Q3 2019 Earnings Call
Greetings and welcome to Simpson manufacturing company third quarter 2019 earnings Conference call. At this time, all participants Arnie listen only mode. A question answer session will follow the formal presentation then what's your to acquire operator said to turn the conference. Please press Star zero when your telephone keypad. Please note. This conference is being recorded I will now turn the converts.
To your host came Orlando with Addo Investor Relations Mr. Orlando you may begin.
Good afternoon, ladies and gentlemen, and welcome to Simpson manufacturing Company third quarter 2019 earnings Conference call on this call. The company May discuss forward looking statements such a feature plans.
We're looking statements like any prediction or feature that are subjective factors, which may vary and actual results may differ materially from any statement.
These factors in cautionary statements are discussed in the Companys public filings and reports, which are available on the fccs or the company's corporate website.
Please note that the Companys earnings press release issued today at approximately work that's team PM Eastern time.
Earnings Press release is available on the Investor Relations page of the company's website at Www Dot since then and AFG dotcom.
Today's call is being webcast a replay will also be available on the Investor Relations page at the company's but right now.
I would like turn the conference over to Karen Colonias sensor, President and Chief Executive Officer.
Thanks, Kim and good afternoon, everyone I'm pleased to discuss our results with you today.
Net sales for the third quarter of 2019 totaled $309.9 million.
Up 9% year over year, primarily due to higher sales volumes throughout almost all areas of our company.
He was housing starts which are leading indicator for approximately 60% of our business grew 4.1% versus comparable period last year.
Notably in the so where we provide a meaningful amounts of content at home starts grew 8.3% year over year.
Our volumes were also up from the second quarter 2019, due primarily to the unusually wet and cold weather conditions, we experienced across the U.S. and the first half of the year.
Our third quarter net sales increased even though we experienced the labor strike.
One of the unions, representing hourly employees that are Stockton facility through most of September .
Which was a large part due to the successful execution of our contingency plan.
I'm pleased that you're in good faith negotiations with the Union, we reached a new core your collective bargaining agreement in early October that we believe it's fair to our employees and representative of the labor market that exists in the Central Valley, where this class is located.
We strongly believe the resolution will provide many more years of economic growth for the Stockton facility and community.
And I'd like to thank all of our employees throughout our company, who helped us through this process.
Looking ahead into the fourth quarter, it's important to remember our volume may be impacted by the typical Q4 seasonality that we experienced as a result, a fewer shipping days from holiday related closures and a slowdown in construction activity due to the winter months.
We still believe there are many underlying factors to support healthy growth in the U.S. housing starts going forward, including strong consumer confidence.
Low unemployment rates declining interest rates and a low level of housing stock availability.
As anticipated our third quarter gross margin of 44.4% remained under pressure, primarily due to increased labor factory and overhead as well as raw material costs.
Due to light volume in the first half of the year. It is taking us longer than anticipated to work through the higher price raw material, which we purchased in the fourth quarter of 2018 to ensure we had sufficient supply during a turbulent market.
Well, we did experience a pick up in volumes in the third quarter a portion of the improvement was offset by Unabsorbed factory costs for lower production personally resulting from the strike at are stocking facility.
We continue to expect raw material costs negatively affect our gross margins for the remainder of 2019.
That said, we still maintain one of the highest gross margins in the industry to our to our longstanding brand reputation we built through our trusted products and services.
Deep industry relationships and superior level of customer service.
Turning now to an update on our key operating initiatives, which focus on growing our market share rationalizing our cost structure to drive improved profitability without sacrificing our competitive edge.
In improving our technologies and systems to provide best in class service to our customers.
Many of these operating initiatives stem from our 2020 plan, which we unveiled with the goal of providing transparency into our strategy and financial objectives to position Simpson for long term sustainable and increasingly profitable growth.
In Europe , our net sales of $42 million increased a half a percent year over year. Despite a 2 million dollar impact from negative foreign currency translations.
In local currencies the third quarter of 2019 represents our third quarter of consecutive year over year increases in net sales.
This growth continues to be achieved through a combination of volume improvements in higher selling prices.
Further our rollout of the GB old fastener line in the Nordic region in France continues to progress nicely and as a result, our operating margins in Europe or improving.
We've also weighed headway on our lean initiative and the final stage of our three phase SKU reduction program to rightsize our product offering.
As of September Thirtyth 2019, our inventory balance was $242.7 million.
Down 23.4 million or 9% compared to levels at June Thirtyth 2019.
When looking at the didn't decrease in pounds on hand, which is an element within our control. We've continued to make good progress since June thirtyth, we've reduced our product inventory in North America, which is the bulk of our total inventory by nearly 7% in terms of pounce on hand income.
He finished goods.
Which have come down by approximately 5%.
And since our plan benchmark of December 31st 2016.
Aggregate inventory pounds on hand in North America have decreased by nearly 19%, including finished goods, which have come down by approximately 22%.
Well total dollars on hand increased marginally, but a little over 1%.
We are focused on improving our inventory balance through careful inventory management and purchasing practices.
Finally in terms of improvements or technology infrastructure, we're continuing our S.J.P. rollout for the remainder of her U.S. branches through early 2020 and continued to work toward a companywide completion in 2021.
In summary, we are pleased with our third quarter results, including our progress in Europe , and our inventory management. We are cautiously optimistic U.S. housing starts will continue to improve.
Helping to drive our sales higher.
And finally, we remain confident in our ability to execute our against our key operating initiatives and the 2020 planned goals to drive long term shareholder value and improved earnings power.
I'd also like to acknowledge all of our employees for their ongoing commitment to providing best in class service to our customers and maintaining a C workplace environment. Thank you all for your hard work and dedication.
I'd now like to turn the call over to Brian who will discuss our third quarter financial results in detail.
Thank you Karen and good afternoon, everyone I'm pleased to discuss our third quarter financial results with you today.
Consolidated net sales for the third quarter 2019 were $309.9 million up 9% compared to 284.2 million in the third quarter 2018.
Within the North America segment, net sales increased 10.7% year over year to $265.5 million, primarily due to increased sales volume and higher average chronic prices.
In Europe net sales increased slightly.
By <unk> percent year over year to $42.2 million despite the impact.
The negative foreign currency translations.
Resulting from Europe currencies weakening against the United States dollar.
In local currency Europe net sales increased primarily due to increases in both volume and average product prices.
Wood construction products represented 83%.
Total net sales in the third quarter of 2019 compared to 84% in the third quarter 2018.
Concrete construction products represented 17% of total net sales in the third quarter of 2019 compared to 16% in the third quarter of 2018.
Our consolidated gross profit dollars increased by approximately 3% year over year to $137.6 million, resulting in a gross margin of 44.4%.
Compared to the third quarter 2018, our gross margin declined by 270 basis points the year over year decline in gross margin was primarily due to increased raw material costs.
Factory and overhead costs are lower production as well as higher labor costs, resulting from tightening labor market conditions.
On a segment basis, our gross margin in North America was 45.6% compared to 48.8% in the prior year quarter.
In Europe , our third quarter gross margin was 38.4% compared to 38.2% in the year ago period.
From a product perspective, our third quarter gross margin on wood products was 44.4% compared to 47.3% in the prior year quarter.
In concrete products decreased to 41.6%.
Compared to 43.4% in the prior year corner.
Now turning to our third quarter costs and operating expenses.
Consolidated research and development and engineering expenses for the third quarter increased 15% year over year to $12 million, primarily due to an increase in personnel costs.
Consolidated selling expenses for the quarter increased 3% year over year to $27.7 million, primarily due to increased personnel costs.
Partly offset by decreases in cash profit sharing sales commissions and professional fees.
On a segment basis compared to the prior year quarter selling expenses in North America were up 7% and in Europe , they decreased by 9%.
General and administrative expenses in the third quarter decreased 1% year over year to $37 million, primarily due to decreases in cash profit sharing expenses and consulting and professional fees on a segment level general and administrative expenses in North America.
Were relatively flat compared to the prior year quarter.
In Europe gene a decreased by 12% year over year.
Total operating expenses in the third quarter of 2019 were 70.
$6.7 million, an increase of $2 million or approximately 3% compared to the prior year quarter.
As a percentage of net sales total operating expenses were 24.7% an improvement of 160 basis points.
Compared to 26.3% in the prior year quarter.
Operating expense dollars increased primarily due to higher personnel costs.
Included in our third quarter operating expenses were Sep implementation and support costs of $3.6 million compared to 2 million in the prior year quarter.
As of September Thirtyth, 2019, we've capitalized $19.2 million in total and of expense $22.4 million over.
Well the costs associated with the Sep project.
As we progress further.
Into the Sep implementation, we are now expensing more of our costs versus primarily capitalizing them.
Our consolidated income from operations for the third quarter increased 2% year over year to 61 million compared to $59.7 million in the third quarter 2018.
In North America income from operations increased slightly year over year to $56.8 million, primarily due to the increase in gross profit dollars.
Partly offset by increased personal expense in Europe income from operations increased 36% year over year to $5.4 million, primarily due to lower operating expenses.
Our consolidated operating income margin of 19.7% declined by approximately 130 basis points from the third quarter of 2018.
Our effective tax rate decreased to 26.2% from 27.1% in the third quarter of 2018.
Our consolidated net net income for the third quarter $43.7 million or 97 cents per fully diluted share compared to 44.4 million were 95 cents per fully diluted share in the prior year quarter.
Now turning to our balance sheet and cash flow.
At September Thirtyth, 2019, cash and cash equivalents totaled $194.1 million.
An increase of 52.3 million compared to our levels at June Thirtyth 2019.
We remain debt free with only a small amount of capital leases.
We generated cash flow from operations of $95.8 million compared to 52.6 million in the prior year period.
During the quarter, we used approximately $9.2 million for capital expenditures, which included a minimal amount from our ongoing S&P implementation project.
In addition, we paid $10.2 million in dividends to our stockholders and repurchased 348901 shares of our common stock at an average price of $61.44 per share for a total of $21.4 million.
As of September Thirtyth 2019, we had approximately $49 million available under our 100 million dollar share repurchase authorization, which remains in effect through the end of 2019.
In addition, I'm pleased to announce.
On October 24, 2019, our board of directors declared a quarterly cash dividend of 23 cents per share.
The dividend will be payable on January 23rd 2020 to stockholders of record as of January 2nd 2020.
Before we turn it over to questions I'd like to discuss our 2019 financial outlook.
For the full year 2019, we are reiterating guidance as follows.
We expect our consolidated gross profit margin to be in the range of 43.5%, 44% given our expectations on material costs.
And housing starts.
Total operating expenses as a percentage of net sales to be in the range of 27.5% to 25%.
The effective tax rate to be in the range of 25.5% to 26.5%, including both federal and state income taxes.
Depreciation and amortization expenses to be in the range of $39 million to $41 million.
Of which $33 million to $35 million is for depreciation of fixed assets and capital expenditures to be in the range of $30 million to $35 million, including approximately 25%, which which will be used for maintenance capex.
In summary, we are pleased with our third quarter results and remain focused on executing against our strategic operational and financial initiatives.
We look forward to updating you on our progress in the coming quarters.
Thank you for your time and attention today.
We'd now like to open up the call for questions operator.
At this time, we will be conducting a question answer session. If you would like to ask a question. Please press star one under telephone keypad, a confirmation Tony will indicate your line isn't a question Q you May press star too if you would like to remove your question from the Q4 participants using speaker equipment. It maybe that's fair to pick up or handset before pressing the star Keith one done that fees, while we pull for questions.
Our first question is from Daniel Moore CJ adds.
Securities. Please proceed with your question.
Karen Brian Good afternoon, Thanks for taking my questions.
Good afternoon, Dan.
Just starting with Q.
Q3 relative to Q2 in terms of whether need a anyway to quantify how much revenue in North America may have benefited from delayed volumes in Q2, given much tougher.
Much tougher conditions early in the year.
I think.
That would be tough to get you a metric associated with that volume as we stated in Q2 I think it was one of the wettest first half of the year that we can be seen and.
So I don't have exactly what that push a volume would have been into Q3, we started seeing a little bit of improvement I think as we were kind of coming out of June .
Due to their lack the labor I don't know that we would have been able to.
Yes, certainly catch up and continue with the volume in Q3, just due to.
The lack of those skilled labor.
Positions in the in that industry.
Understood now certainly makes sense I guess.
As it relates to the strike congratulations on unsettling that was there any revenue and or operating income impact in Q3, and any lingering impact into the first couple of weeks Q4.
Yes, Dan it's Brian its Oh, we what we would expect approximately 2% to 3% impact on revenue.
That would be.
More likely than not pulled in pulled into the fourth quarter.
And just based on that there was unabsorbed overhead.
Probably 20 to 30 to 40 basis points of gross margin impact to the negative in Q3.
So.
And the reason im saying approximately is obviously volumes.
Can fluctuate on a day to day basis. So we don't know exactly how much we would have shipped.
In September but.
But that's our best guess at this time.
Okay, and the gross margin impact I understand I'm, just trying to understand that the the revenue 2% to 3% impact on Q4.
Is that volumes that will if you think you will occur in Q4 that you couldn't in Q3 or just just help me understand that commentary thank or no.
Sorry to clarify 2% to 3% on Q3 revenue got it okay got it.
Impact on Q3 revenue.
Okay.
And then you gave good commentary for one more for me just in terms of Cogs in steel inventories.
How much longer do we'd expect to be working through the kind of higher cost steel.
Higher cost inventories I know you mentioned through Q4 could you could that.
Bleed into Q1 at all or we expect to be largely through that by year end. Thanks for the color I'll jump back in Q.
Yes, Dan I think obviously, that's a function of what we see it's a function of typical fourth quarter weather.
And so at this point, we think it's certainly going to take it to all of 219 and.
The rest of the puzzle will be really what happens from the winter standpoint on weather.
Our next question is from Tim watches Baird. Please proceed with your question.
Hey, everybody good afternoon.
Hello, Hey, Hey, can you get can you guys, Hey, Rick Yes, yes good.
Okay, great. So maybe just kind of circling back on the last question. So if I'm hearing you right did you basically thought you asked about six or $7 million from this from the strike in third quarter.
I guess just back of the envelope that implies like North America would occur and 15% and so I'm just trying to understand what the gap is relative to starts because it because I know you'd obviously it more content in the south that starts is only up 8% in the south and I think there were only up a little bit less than that in the west. So can you just kind of help us bridge the gap between what that kind of underlying.
Volume growth is and what the starts activity is.
Yes part of the what we're looking at Tim on the starts are the starts during the month of the quarter compared to last year. So for July August September .
We see the south up about 8%, we see the west down about three 3.5%.
But just a reminder, last year Q3, we we had the price increase take him take up take place at the very beginning the that quarter and we.
There was some pre buy into Q2 of 18.
On that so I think thats, where you're really seeing the volume change.
In Q3 of 18 to Q3 of 19.
Okay. So it's just that.
It was that sizable have an impact question.
Well I think that with the.
The.
The starts the activities that we're seeing that are up and then the balance.
That's what we suspect.
Being attributable to that pre buy.
And the and on the on the revenue you're right, it's about 2% to 3% of consolidated.
Due to the strike which would have.
Had we had those sales in Q3, obviously would have had the additional volumes there.
Okay and was with any of the inventory improvement tied to the strike and I'll. Just the fact that you might have had some.
Yes, some stock inventory that you were still able to ship it though even though production was down and I guess is there any any if so is there any plans to kind of replaced that inventory level or is it kind of a permanent reduction.
Yes, Tim I think what we saw during the strike was.
A lot of great effort from the Simpson employees to be able to meet our customer needs.
And some of that was met by shifting from our other producing branches. So certainly.
On the strike lasted for almost a month and that certainly would have had a pretty significant hit stocked into probably our second largest manufacturing facility.
I think our again employees did a great job on really making sure we were focused on the customers and really trying to get products out.
Some of the other locations were working.
Quite a bit of over time to be sure. We can do that so.
You will see us trying and that's where we are right now is rebuilding some of that inventory.
And so we're very active.
Actively working on that at all of our locations of rebuilding that.
That inventory of production that we lost during that stripe time.
Okay, and then I guess as you look into 2020 conceptually how would you think about kind of SG in a leverage.
You know kind of kind of looking out to next year I mean.
Yes, I don't have to get a number but you should ask DNA, just conceptually grow at a lower rate than revenue and if so if not why.
Well, that's certainly what we've been working on ever since we put the 2020 plan in place. It's the fact that.
CNH should not grow at the same rate that revenue has been and obviously we were very successful in 2018 of being flat.
Fairly flat from a dollar standpoint.
I think our teams have done an excellent job this year, ensuring that the cost that we are putting in place whether that be from a head count or from projects that that's contributing nicely to both our top and bottom line being more profitable from the company's standpoint, and we will certainly continue that process as we go into our 2000.
20 budgeting cycle.
Okay. Okay.
Okay and the last one I have this is the building that you've sold is there any sort of gain that went through the PML in the fourth quarter.
It can you clarify again the building the over the building that we announced in the earnings release will close in the fourth quarter.
Right.
Yes, yes, we're.
Anticipating.
I think we're expecting.
3 million.
Plus or minus.
Three to 4 million on a on a gain on sale there.
Okay. Thanks.
Look on the diversity of.
Thanks, Thanks, Tim.
Our next question is from Steve Chercover.
D.A. Davidson. Please proceed with your question.
Thanks, Good afternoon, everyone.
Hi, Steve.
So just not to beat a dead horse on steel but.
Are you currently laying in some cheaper steel and we just have to run through the higher cost stuff because its FIFO accounting.
Well certainly steam we look at making sure that.
Not all Sealy exactly the same and not all products are produced at the same right. So we absolutely have had to have some infill.
To meet the needs of the raw material for specific products. So yes, we bought some steel from an infill standpoint, and you would see that still be slightly lower.
However, not enough of that to where we aren't seeing this gross margin impact.
So forgive anymore.
Sorry, Steve and it's more on a weighted average cost being not on LIFO.
And typically how many months worth of inventory do you carry.
Well, let me think abarth turns being it to that would give the indication of how many months. However.
Obviously, one of our goals is to get that inventory turns to for a.
We had a very nice plan in place before the tariffs came into.
Effect, which kind of through our plan out the window. So.
Typically on.
Most of our steel we'd like to get those.
Inventory on hand somewhere around three to four months depending on the.
Unique specification of the steel.
What were impacted with is.
Again, we did.
An additional by in Q4 2000.
18.
The first half I think.
Sales started falling off pretty dramatically in December of 2018, and then of course, the first half of 2019 was dramatically less than anticipated and Thats why were still find ourselves working through some of that steel that we.
Purchased in Q4 up to 18.
Okay, Thanks, Karen and one of the the bright spots in the quarter in my opinion is concrete products, which almost experienced a step function change. So is that segment a beneficiary of the pent up demand associated with wet weather or something else accelerated.
No I think what you're seeing in the improvements in the concrete space again, we've changed our strategy. We have our sales force focused on these six target markets, where we've got products to meet those markets. So.
Good change there some price increases that were put in place and then of course.
Mechanical anchor rollout that we've had in just a little over 1100.
Think about 1100 home depot stores.
This has certainly been things said it really help that gross margin on the concrete side.
All right. So you know higher run rate going forward presumably.
I mean, a higher run rate.
More factory absorption in our China facility.
That's helping us from that costing standpoint.
And my final question, maybe it's almost another thing to be analysts should be answering but the stock went almost parabolic in the last few weeks and is there anything your order book you've noticed over the same timeframe permit applications or anything else that would.
Top that or is it just optimism versus housing.
I think theres quite a bit of optimism about housing again, you know interest rates are trending down we still have quite a bit of pent up demand very low inventory available all of those things I think are a positive sign from the standpoint of just housing in general.
From our order book as you know, we can provide products to our customers and a 24 hour a turnaround time. So we don't really have a lot of visibility from what we would call an order book.
And from the housing start numbers, you know for US again that positive would be that increase that we saw itself. We've talked about we put more content in those hurricane areas and those earthquake areas. So for us that's a positive trend seen that 8% increase in starts in the southern markets.
All right, how but fires that impact you in any way in California, either from a production standpoint or anything else.
So.
Depends on which my first [laughter].
So the latest fires.
You know there obviously some structures that have been earned.
As we talked about in in previous years.
Typically it takes somewhere between 12 to 18 months before we might see any.
Rebuild in those fire damaged areas.
So there'll be no immediate impact.
From those rebuilding of those structures in those burnt out there is.
Okay. Thank you.
Our next.
Our next question is from Julio Romero Sidoti.
Please proceed with your question.
Hey, good afternoon, everyone.
Hi, good deal flow.
Brian did I hear you mentioned that within concrete products gross margins declined even with that double digit increase in concrete sales I'm not sure if I Miss heard you, but if that's correct can you just kind of provide any color there.
That was compared to last year.
And there there was.
Slight decrease in gross margin in concrete versus Q2 through I'm sure. It Q3 of 18.
And.
Well there there's a fair amount of concrete gross margin tied up in.
Carbon fiber based.
Products, which are often large sales large projects.
So.
I will often see those.
Impacts gross margin.
I think from a from a.
Chemical anchor chemical anchoring it's.
I don't know for sure actually I was going to speculate but.
Okay. That's model the primary reason there I'll just follow with you offline with that.
On the European segment.
Got you hit a almost 13% op margin there I'm just looking at the numbers I think there was a big step down in the Opex in that segment that opex shift to maybe another another segment or or is there something material. They got taken out in the cost side there.
I think as we've been focused on our new European strategy and management team there have been very.
Aggressive looking at as to unit costs in Europe and the like.
We may be lapping a little bit on some severances that we've taken.
In prior years, but we're really focused on.
The European strategy as we laid out a couple of years ago.
And starting to really see some benefits there.
Little bit of cost consolidation in some facilities very minor but.
Turning to take a look at that entire operation whether it be facilities, we can combine or just the general strategy I mentioned.
And it seems from that got improvements.
Got it and maybe last one from me here is I think Karen you mentioned, you had 1100 stores to date.
I think that's already ahead of the year end of your target you might have called out in the last call.
You just give us any update on the roll out there and where you maybe expect to be baby bond of here in the couple of quarters after that.
Yes, I think I overstate that by a few stores I think we're at a thousand 50.
We're still working with home depot on the on the Rollouts of these stores and as he said, it's very very difficult to reset and move things around I think the rollout will probably continue to be at about the same pace edits that is that we had a really nice push in second quarter and now I think you'll.
I'll start to see that really kind of slow down as each each of the home depot locations again, it's it's a one by one type of process as we roll this out so today, we're at 1050.
Still looking to get a few more before they ended the year.
Helpful. Thanks for taking the questions on best of luck unfortunate.
Thank you.
We have reached the end of the question answer session and this does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.