet our customers’ needs with our connectors, fasteners and anchor products. Our initiatives in wood trust and concrete repair and strengthening are large market opportunities in which we have enhanced our engineering, marketing, manufacturing sales and customer support.
These are the elements that our brand was built on and that differentiate us from our competition. In the second quarter we expect to have our next trust software release and in late Q2 we also anticipate we will be marketing our new U.S.
code approved fiber reinforced polymer product line for concrete strengthening applications. As always we have 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 availability.
We’ll continue to monitor operations and SG&A expenses around the world to start the long run returns that are acceptable to us and our shareholders. And now I’d like to turn the call over to Brian who shares the more additional financial information.
Brian Magstadt
Thanks Karen. As noted in the earnings release Q4 2014 gross margin was 43.7% flat from Q4 last year.
The margin differential of wood to concrete products is about 9 percent points this quarter compared to about 16 percent points last year, with concrete products up and wood products down slightly. As noted in then press release we believe our -- the estimated gross margin will be in the 44.5% to 46% range for 2015 although depending on the rest of the year that may change.
Total operating expenses as percentage sales were slightly less in the quarter compared to last year. Regarding taxes, the tax rate of 32.3% is down compared to last year’s Q4 due to a tax reserve release in France and the renewed R&D tax credit in the U.S.
offset by foreign operations which had slightly higher losses subject to valuation allowances this year compared to last year. The annual rate of 36% for 2014 came in just under the rate we have been estimating for the year.
The 2015 estimated tax rate is believed to be between 36% and 38%. Q4 2014 CapEx was about $6.2 million primarily for manufacturing equipment and software in the U.S.
We estimate total 2015 CapEx to be in the 30 million to 33 million range excluding software. For 2015, depreciation and amortization expense is expected to be between 30 million to 32 million of which 24 million to 26 million is 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 number listed on the press release. Also, look for our annual report on Form 10-K to be filed at the end of February.
We’d like to now open it up to your questions.
Operator
(Operator Instructions) And looks like we will take our first question from, Tim Wojs from Baird. Please go ahead.
Your line is open.
Tim Wojs
So I guess just, Karen, to touch on something you said -- you said the builders were enthusiastic about the outlook in 2015. And I'm curious, has any of that enthusiasm led to sticks in the ground?
Or are we still -- is it a little bit more talk right now versus -- I'm just trying to understand what might be enthusiasm versus what might actually be going in the ground now.
Karen Colonias
Tim, as you know, late four early first quarters are typically based on weather conditions not the primary building season. They were enthusiastic I think about what they’re seeing as far as potential customers, what they’re looking at from economic conditions, things that are happening from what’s going on with interest rates and that sort of thing.
So, I would anticipate again that we would see the standard type of building time frame which would be largely in second and third quarter just that it has always been.
Tim Wojs
Would you say that maybe their tone is a little more positive than maybe the last 12 or 18 months?
Karen Colonias
Yes, I would say their tone is more positive than it was at the IBS show last year.
Tim Wojs
Okay, perfect. And then, just, Brian, the corporate line, I think there was a larger than expected income item there.
I'm just wondering what that might be and how we should think about that line moving forward?
Brian Magstadt
Tim, can you elaborate that what you’d refer to on the corporate line?
Tim Wojs
There was a, I believe in the press release, there's a -- in the segment breakout, there is an Administrative and Other -- All Other income line.
Brian Magstadt
Right, the Admin and All Other.
Tim Wojs
Yes. And that was just a $4 million number.
I was just wondering what exactly that is? And is that something that is repeatable as we go forward?
I'm just -- I'm a little curious there.
Brian Magstadt
I think it’s typically going to be in the 1 million to 2 million range for the year, if you look at the 12 months. It’s really allocations from the home office to the rest of the segments and at the end of the year there are some true-ups.
So if you look toward the -- look at the 12 month it’s -- the 12 month number is about where we would typically expect the range to be, so Q4 ends up being the quarter where items get trued-up.
Tim Wojs
And then just a couple of housekeeping questions, what was the FX translation impact in the quarter? And how much of North America is Canada?
I just can't recall.
Brian Magstadt
For North America and Canada it was less than 1 million on revenue and for the entire Company it was about 2.5 million negative effect in the quarter, companywide, so obviously primarily Europe.
Tim Wojs
And then how do you think about just the outlook for steel in 2015? And how should we think of gross margins looking into 2015?
Brian Magstadt
Well, we provided a little bit of guidance to 2015 gross margins so I don’t think we’re anticipating any significant changes there.
Operator
And we’ll take our next question from Steve Chercover from D.A. Davidson.
Please go ahead. Your line is open.
Steve Chercover
It's good to hear that the truss software is going to be released in Q2. I'm just wondering is that too late really for the 2015 building season?
Karen Colonias
Well, we are constantly doing releases and so it’s the release that we’re anticipating in Q2 will give our sales force the opportunity to call on a few more customers and as you pointed out Steve it certainly not going to allow us to really pursue heavily the entire truss market but it will allow us to pursue an incremental number of customers. As we mentioned the truss software that we’re releasing right now is probably targeted to those customers with a little less complication on the truss’ that they build and that alone kind of gives us that little bit better window of opportunity.
Steve Chercover
So, is this the big one, so to speak? Or is there still more to come?
And once you finally have the software that you've been working so hard on in the marketplace, remind us of the addressable market size.
Karen Colonias
So we believe the addressable market size for truss is at about 1 million housing starts between $450 million and $500 million. When you mention the big one, I think software is continually under development improvement and enhancement.
So we will continue to have our software expanse as we work on even improving this more to meet some of those needs of those customers who have much more complicated designs.
Steve Chercover
Okay. My other question was with respect to the concrete margins.
Good to see them coming up as opposed to wood coming down. So, what is it that you are doing?
Is it an improved product or how are you cutting costs? How are you getting those margins up?
Brian Magstadt
I think lot of it has to do with getting some expenses behind us related to certain factory improvements that run through that cost of sale line. There could also be a bit of a mix issue as we go into more of the fiber reinforced polymer product set that Karen mentioned in her prepared notes.
But I think it’s largely due to getting some past expenses behind us.
Steve Chercover
So they ought to be sustainable? Is there more to come?
Brian Magstadt
I think it may be too early to make that call on more to come at this point.
Operator
We will take our next question from Alex Rygiel from FBR. Please go ahead.
Your line is open.
Alex Rygiel
Could you comment on why the Home Center sales declined in the quarter? Third-quarter was very strong; fourth-quarter seemed to be a little bit soft.
Obviously, 2014 was a little bit of a lumpy year. Should we be reading into that weakness in Home Center sales in the fourth-quarter at all?
Karen Colonias
I think Home Center sales is really a function of what you see them preparing for their future growth opportunities. Again, they are really looking for those spring/summer building seasons and so it’s not unusual that we would see a little bit of a slowdown in the fourth quarter for Home Centers, I think last year when we looked at home center other than the Northeast -- which I believe has some pretty tough winter we saw Home Centers picking up kind of in their normal fashion of when we see peaks and valleys.
The other thing I would mention I think as we said in the past that home center sales might not be tied so closely to housing starts as we see a lot of our product going through our contractor distributors and our lumber yard distributors. So, a couple more avenues that the product is delivered.
Alex Rygiel
Do you sense that they may be a little bit gun-shy going into the winter this year, after maybe carrying a little bit too much inventory in sort of the earlier months of 2014?
Karen Colonias
I have no idea on that one.
Alex Rygiel
Okay. You also referenced that there was an increase in shipping costs in the quarter.
Could you discuss that in a little bit greater detail? And comment on sort of the outlook for shipping costs in 2015, given that fuel is declining?
Brian Magstadt
It was -- it had a marginal effect, but as we work with our vendors we take a look at all those different opportunities and although we’re not necessarily projecting any significant movement in shipment cost you are right to the extent that fuel obviously played the big impact, we’ll be monitoring those. But I don’t know that we would have a specific guidance to that particular number.
Alex Rygiel
And lastly, any view on sort of how product mix might change in 2015, specifically? Should we think about wood products growing at the same rate as concrete?
Or should we continue to sort of anticipate concrete to outgrow wood?
Brian Magstadt
Well, I would anticipate that we would see wood products obviously to continue to grow. But I think there is more opportunity on the concrete side just because we have a smaller market share there and we’re introducing some new opportunities and some new avenues in which to market and so our engineered systems.
So I think we’ve got some things in place that will help us a little bit more on that concrete side.
Operator
We will take our next question from Barry Vogel from Barry Vogel & Associates. Please go ahead.
Your line is open.
Barry Vogel
Karen, could you give us the percentage change of home centers overall for 2014 versus 2013? And at the same time, your largest customer changes in 2014 versus 2013.
That's my first question.
Karen Colonias
Ryan looking at up right now, Barry.
Tom Fitzmyers
So for the year our largest customer was flat and for the channel -- bear with me just a second -- the channel was flat as well for the year.
Barry Vogel
Are you surprised that your largest customer was flat when the economy and the building environment was improving?
Karen Colonias
Well, of course, we’re always working with all the home center change to put more products in and to be sure we’ve got products that are really moving and our group continues to do that and we did that through 2014. I just think that what you’re seeing is as home starts increase that are other avenues of distribution is the location that the customers are purchasing the product.
Barry Vogel
So we’re going to see more of that going forward, the flatness for your largest customer?
Tom Fitzmyers
We work with them obviously very often to make sure as Karen mentioned that we’ve got the right products in there. I mean it does -- obviously no good for then for us if the products that we have in there aren’t turning as much as we need to.
So we’ve worked with them -- all customers on a continuous basis to make sure they’ve got shelves of product and the right product, and that’s always our focus with those customers.
Barry Vogel
I have a couple of questions, a couple of numbers questions for you, Brian. What was the capital expenditures last year?
Tom Fitzmyers
It was -- total year CapEx 23.7 million.
Barry Vogel
And did you repurchase any shares last year?
Tom Fitzmyers
Well, we repurchased early in the year we did not do any repurchases in Q4.
Barry Vogel
And what was the total amount of the dollar repurchases?
Brian Magstadt
About, 3 million?
Karen Colonias
About 3 million, yes.
Barry Vogel
Okay. And what is the -- considering your balance sheet of $260 million, and your depreciation for next year being similar to capital expenditures, obviously, you have a tremendous balance sheet, and has had it for a long time.
What -- is there any plans to use that balance sheet a little more aggressively going forwards?
Tom Fitzmyers
Barry as we've said in the past, on a quarterly basis, we reviewed where we’re at from an opportunistic standpoint to repurchase shares, like we did last year. We have $50 million line of credit that directors have approved and --.
Brian Magstadt
$50 million dry bag approval.
Tom Fitzmyers
Yes, dry bags approval that the directors approved. And we look at that from an overall opportunistic standpoint we review the dividends levels on a quarterly basis and I think that Karen has been pretty explicit about some of the areas that we’re interested in as far as adding acquisitions.
And she might want to expand on that some. And also it takes a certain amount of the cash just to run the business; I think Brian has estimated this between 90 million and 100 million worldwide.
But we’re aware of it, we’re paying attention to it and we’re considering all alternatives. Another thing that happens, and it doesn't really appear there to the same extent, you might think, is that we’re constantly improving the Company in a lot of different places and while it doesn’t necessarily show up as a CapEx for example we do spend a lot of money to improve everywhere that we can and you’ve seen that from the margins that we’ve been able to both increase and maintain after the ‘08 period.
Barry Vogel
Now, it was early in the morning -- well, not early in the morning -- well, it's fairly early in the morning -- I noticed that the Asia-Pacific operating profit on your sheets, which are very well done, had a profit of $217,000. Was that the correct number?
Tom Fitzmyers
We believe so, yes.
Barry Vogel
So how did that happened?
Tom Fitzmyers
We’ve got a lot of different programs going on, one of the Asia-Pac is a pretty big part of the world, we’ve got China, a little bit of the Middle East, Asia and then we’ve also got Australia and New Zealand, South Africa, and we’re seeing in the Pac part of that Asia-Pac, Australia, New Zealand, it's their summer, it's their busy season down there now and I think we’ve seeing opportunities for increased sales due to a lot of things that are going on down in that region. For example, a few years ago New Zealand had a pretty devastating earthquake in Christ Church and now there is some rebuild going on there, which uses a lot of our concrete type product, so it’s relatively a mix between the regions.
Barry Vogel
Karen, what do you think the outlook is for Asia-Pacific in 2015 as well as Europe?
Karen Colonias
Well, I think if we look at Europe they’re definitely having some struggles from an economic condition our managing director there is doing a great job of really searching out and working with the sales force to make sure we can get our products in all different avenues. As I’ve mentioned in the past we’ve done some reorganization and we’ve certainly seen some great improvement from Europe when you look at the operating income line.
I think they’ll have a tough year and -- but, again, I think we've put things in place where they can really take the advantage of the revenue that they have and transferring that down to the operating income line. When we look at the Asia-Pac as Brian mentioned we have some opportunities in Australia, New Zealand, they are on a different cycle than us and we’re looking to -- predominantly we used to only sell fasteners in those market areas.
We’re now selling mechanical anchors and adhesives and we’re looking to also do some opportunities with some of the connector line because they build very similar to how we do in the U.S. market.
And in Asia we have had the opportunity there is really with some of our new fiber reinforced products and our repair and strengthening and predominantly a concrete market. We don’t sell really our fastener line or our connector lines.
But as we’ve discussed in the past the Asia markets are pretty tough from a competition standpoint and to really get your product line on some of these large projects -- then again we’re working very hard in the Asia to be able to do that.
Operator
(Operator Instructions) We will take our next question from Daniel Moore from CJS. Please go ahead.
Your line is open.
Daniel Moore
I was hoping you could talk a little bit about the pricing environment, what you're seeing, whether the easing of some of the pressures from your largest customers -- sorry, competitor in North America is eased? And your expectations for 2015.
Karen Colonias
I think we’ve mentioned in the last couple of conferences we haven’t seen so much price pressures certainly as the increase in housing start goes up that takes a little bit of price pressure off because we’re really more concerned about availability and support. As we look into ’15 we’re currently not seen a lot of pricing pressures and I would -- I guess anticipate that that might be somewhere going into 2015.
Daniel Moore
Very helpful. And just taking a stab at the expenses, obviously, well-documented, significant investments that you've made.
As we come out of 2015, should we think of this -- the level of SG&A as sort of a good run rate? Do you have additional projects that you are anticipating?
Or are there actually some expenses that might come out of the line as we look forward?
Brian Magstadt
I would say other than some of the variable expenses that are tied to sales or profits I would expect the run rate to be fairly comparable at this point I think it’d be too early to make that call on any significant variations there.
Daniel Moore
But nothing anticipated in terms of incremental investment that we might hear about over the next quarter or two?
Brian Magstadt
No, I don’t think so.
Operator
And at this time, we have no further questions. I will turn the program back over to Mr.
Fitzmyers for any additional or closing remarks.
Tom Fitzmyers
Thanks very much everybody. We appreciate you listening I’d be glad to take any phone calls if you might have.
Operator
This does conclude today’s program. Thank you for your participation.