SSD
#Thank you <UNK>.
In an effort to ensure we are the most cost effective manufacturer in North America, we have started to transition our high volume connector production out of the Riverside branch to our other major manufacturing locations in North America.
The complete transition will take a couple of years.
This will allow us to use our equipment more efficiently and to strive for our goal of 75% utilization on two full shifts.
Riverside will remain one of our major sales and distribution locations, with shearwall manufacturing and a specials facility to continue to meet our commitment of service and availability to our customers in the Southwest region.
Once the transition is completed we expect to see over $3 million of annualized savings.
For the past 18 months, we have done extensive review of commercial ERP systems.
Our current home grown system, although perfect for what it was designed to do, can no longer keep up with our geographic growth, and our product diversity.
The Board has approved our implementation plan for SAP, which will become our global enterprise platform.
This is a three to four year plan of approximately $30 million.
Some of the spend will be capitalized.
Although a short term increase in operating expense, once fully implemented, we anticipate annual savings around 1% of sales through new business analytics, improved inventory management, improved purchasing, and reducing operating costs as we grow.
Our truss specialists have been actively presenting our truss design and manufacturing ---+ or, excuse me, management software and are working on converting customers.
We have converted a number of small component manufacturers since the release and are making good progress.
Truss sales, although small, were up just over 14% from Q2 of 2015, and year-to-date those sales are up 22%.
As a reminder, our current software design features allow us to approach about one-third of the US truss market.
We continue to be engaged with M&A firms in North America and Europe, working to find out acquisitions to help us meet our long term growth strategy.
We spent a little money in Q2 evaluating a couple of the companies, but as of now we do not have anything to announce.
And I would now like to turn the call over to <UNK>, who will give some additional financial information.
Thanks <UNK>.
As <UNK> mentioned, exchange rates had minimal effect on Q2 comparable sales.
But there was about $1 million of foreign exchange cost in operating expenses to account for unrealized losses on payables denominated in foreign currency, primarily for the UK operations as the pound moved against other currencies at the end of the quarter.
The margin differential of wood to concrete products is about 13 percentage points this quarter compared to 15% Q2 last year due to concrete product gross margin increasing at a higher rate than wood product gross margins, both on increased sales.
Those factors led to a Q2 2016 gross profit margin of 48.5%, up from Q2 last year of 45.4%.
As noted in the press release we believe the estimated gross margin will be 46% to 47.5% range for 2016, depending on how the rest of the year goes.
Total operating expenses, which are R&D and engineering, selling and admin, as a percent of sales was up about 170 basis points in the quarter compared to last year, as the company incurred expenses related to those unrealized foreign exchange losses previously noted, increased cash profit sharing on higher operating income, and legal and professional fees as the company works to deliver on its long term strategic initiatives.
Regarding taxes, the tax rate of 35.8% for this year Q2 is down from 38.5% last Q2, primarily related to lower foreign losses and the R&D tax credit which was made permanent at the end of 2015.
We believe the annual effective tax rate for 2016 will be between 37% and 38%.
Q2 2016 CapEx was about $13 million, primarily for improvements in our new chemical facility that we announced last year as we are continuing to build out for the move of our two existing chemical facilities anticipated for late 2016.
We also invested in manufacturing equipment and software development.
We estimate total 2016 CapEx to be in the $50 million to $55 million range, assuming we complete all projects this year, and that includes the expansion of our facility in Texas for greater warehouse and office training center capacity that we announced last quarter.
For 2016 depreciation and amortization expense is expected to be in the $29 million to $31 million range, of which depreciation is $23 million to $25 million.
Before we turn it over to questions I would like to remind you that if you would like further information, please contact <UNK> at the phone number listed at the press release.
Also look for our quarterly report on our Form 10-Q to be filed next week.
We would like to now open it up to your questions.
Hey <UNK>.
Hey <UNK>, it's <UNK>.
Thanks for the question.
I would say that the uncertainty in that wide range is due to the steel pricing that's in the marketplace.
As you probably noted, steel has taken up a pretty big run up over the last six months.
So that's what's creating that uncertainty there.
Yes, we have had ---+ I wouldn't say any significant buys, I mean, we have inventory throughout the ---+ over the last months to take us through a little bit further, but depending on the specific material there weren't any major buys, I don't think, in the last quarter.
So as we look at what we have on hand and what we are bringing in, obviously we are bringing in material at higher amounts, at higher costs.
Again, that's I think where that uncertainty is coming from in my mind.
Hey, <UNK>, this is <UNK>.
Obviously a lot of information out in the industry about what's going on with the steel prices, and of course it's mainly due to the new tariffs that have been put in place for steel that's coming in outside of the US market.
Certainly many companies in the building materials that have steel as their predominant material ---+ we have seen price increases that have been announced for them, and we certainly are analyzing that and will have to make some decisions as to what we might need to do in that front.
Yes, <UNK>, it's <UNK>.
I would say maybe a little bit of spend toward the end of 2016.
We have actually, as part of our readiness and evaluation we have been spending a little bit of money to evaluate the various systems and the like.
But as the project is now moving forward, we may capitalize a little bit towards the end of this year regarding licenses that we may need to acquire or equipment that may need to support that.
But I would say that the spend would largely begin next year.
And of that total that <UNK> noted, if I had to ballpark an approximate capitalized piece, maybe about a third, maybe a little more.
And of course if it's capitalized, it's going to run through the P&L at some point.
And it's got a pretty short depreciable life, so that will take it out couple of years but not too significantly.
So, I would say that as we go through the phases of implementation that 2017, 2018 are probably the heavier years as we look at that, and then as we bring more locations on, the work hopefully just continues to roll and we are not having to spend as much on those subsequent phases if you will.
Yes, <UNK>, I think we have had a team of over 50 people here at Simpson from both our North America branches as well as our international branches.
We have looked at it ---+ brought in people from operations, finances, inside sales and the warehouse, everybody really that would be directly impacted by a new ERP system.
And as I mentioned, we have spent about 18 months analyzing first of all what system is the best for us, and certainly the team came up with the SAP system.
And this year, as <UNK> mentioned, we have spent a significant amount of time in what they call readiness, which is really looking at the exact operations that we do at the Simpson locations and how will they work on the SAP platform.
You mentioned customization, the idea is not to customize but to use the off the shelf program.
If we start customizing we really do lose some efficiencies, and certainly that has been our message as we have been really communicating significantly with the entire company on why we are bringing this product in and what it will do to help us be more efficient in all aspects of our company.
So we are not looking at customizing; typically that creates a few headwinds when we do customizing.
So I think we have done a good job, again, over the last 18 months getting key people engaged.
We have a very key team that will be working on this project full time.
We have spent quite a bit of time with an implementer and they specialize in manufacturing companies.
So I think we have done a good job on our due diligence with this project.
No ERP implementation is easy but I really applaud our group.
I think they have done a lot of great ground work, and we will be rolling this out in about 4 different waves.
And that's really that timing.
Obviously, the first wave will take the longest and then we anticipate each one after that should be a little bit shorter.
So, can't say we won't have any headwinds, but I think we have done a really great job and the team has done an excellent job of thinking of all the things that may come into place, and I think more importantly the communication with the employees on why we are changing and what the benefits will be and getting their engagement and involvement in the project.
<UNK>, it's <UNK>.
Not all of it.
I would say it was ---+ a fraction of that was.
It was broken up; we were looking at acquisition opportunities, but as we just talked about, the SAP readiness is part of that.
We have done some shareholder engagement so we have had a little spend around there, and then just an increase in legal expense related to nothing major but a few different things that add up.
So of that total that you noted, maybe a quarter of that was for the acquisition type activity.
Let me talk about the Riverside and SAP.
We are still ---+ we have not tabled our look for acquisitions that can help our long term growth strategy.
So we are still actively looking at those.
And certainly lot of acquisitions take a long time to come to fruition and evaluate, so we are still very active on looking for acquisitions.
We have a great team that is helping us from the manufacturing side with the Riverside transition, and again that's well under way.
And as I mentioned, I already mentioned the SAP team.
So, we have really got good teams working on both those projects but they are not hindering or slowing down what we are trying to do from an acquisition standpoint.
And <UNK>, it's <UNK>.
On the shareholder engagement ---+ last year or at the last annual meeting we had a low say on pay vote result, so we wanted to get out and talk.
We have been getting out and talking to the governance teams of shareholders specifically around our compensation programs and governance programs and getting feedback, listening, and taking that information back to our board and various other folks that would help us work through what those programs are.
So that's really where the shareholder engagement efforts were.
Thanks, <UNK>.
I think, obviously, <UNK>, our core ---+ we have built this company over the last 60 years on that connector business and what we can provide to the industry from wood construction.
We have obviously added to that, if you look at our revenue, at 1.2 million housing starts versus where it was at 2.1 million housing starts, you certainly see that our revenue is approaching the same level.
And I believe that is because we have had our additional product lines of fasteners and the truss business as well as what we are doing in the concrete space.
So, as housing starts increase, it's obviously a great thing, but it's also ---+ creates a little bit more difficulty in that diversification.
But I do believe that what we are doing in the concrete side, we are much better positioned for looking at construction products in commercial market as well as concrete repair market.
So nice to see housing starts going up and certainly that's our huge focus, but I also think we are in a much better position from a balance as we look at being able to spread geographically as well as in different product lines.
Yes, I think our sales team and our support groups do work very hard every single day to keep our margins and our market share.
We still see MiTek has a very good software program, and so from a truss standpoint it's a tough push for us to compete against them.
But I think we have got a good product on the market now that's helping us penetrate that space a little bit.
We still see them using software sort of as a key selling aspect and trying to basically bundle truss plates and software along with the USP connectors.
And I think that's their strategy on how they are going to market.
We have been able to, I think, hold most of our market share, and that's really just a function of what we built our company on and that's that customer service.
And so as I have mentioned, and I talked about it a lot, pricing is an interesting thing but you need product availability.
You need to be able to support the customer.
You need 24 hour turnaround on specials, and those are all the things that we have really put in place to continue to service those customers, and I think they reward us for that by staying loyal to our product line.
Thank you <UNK>.
Yes, <UNK>, let me address the home center piece first.
I think it's definitely a timing issue.
The home center business was up pretty significantly in the first quarter.
I think it probably pulled some of the second quarter business into the first quarter business, but certainly on a year-to-year basis we are still up in the home center space.
And actually that's sort of a similar timing with the rest of the connector product line.
We had a very significant increase in our revenue in the first quarter, and as we mentioned, we believe that pulled a little bit of second quarter into first quarter, and so that's I think what you are seeing as again you look from the first quarter into second quarter.
Thank you.
Good morning <UNK>.
Sure, our system, again I mentioned our ---+ we call it ---+ ERP system is called Blue Screen, and it was developed about 30 years ago really with the connector business in mind, and although it's been a great system and it's certainly served us very, very well, as we grow and have different currency issues, as we look at different product lines, it just is not really designed for where Simpson is today.
So we are certainly looking at the opportunities for efficiencies.
We can look across the entire company looking at inventory.
We can't really do that today.
We will be able to look across the entire company and see from a standpoint of metrics associated with sales in different regions, specific products.
If you think we use Blue Screen for our operating systems; from a finance standpoint, we use AX right now.
So it will certainly have a better tie-in with both operations and finance to help us from closing the books sooner, a little more consistency across all our branches from an auditing standpoint, consistency from the standpoint of joint purchasing.
So there's many, many pieces that we believe will see cost savings.
And one of the key things is that we have ---+ we believe as we grow, the system will help us not need to add additional people, because it is more efficient in how we are all connected.
So we will be able to grow with not a huge increase in employees because of the efficiency of the system ---+ which right now we have a lot of hand operations that are having to go through our systems today.
Volume definitely helps as we noted in the release.
As a percent of sales, material and labor helped.
Those were some of the key drivers there; and then, as I noted in the prepared remarks, the mix of ---+ within concrete and wood and concrete margin improving a little bit better than wood, although wood improved as well, helped in that mix ---+ helped drive that gross margin in the quarter.
I would say mostly absorption, it being more efficient in the manufacturing and delivery of those products.
I think it's pretty early; again, as we mentioned, the ---+ we are sort of in our first year looking at both the truss software that's out, and certainly I mentioned, I think last quarter, we have got our code report on that carbon fiber now, so we will have a little bit better feel as to where that might be as we finish out 2016.
Thanks <UNK>.
Great, thank you.
Thanks, everybody.
