SSD
#Thank you, <UNK>.
In late September, we announced our three-year capital allocation plan, which includes share repurchases and potential dividend increases based on our cash position.
And as always, subject to future approvals by the Company's Board of Directors.
This plan is not change the Company's overall strategy to grow and diversify our business and product offerings to reduce our dependency on North American residential construction.
We want to grow organically and through acquisitions which lever our engineering, testing, manufacturing, and distribution strengths.
We are currently engaged with a number of M&A firms in North America and Europe working to find good acquisition targets.
The BCMC show, which is the Building Components Manufacturings Conference ---+ that show is held this week in Milwaukee, Wisconsin, where we demonstrated our latest software release.
The comments were very positive on our progress in designing software to meet our customer needs.
With this software release, the sales team that we have in place and our manufacturing capacity, as well as our technical support team, we believe we are positioned to pursue about one-third of this estimated $500 million market opportunity.
A general release of the software is scheduled for later this year.
Also in the third quarter, our manufacturing facilities for our carbon fiber, or FRP materials, passed their quality control inspection and we will have our final ICC code report sometime next week.
Part of our strategy as always is to use new technology to advance our business in all areas.
And when we choose to discontinue a project with no further cash flow benefits, we write those off.
With that, I'd now like to turn it over to <UNK>.
Thanks, <UNK>.
As <UNK> mentioned, exchange rates had a significant negative effect on Q3 comparable sales, which we estimate to be about $6.4 million as the dollar strengthened primarily against the European and Canadian currencies.
We estimate the negative effect of foreign exchange on operating income was approximately $800,000 for the quarter.
The margin differential of wood-to-concrete products is about 15 percentage points this quarter compared to 12% Q3 of last year.
With lower margins on flat concrete product sales and increased wood product margin on increased wood sales, the Q3 2015 gross margin was 46.4%, up from Q3 last year.
In that number, though, is a one-time pension settlement, which added about 0.5% to the current gross margin ---+ about $1 million.
As noted in the press release, we still believe the estimated gross margin will be in the 44% to 46% range for the entire year 2015, with the usual caveat that it depends on the rest of the year.
Total operating expenses as a percent of sales were down slightly in the quarter compared to last year, although we took that charge in writing off a project that <UNK> had noted that had been capitalized over the last year.
That was in the R&D and engineering line.
Regarding taxes, the tax rate of 38.4% is up compared to last year Q3, due primarily to about $1 million in additional losses subject to tax valuation allowances compared to last year, most of those losses occurring in Asia as we wind down sales offices there.
We believe the annual effective tax rate will be between 37% and 39%, in line with our prior estimate last quarter.
Q3 2015 CapEx was about $5.6 million, primarily for manufacturing equipment in the US.
We estimate total 2015 CapEx to be in the $35 million to $40 million range, excluding software.
And the added real estate project in west Chicago that we announced on the Q2 call is included in that dollar range.
That facility is expected to close escrow before the end of the year and we are planning to complete the move of the two existing chemical facilities in late 2016.
For 2015, depreciation and amortization expense is expected to be $29 million to $30 million for the year, of which $22 million to $23 million is depreciation, down slightly from our prior-quarter estimate.
Before we turn it over to questions, I'd like to remind you that if you'd like further information, please contact <UNK> at the phone number listed on the press release.
And also look for our quarterly report on Form 10-Q to be filed in early November.
We'd like to now open it up to your questions.
Hi, <UNK>.
We have not seen a dramatic increase in our customers from a restocking standpoint.
Obviously I think everyone saw the housing starts came up, so we are seeing really the flow-through of our material based on that demand.
And certainly I think another large point is repair and remodeling is also up.
And we have several products that go through our channels of distribution that support that market space also.
No, I think the competitive landscape hasn't changed much.
It's very similar to how it has been in the last few years.
And so I think that's what you are seeing there is just a little bit of a continuation of that.
So let me take that in a couple steps.
From the pipeline standpoint, I think I've mentioned that we are very interested in looking at acquisitions that can help us expand and grow our fastener market line.
And we're also very interested in looking at products that can help us grow in this concrete repair.
I think I've mentioned that that's a very, very large $3 billion market opportunity and we want to be able to organically grow, but more rapidly grow in that space from an acquisition.
So those are really two highly focused areas, but we have a couple people here who are looking predominantly in those areas, but also as other things become available.
When we think about Europe, our focus in Europe is really on connector manufacturing.
Our market share there is significantly lower than it is here in the US market.
They build much more with concrete and not as much wood, so it's not as large a overall market, but we want to be able to get a larger part of that market share.
So our focus in Europe is really more on connector manufacturing companies.
The difficulty in Europe as I've seen in doing acquisitions is typically these are long-term family-owned companies ---+ sometimes 150 years of tradition.
And it just takes a much longer time to court those potential targets; have them get to know you.
And sometimes when I said longer ---+ these are multiple year projects.
So it just is a I find a much longer time to try and get an acquisition across the board when we look at Europe than the US.
But we also have particular M&A firms and our director there of European operations ---+ that is their major objective, to look for acquisitions in that space.
<UNK>, this is <UNK>.
So we use software and technology in all of our aspects ---+ all of our business lines.
So it happened to be one that fit obviously within our business elements.
But again, we have it in both ICI and fasteners, in our truss business, even in our general connector business.
So unfortunately, it was a project that didn't work out for us.
But as you know, technology changes and it's certainly something going on every single day and this was something that we looked into that just didn't work out.
But the technology again is used in all aspects of our business.
We do ---+ we use ---+ we have both in-house software development and we also outsource.
So we try and use the best avenue possible for us to be able to come to technology with the market in a rapid time and also make sure it's something that's meeting our competitor needs.
Again, unfortunately, this was a project that just did not come to fruition.
I think a little bit of a difference on our M&A approach as we look at it in this cycle is that we are looking for sort of larger acquisition targets.
We're really looking for fairly well-established company that can give us maybe either a customer base, production expertise.
So we are really looking for larger companies than we may have been looking for in the past.
From my perspective, <UNK>, I think it's any time we ---+ there's always going to be risk when we look from an acquisition standpoint.
And the risk could be associated with a cultural fit, which we talk a lot about here at Simpson.
And we spend a lot of time when we look at an acquisition to be sure culturally it is going to fit with us.
But again, there's always risk because it's not our known market and certainly a market that we have developed.
So I think there is risk in both a small-sized acquisition and a little bit larger-sized acquisition.
Some of the things that help us at least reduce the risk from looking at maybe a little bit more established acquisition target is usually if they've got a reasonable revenue.
They've already get in place good quality control, good engineering, certainly good customer base and that sort of thing.
So ---+ but I would say there's always risk whenever we do an M&A or whenever we do an acquisition.
I would say we are looking at ---+ we're looking at targets anywhere probably from $50 million to $150 million.
Hi, <UNK>; it's <UNK>.
So for M&A obviously, I think you guys are all aware: multiples today are running between maybe 10 times to 12 times the EBITDA.
We start off first of all looking for a company that's going to help us grow in our strategy.
So again, I've mentioned the strategy of really trying to diversify from this North American housing market, but really look into these areas where Simpson can be additive.
So we're really looking for companies that are in the building space.
Do they have a product that can be differentiated.
I mentioned to you, we always want to give our salespeople a tool when they go into get our product specified and we don't want that tool to be price.
So it has to be something that can be engineered; can be specified to meet within those parameters where we can differentiate it.
So we really start to see are we looking at something that fits within our strategy.
Then we kind of funnel that down.
Is it a customer base.
Is there some IP there.
Is it a unique manufacturing process.
And then we'll start reviewing all the numbers from that standpoint.
So our first metric is to find the right company, the right people, and the right product that work for it.
From a metric standpoint, I think we get pretty well almost in what the market is doing as far as the things from a multiple.
And that's typically how we see potential targets are also looking.
So from a valuation standpoint, that's typically what's happening these days.
So I have a very, very large focus on SG&A and everyone here in the Company.
We are looking ---+ and as I mentioned to you, we kind of had spike in SG&A when we did some acquisitions.
And really the reason is that the way Simpson goes to market is I need all the feature set behind the product.
So that's why I have code reports and testing and marketing literature, salespeople ---+ I need all those things in place.
What we're seeing is we've got that foundation in place for our ICI business and our truss business and we're starting to gain some revenue from those.
So there's no need to have additional SG&A in that space.
But we look at it very, very carefully and I would like to see that number continue to drop and we will still be working on that.
So I would not anticipate seeing SG&A increase.
And we will still be, again, as I mentioned, very closely looking at all aspects as to what we can do to continue that number on a down trend.
Hi, <UNK>; this is <UNK>.
So the ---+ other than the items that you noted that there, we're always looking at how we can make our operations more efficient, whether it's in the office or on the factory floor, to be able to meet additional customer needs and demands without having any significant cost to that.
So it's probably more of the smaller incremental improvements.
I don't know that we would anticipate anything moving that line with any significance at this point.
So going into next year, we'd probably be looking around that similar range where we're at today.
If not, just a little bit better based on some of the things that you mentioned there.
No, Dan.
As I mentioned before, again, we have technology in all of those areas.
Yes.
So that was on our carbon fiber materials ---+ the FRP business.
We had completed ---+ obviously we had completed all the testing.
One of the requirements as a manufacturer when you get a code report is that the code agency has to do a QT inspection on your production facilities.
So our carbon fiber material is produced in our Portugal location and it's also produced in one of our US facilities.
That QT inspection has been completed successfully and we will get the actual hardcopy report should be coming out next week.
So that will allow us to be able to enter very aggressively the carbon fiber material ---+ excuse me, carbon fiber market with a code report, which, for that particular product, is really needed here in the North America market.
We've got marketing ready; we've got our salespeople trained.
So they will now be able to have a much more aggressive conversations with the specifying community to be able to use those particular products for concrete repair.
In Europe, the UK is definitely doing quite well and we've seen that really over probably the past year.
So they seem to be kind of out of their economic conditions there, so we anticipate that the UK will continue to grow.
We have a couple small product lines that we've introduced there that we are trying to really expand into some different space.
From France and Germany, still very, very tough.
Still having some major economic conditions in those countries.
And as we look at France and Germany, that actually impacts our Denmark location because Denmark actually produces most of the product that is shipped into Germany.
So from the connector standpoint in Europe, difficult, difficult time still for our major locations.
Our concrete repair products, on the other hand, are doing better.
Those are road repair ---+ again, using our carbon fiber material as a concrete repair and strengthening.
We're in a few different countries there.
Those projects and products are doing a little bit better, and those are really a function of our S&P acquisition.
So those are hanging in there and actually, we are getting a little bit of growth in some of those market spaces.
Dan, it is <UNK>.
It is wood dominant.
I think 90%/10% is a bit much, but it's still predominately wood product in Europe.
Dan, obviously we look at both.
I'm really looking at the percent of revenue, yes.
Correct.
The end of the quarter amount was ---+ bear with me ---+.
I got it.
It's about 48.3 million.
Hi, <UNK>; <UNK>.
As you know, again, from a software standpoint, that's a never-ending project ---+ always needing to put new enhancements into the software.
So I would not anticipate that dropping because we still need to really enhance that product and keep it out in front of our customers and certainly meet their needs.
It would have a slight difference from the ICI, but this is just our first step on ICI.
So we will continue to take that product line and find different applications, do code reports, full-scale testing, and that will be how we continue to grow that product line.
So when we think about the FRP product line, that was really the S&P acquisition that we did in Europe.
And those margins are still very high, north of 55% margin that we're making on that particular product line.
The code reports that we've been working on have been for the US market.
So for the European market, they already had code reports.
And let me just make sure I'm clear that the margin was a gross margin when I gave you that number.
So when I look at Europe, I look at those as two different areas.
So Europe is much more advanced in the use of that product as far as engineers being familiar with it.
So we have code reports there in there in Europe for FRP.
In the US, the code report we will be getting is for US acceptance for those particular products.
But the additional thing that's not happening in Europe is some of our cementatious materials that we bought from our Fox acquisition can be used in Europe.
So now the code issuance starts for Europe for that product.
So getting a code report, doing full-scale testing, putting engineering support, as you know, is what differentiates Simpson and how we feel we can deserve some higher margins on some of our product lines and providing that support.
So that is really a never-ending type of projects that we work on.
Just a little bit different from Europe versus the stage in the US.
I would anticipate that we should see some ---+ with the code report, we should see a little bit of revenue increase there on this particular product line.
And because the carbon fiber is a very highly engineered product, it does give us some better gross margins.
So I would anticipate some positive movement in that space.
I think it ought to be fairly comparable in that particular product category.
Great.
Thanks, everybody.
