Simpson Manufacturing Co., Inc.
Q1 2009 Earnings Call Transcript

Published: 1 May 2009

[Operator:]

Good day and welcome to the Simpson Manufacturing Company first quarter 2009 earnings conference call. I would like to turn the meeting over to your chairman, Mr. Barclay Simpson. Please go ahead, sir.

[Barclay Simpson:]

Thank you. Hello everybody. It's clear that what we need to do to get a whole bunch of people on this call is to show a loss for the first time since we went public 15 years ago. Not the best reason. We will do everything we can to change that. As most of you have heard me mention, we are determined to become less dependent on US housing and much more of an international company. Consequently, today is the last time that Mike Herbert, our CFO will be on this conference call. As of May 11, he has agreed to become Vice President of International Operations. Karen Colonias, who has been head of our largest branch, Stockton, California has agreed to take Mike's job of CFO, and he's with us this morning. Welcome Karen. Okay, so why the loss? It's pretty simple. The depression in housing starts and now commercial construction caught up with us. Our revenues were down 29% and cost related to production could not be reduced enough. Also administration costs were up partially due to acquisitions. Generally, it takes about a year to integrate an acquisition and we’ve made four in the past year. Also, a major customer has filed chapter 11, and we took the last of the write off in the first quarter. As most of you know, we are reluctant to lay good people off, but as of today we have felt it necessary to lay off about 30% of our people. And wherever it will not hurt future plans we are closing or combining some operations and cutting some costs like the contribution to our pension plan. What we are not doing is cutting costs that are important to the future of this long range company, and that includes major expansion in China and Asia as well as Australia where Ahorn’s Big Drive tool and fasteners for roofs look quite promising. I spent last week in China where we had a grand opening for our 175,000 square foot plant in the City of – man I have trouble pronouncing this – Zhangjiagang, which is about a two hour drive from Shanghai. Our sales force was able to get customers from 10 countries to the opening as well as two important Chinese officials. Both customers and officials were most positive about having us there and helping us to build a substantial business. Obviously, Rob Guzikowski and the sales people and others that he has hired have done a great job in getting us started in China and Asia, and much of China is subject to destructive earth quake and high wind forces, which should cause the adoption and enforcement of building codes, and it seems that our knowledge and products can help to get that done. And we are going to get help from the officials. Our European operations in the first quarter seemed to reflect even worse economic conditions than in the US. Our loss was $4 million there. Our acquisition of Aginco last month should help this year and we just bought a building for a new test lab which should help our brand name. Simpson Dura-Vent had a net loss of $2.2 million. We are working on turning it around, but unlike Strong-Tie, it’s no sure thing. So far this year, it is hard to find indications that the US or Western European economies are starting to turn around. And our China operation probably may take several years before contributing substantial profits. Acquisitions which were purchased in the past year should start to help out this year. The DeckTools software purchased this year will have our connectors in it shortly. New products developed internally will help also, but the rest of this year continues to look tough. But the long, not short, range future continues to look bright. We have the people, the balance sheet, the knowledge and the desire to continue to make progress in becoming more and more international, and in time to get us back to making outstanding returns on capital. Questions?

[Operator:]

(Operator instructions) We can take our first question from the side of Arnie Ursaner of CJS Securities. Please go ahead.

[Barclay Simpson:]

Hi, Arnie.

[Arnie Ursaner:]

Bob, good morning to you. First question I had related to your gross margins. Obviously these are unprecedented low levels for you as a company. You went into the quarter; you had some relatively high cost lingering steel inventory. And I know your plans’ under absorption has been a major factor. I know you have been your plants on much shorter hours and things like that. Without specific quantification, can you give us a feel for how much of the margin degradation percentage wise has been caused by each of those two factors?

[Barclay Simpson:]

Mike, you want to take that?

[Mike Herbert:]

The primary reason for the margin degradation is the plants. And those have just started to get – we started to increase production just slightly in those. So those should come up as we go through the year.

[Arnie Ursaner:]

Second question. And what is your sense of – the 25 or so margin you showed this quarter, how should we think about that for the balance of the year?

[Mike Herbert:]

That’s a really difficult question. But my personal best guess, and that is all it is, is probably around 28%.

[Arnie Ursaner:]

Second question, it’s a little more strategic or global for your Barc. You made some fairly management change announcements earlier in the quarter, and I know you’ve got your Analyst Day coming up shortly. Can you perhaps give your shareholders some sense of the goals you hope to accomplish with these change and tell us about the roles these people are expected to play going forward?

[Barclay Simpson:]

Well, I think it broadens the knowledge and experience of some of our very top people and that’s got to be a plus. And also of course I think it was great that Mike agreed to take the job of running international because that is a major part of the future of this company. And we need the best people there. And I think it was great that Karen agreed to take over his job too. It just broadens both of them immensely.

[Arnie Ursaner:]

You see it affecting the operations of the company in any material way, or your communication with street in any material way?

[Barclay Simpson:]

No, I don’t think so.

[Arnie Ursaner:]

Okay. Thank you very much.

[Barclay Simpson:]

All right.

[Operator:]

And we will take our next question from the side of Mr. Alan Robinson of the Royal Bank of Canada. Please go ahead.

[Barclay Simpson:]

Good morning, sir.

[Alan Robinson:]

Good morning to you. Good morning. Barclay, could you talk a little bit about how you are addressing your sales operations in this new environment? I mean, are there any channels you are pulling away from? And I guess more generally, where is your focus in terms of sales channels now?

[Barclay Simpson:]

It really hasn’t changed a lot. We of course with our acquisitions, we’ve broadened our products and that broadens your customer list. And things like Aginco that we just bought in France, that enables us to increase our customers, particularly in that area. And we haven’t changed a lot but we are constantly looking at acquisitions, and if an acquisition has products or geography that – it broadens our ability to sell, why, that’s a plus. All the time we are looking at about a half-dozen acquisitions.

[Alan Robinson:]

So you are not particularly thinking of scaling back sales channels that have been underperforming over the last couple of quarters?

[Barclay Simpson:]

Scaling back, no. We are not scaling back anything that has to do with the future of the company and that is major.

[Alan Robinson:]

Okay. And then on the subject of acquisitions, can you talk a little bit about how the acquisitions you’ve closed over the last 12 months or so are performing versus your expectations going into the acquisitions? I guess, leaving ProTech and Ahorn, the major ones. How is your experience with the integration of these acquisitions influenced your appetite for further or additional deals?

[Barclay Simpson:]

Well, the acquisitions generally were bought because they added either products or geographical expansion. And they are not for sale because they are doing tremendously well. And so consequently, particularly in the two European ones, integrating them is taking longer than it often does for an acquisition. It always takes roughly – this of course they vary all over the lot, but roughly a year to get an acquisition integrated. And in these cases it’s taking a little bit longer, but the reason we bought them, the reasons we bought them are still there and we are very positive about them. It’s just that they hit our earnings in the meantime.

[Alan Robinson:]

Okay. And then one of actions that called my attention in your release was the bad debt expense, again in the quarter. How should we view or what is your view of the potential for further charges going out the remaining three quarters of the year?

[Barclay Simpson:]

All right. That’s a very tough question. How long is the depression going to go on and is it going to get worse or is it going to get better? And those questions after all these years watching such things I know, I don’t know, but nobody does. So –

[Alan Robinson:]

I get the impression, the charge you incurred this quarter is due to one particularly large customer. Is there a potential for other similarly large customers to experience those kinds of problems going forward?

[Barclay Simpson:]

I really don’t have a good answer to that. I think it depends on how long this downturn goes. And if it goes a lot longer, yes, there might well be others. But, of course as I think you all know we have an extremely strong balance sheet and we are ready for whatever happens.

[Alan Robinson:]

Okay. Thank you. Good luck.

[Barclay Simpson:]

Thank you.

[Operator:]

And we will take our next question from the side of Barry Vogel of Barry Vogel & Associates. Please go ahead.

[Barclay Simpson:]

Good morning, Barry.

[Barry Vogel:]

Good morning, ladies and gentlemen. The first couple of things –

[Barclay Simpson:]

Ladies and girls, right.

[Barry Vogel:]

They are right. Karen is there. The first question – a couple of questions for Mike. I know that you're not on LIFO in terms of your accounting, am I correct, Mike?

[Mike Herbert:]

You are correct.

[Barry Vogel:]

You had $250 million in inventories on your balance sheet at the end of December, and now you’ve got $225 million. And on several calls over the last year, year and a half, people have been always asking about the impact of steel pricing on your gross margins. And steel pricing obviously last year continued to rise basically through the whole year and we know now that steel pricing has come down very dramatically and there has been a deflation in steel pricing. Could you really tell us – and you didn’t answer the question before when Arnie had asked that. What the impact on your profitability or gross margins was strictly from steel pricing?

[Mike Herbert:]

There was no significant impact.

[Barry Vogel:]

Now, if you are not in LIFO, when prices go down how do you prevent there from being an impact?

[Mike Herbert:]

Our inventory is based on net realizable value and that is still positive.

[Barry Vogel:]

So, you haven’t been forced to lower your prices?

[Mike Herbert:]

We have not had to impact our inventory.

[Barry Vogel:]

Okay. And do you think that this is going to change going forward. Do you think given what’s happened here recently as you might be able not to have an effect by that?

[Mike Herbert:]

The future is uncertain.

[Barry Vogel:]

Okay. And could you tell us now what your expected capital expenditures and depreciation and amortization will be this year?

[Mike Herbert:]

Capital is $15 million. Depreciation and amortization is $27 million.

[Barry Vogel:]

Okay. And now, Barclay, can you tell us what the percentage change in sales were by region, starting with the – I guess starting with California – I am sorry, the west, excluding California?

[Barclay Simpson:]

Okay. That was the worst, the west. And let’s see – the west was down 42%.

[Barry Vogel:]

California?

[Barclay Simpson:]

23%.

[Barry Vogel:]

Southeast?

[Barclay Simpson:]

Southeast, 22%.

[Barry Vogel:]

Midwest?

[Barclay Simpson:]

Midwest, 28%.

[Barry Vogel:]

Now, I know you made a comment about changing slightly the way you look at home centers. And so, if you can give us an idea on a comparable basis – you know the new basis, what home centers sales were down in the quarter versus last year?

[Barclay Simpson:]

Well, they were actually flat.

[Barry Vogel:]

Okay. And that’s on an apples-to-apples basis?

[Barclay Simpson:]

Which is remarkably good. Apples-to-apples, they were down about 4.5%, which also for the time was extremely good, and I think it has to say that a very significant part of their sales is not new US housing.

[Barry Vogel:]

Right. Well, I understand that. And how about your largest customer?

[Barclay Simpson:]

Yes. Now, Home Depot is back again where we have to – they are about 11% of our total. So we have to disclose them again. And actually they were up a hair.

[Barry Vogel:]

Okay, slightly. So when you said flat to home centers and then you used minus 4.5%. Was that the same number you are talking about?

[Barclay Simpson:]

Say that again?

[Barry Vogel:]

First you said home center sales were flat and then you said down 4.5%.

[Barclay Simpson:]

Well, using the old method they were down 4.5%. Using the new, they were flat.

[Barry Vogel:]

Okay. Now –

[Barclay Simpson:]

And the only change is that we dropped a couple that really weren’t significant anymore.

[Barry Vogel:]

Okay. And could you tell us what the decline in sales were for Strong-Wall anchoring systems in Europe?

[Barclay Simpson:]

Strong-Wall anchoring systems in Europe?

[Barry Vogel:]

No, Strong-Wall as a category, Europe as a category, and anchoring systems as a category.

[Barclay Simpson:]

I don’t have an exact number. But Strong-Wall was – wait a minute, what was Strong-Wall. You are getting me to do something I should have done already.

[Barry Vogel:]

Just trying to make you a better person.

[Barclay Simpson:]

I needed. Let’s see. Yes, here we are. It was – and this shows you new US housing, it was down – the shearwall was down 44%.

[Barry Vogel:]

And anchoring systems?

[Barclay Simpson:]

Anchor systems, I don’t have an accurate number, yet on that. I think it was down some, but I expect that that is turning around rapidly because of sales in China is starting to get going.

[Barry Vogel:]

And Europe sales?

[Barclay Simpson:]

Europe sales were down substantial. As I mentioned their economy looks worse than ours, like – let’s see. They were down 35%.

[Barry Vogel:]

Now in terms of – I don’t know if you have this. Obviously, you made several acquisitions last year. Can you give us an idea of what the sales from the acquisitions in the first quarter of ’09 – and I know you didn’t have those in the first quarter ’08 – how much they added to sales?

[Barclay Simpson:]

No, I haven’t got that number.

[Barry Vogel:]

And I got another question for Mike. As your inventories come down and let’s assume business conditions stay very tough. Do you expect additional inventory reductions?

[Mike Herbert:]

Yes, we do.

[Barry Vogel:]

Can you give us some idea of your guess?

[Mike Herbert:]

It depends on how sales go.

[Barry Vogel:]

No, I understand that. But let’s say sales still are poor, generally.

[Mike Herbert:]

We continue to – our plan is to continue to reduce our inventories.

[Barry Vogel:]

What’s your goal? Put it like that.

[Mike Herbert:]

We look at it every day and we look at it based on how the economy is doing? How daily sales are doing? So we don't really have a specific goal I can tell you.

[Barry Vogel:]

All right. One other question, Mike. Did you lose money in China?

[Mike Herbert:]

Sure.

[Barry Vogel:]

How much did you lose?

[Mike Herbert:]

A lot.

[Barry Vogel:]

How much is a lot?

[Mike Herbert:]

I haven’t got that number. We haven’t got that split out. There were too many things that were – people who are doing something there and something elsewhere and so forth. But it’s quite a bit.

[Barry Vogel:]

Okay. I’ll let – I’ll go back in the queue. Thank you very much.

[Mike Herbert:]

All right, Barry.

[Operator:]

And we will take our next question from the side of Mr. Robert Kelly of Sidoti. Please go head.

[Barclay Simpson:]

Hi Bob, how are you?

[Robert Kelly:]

Good morning, Barc. Mike had made a comment that you are bringing up your production rates in the plants. Can we infer that the sales declines are getting less sever in late March and April?

[Barclay Simpson:]

Not, yet.

[Robert Kelly:]

You are still looking at down 30%, year on, year in, in April.

[Barclay Simpson:]

Well, yes, but as I mentioned earlier we can’t predict that. Nobody can.

[Robert Kelly:]

Well, April then –

[Barclay Simpson:]

We are just going to be ready for whatever happens.

[Robert Kelly:]

Well, April is a backward looking number. I mean –

[Barclay Simpson:]

It’s not looking good.

[Robert Kelly:]

All right. Understood. You had also, Barc, in your comments talked about cutting 30% of your workforce closing, combining facilities. Where, what product lines and can you put a number around how much savings you think that that pulls out of the system?

[Barclay Simpson:]

I don’t want to go into detail yet on that. But I would be happy to give a guess on how much we saved. It will take us just a second to figure that out, but we’ve got the numbers here.

[Mike Herbert:]

With the cut we’ve made so far with reductions in headcount, we are moving our automatic production from our Brea, California facility up to Stockton. With changes in our – reduction in the pension plan, reducing CapEx, cutting our budgets for things like advertising, anything we can look at we think we’ve identified $67 million of savings to date.

[Robert Kelly:]

That’s an annualized number, Mike?

[Mike Herbert:]

Yes it is.

[Robert Kelly:]

Did that show up in 1Q at all or is that more of a 2Q story, those savings?

[Mike Herbert:]

Although savings will happen over the year. Those actions we have taken, to lay off an employee obviously you won't be paying his salary during the year.

[Robert Kelly:]

Right. I am just trying to get a sense of if any savings were evident in Q1?

[Mike Herbert:]

Not as much of those savings. Those are – a majority of those are going to be coming in the future.

[Robert Kelly:]

Okay. And then just finally, your gross margin comment, the 28% for the year, what does that imply, I mean it’s certainly better than – and implies better quarters ahead of you relative to what we just saw. That’s all just improved productivity and production at the plants? Or better pricing, I mean how do you – why 28% and what drives that improvement versus what we just saw in 1Q?

[Barclay Simpson:]

Bob, at this point, all that can be is a crazy guess.

[Robert Kelly:]

Okay. I understood.

[Mike Herbert:]

It does focus on the plants increasing their productions –

[Robert Kelly:]

So, it’s all just better utilization?

[Mike Herbert:]

That’s correct. And we also have to think about – when we talk about laying off the people in the factory, it is a double-edged sword. We do save cash, but those people were running the factories and we had good factory utilization. And so if you are not right, as those people left we do have to right-size our factory. So there is cost involved in that also.

[Robert Kelly:]

Right, okay. And then just a final one on the Aginco acquisition. You are not seeing a lot of movement on M&A activity in this environment. I am just wondering you don’t have to put a hard number on it, just anecdotally the multiples that you are paying for these type of business, what did they compare to you what you paid historically? How are you valuing these businesses now in what you are calling a depression?

[Barclay Simpson:]

There is a huge difference one to another. And what we are always looking at, number one, is not the immediate cost, but how we can get a good return on that in the future and sometimes if it’s a small acquisition it maybe a couple of years.

[Robert Kelly:]

Right.

[Barclay Simpson:]

But there isn’t any number that you can apply to them all. You can be sure of that we are not going to buy anything that it isn’t good in the long run.

[Robert Kelly:]

Right. Well, how about why Aginco at this point in the cycle? What are they doing that you had to make a move on them? Was it evaluation type thing or is it some product that you needed to have in France?

[Barclay Simpson:]

Let’s take one example. Ahorn. Ahorn has products which really fit right in with our Quik Drive products. And so you get two plus two equal five, but it takes in that case – because this company was not in great shape and it takes probably in that one or it will be a couple of years before it really starts to pay off. But that’s not unusual and Liebig for instance, they had mechanical anchors made to metric standards and that enables us to get started in Europe and it also fits China. So while we are already starting to make some mechanical anchors in China – they have some code approvals in Europe, which helped to market there and we also learn things about the products that will help us in our production in China. That’s kind of just one example. And each acquisition is different.

[Robert Kelly:]

Right. I think I understand the examples, but maybe how those analogies apply to Aginco specifically?

[Barclay Simpson:]

I beg your pardon.

[Robert Kelly:]

How does –

[Barclay Simpson:]

Aginco?

[Robert Kelly:]

Yes. I mean –

[Barclay Simpson:]

Well, that one is a little different. Looking at the number that we paid for it you would say that it, really, boy you paid too much. However, our European manager who had really gone into it heavily to find out about this company that did become available to us. He flew over here, the only time he’s ever done that. He flew over to talk to the board about how important it was for our production there, particular in France for the market. And that’s why we bought it. It really helped us in the French market and a little bit elsewhere in Europe. It helped in France a lot. And France, for the first time since we bought it years ago, is show a deficit in both earnings and sales. So it was really needed and it came at just the right time. That one’s by itself I would say as a reason.

[Robert Kelly:]

Thanks for answering my questions.

[Barclay Simpson:]

Right.

[Operator:]

And we will take our next question from the side of Mr. Garik Shmois of Longbow Research. Please go ahead, sir.

[Barclay Simpson:]

Good morning, sir.

[Garik Shmois:]

Hi, good morning. Thanks for taking my call. First question is related to the headcount reductions. Are there any charges that you anticipate this year?

[Mike Herbert:]

For the reductions we have done so far we will incur about $1 million in the second quarter.

[Garik Shmois:]

And just moving on, Mike, do you have a number for the cash flow from operations on the quarter?

[Mike Herbert:]

Yes I do. It is slightly less than $1 million.

[Garik Shmois:]

Okay. Lastly, Barc, can you talk about the Chinese plant and what you are seeing as far as your production schedule there? If you are hoping to see any offset from China relative to the rest of the footprint and when, as you look out on your projections, when can that plant start to become profitable? I understand that it is not obviously because – it just started to develop, but any guesses?

[Barclay Simpson:]

That is really a good question and it is impossible at this moment to give you a decent answer. I can tell you that it really, having just come back from there and talked to all of our own people, talked to a whole bunch of customers from 10 countries and talking to the governmental people who were there for our festivities, I just feel extremely positive about that operation. But, we are still working on discovering what products fit that market best and we are only making a fraction of what we're going to end up making in that plant. I haven't got the numbers yet, but I do know the prospects there are just terrific. How soon will we will be able to realize profits from it, it’s too early to even make a guess.

[Garik Shmois:]

Okay. Can you clarify what a fraction is?

[Barclay Simpson:]

What a fraction is?

[Garik Shmois:]

The fraction of the utilization.

[Barclay Simpson:]

You mean the percentage of production? Is that what you mean?

[Garik Shmois:]

Yes.

[Barclay Simpson:]

Well, I guess and just thinking about looking at the plant again in my mind, we are using maybe 20% of it.

[Garik Shmois:]

Okay. Great. Thank you very much.

[Operator:]

And we will take our next question from the side of Peter Lisnic of Robert W. Baird. Please go ahead.

[Barclay Simpson:]

Good morning, Peter.

[Peter Lisnic:]

How are you?

[Barclay Simpson:]

Good. How are you?

[Peter Lisnic:]

Good. Quick question, I want to explore the crazy gross margin of assumption, per se. At 28%, first question would be, you run at that rate for the year. My guess is it's probably pretty hard to make money for the full year. So is that a crazy assumption on my part? Then the second question is you talk about some of the restructuring that you have taken so far and headcount reductions, and moving things around. Are there incremental levers you can pull or are planning to pull as you kind of look at this relatively depressed or down [ph] end market?

[Barclay Simpson:]

Well, I’ll answer the first part of the question. Yes, it will be tough to make money this year. Second part, I’ll leave to Mike. The tough part I’ll leave to him.

[Mike Herbert:]

We do. We had a plan A and B and we executed those. We do have a plan C already written out and we are deciding as the quarter proceeds and as the year proceeds how we execute on those.

[Peter Lisnic:]

Okay. Is there any way that you can maybe quantify the magnitude of plan C relative to plan A and plan B in terms potential costs savings and how quickly those might accrue to the bottom line?

[Mike Herbert:]

No. They can be either small or large and it depends on our view of what’s really going to happen with the economy in 2009 and 2010 as we proceed.

[Peter Lisnic:]

Okay. All right. And then in terms of utilization, you mentioned utilization in the China plant. I'm just wondering if you can give us a sense as to what utilization is like in the domestic factories, to give us a sense as to what the under-absorption issues are.

[Barclay Simpson:]

It is pretty low. What do you think it is Mike?

[Mike Herbert:]

In Q1, we significantly reduced our factory production, so they were extremely low. I will leave it at that. We are starting to make a conscious decision to reduce inventories. We do have to start utilizing those plants more, so those will be coming up. That is how I like to leave that. As far as China, when we talk about 20% utilization for the space that Barclay mentioned, when we built that building we identified that we only needed half that space. But we decided to build out the complete land for future growth. So, we made – again it was a conscious decision to give us some extra capacity there.

[Peter Lisnic:]

Okay. All right, that makes sense. And then last question I guess, in terms of the pricing environment, given how significant the volume pressures are, can you maybe talk about pricing in the home center channel specifically and also in other markets as well?

[Barclay Simpson:]

Well, everybody has pressure on us for pricing, of course we are in a recession or some say a depression. So, the pressure is on all the time. And of course the price of steel has gone down. So, just exactly how that is all going to come out, I can't say right now. I can say, though, that we are going to have to lower some prices in all probability.

[Peter Lisnic:]

Will that just be a function of materials cost or is that a competitive response?

[Barclay Simpson:]

It is both.

[Peter Lisnic:]

Okay. All right, I appreciate the answers. Thank you very much.

[Barclay Simpson:]

You are welcome.

[Operator:]

And we will take our next question from the side of Mr. Steve Chercover of D.A. Davidson. Please go ahead.

[Barclay Simpson:]

How are you, Steve?

[Steve Chercover:]

Good morning everyone. Couple of quick questions. Some of my questions have already been answered. Did you give us operating earnings for both Strong-Tie and Dura-Vent? I think you said Dura-Vent was a $2.2 million loss. What was Strong-Tie?

[Mike Herbert:]

Income from operations for connector products was negative $7.088 million. And bending parts was a negative $3.259 million.

[Steve Chercover:]

$3.259 million. Thanks.

[Mike Herbert:]

And Barclay gave you the after-tax number.

[Steve Chercover:]

Got you. Okay, is it possible to identify the customer that went bankrupt?

[Barclay Simpson:]

We would prefer not to, although it is public information.

[Steve Chercover:]

Okay. And you discussed acquisitions a little bit. I am just wondering if this might not be an opportunity to accelerate deals, given your balance sheet and the fact that some targets might be in distress.

[Barclay Simpson:]

Steve, we are not going to change our general principles in figuring out acquisitions to buy. And of course, we are getting more possibilities all the time, but usually the reason is something that isn’t too positive. So I expect that we will continue to make acquisitions, whether we will find that one a sizable one that contributes significantly immediately to profits, which if it’s sizable it would have to, who knows. But we are – that’s something we are not cutting back on costs. In fact, we are increasing our costs and using outside people to help us look at acquisitions.

[Steve Chercover:]

And finally, you declined to quantify what the negative impact of China was. But absent those startup costs, which I think other companies might have called out just in order to make the ongoing operations look better; do you think you would have been profitable without those costs?

[Barclay Simpson:]

Well, no.

[Steve Chercover:]

Okay, thanks. Good luck this year.

[Barclay Simpson:]

Okay. Thank you, Steve.

[Operator:]

And we’ll take our next question from the side of Jim Wilson of JMP Securities. Please go ahead.

[Barclay Simpson:]

Good morning, sir.

[Jim Wilson:]

Good morning, Barc. How are you?

[Barclay Simpson:]

I’m okay. How are you, Jim?

[Jim Wilson:]

Doing just fine. I was wondering – I guess, first, looking at what you saw this quarter and so far, I’ve been talking with your distributors. Is it worse on the commercial construction or the residential, or just equally bad all around?

[Barclay Simpson:]

The commercial has pretty much caught up with the residential, in the wrong sense. And they are both – we are not seeing a turnaround yet in either of those.

[Jim Wilson:]

Okay. And it appears certainly the commercial building is coming to a complete standstill. But what I was wondering though going forward, to my other question, is with all the potential for infrastructure spending and the dollars being allocated presumably by the Federal government, what do you think – where are the opportunities for Simpson and what can be a role in infrastructure rebuilding around the country?

[Barclay Simpson:]

Jim, at this point, we really can’t give you a good answer on that. Of course, if there are a lot of roads and bridges built by our epoxies and mechanical anchors are used there, if they help a lot with mortgages, why, perhaps that gets housing back to going. But at this point, any guess doesn’t mean too much.

[Jim Wilson:]

Okay, fair enough. Thanks.

[Operator:]

And we’ll take our next question from the side of Keith Johnson of Morgan Keegan. Please go ahead.

[Barclay Simpson:]

Good morning, Keith.

[Keith Johnson:]

Hi, good morning. Covered most of the questions. I guess one, just back to sales by region. I don’t – I may have missed it. I didn’t join down on my notes with how the Northeast did year-over-year in the first quarter?

[Barclay Simpson:]

Right. That was the last. It was down 23%.

[Keith Johnson:]

Okay. If we look at utilization rates again, I guess you made the comment that you kind of ratchet it back more in the first quarter. How did that look sequentially as you came from the December quarter your utilization rates to where you are now operating in the first quarter?

[Barclay Simpson:]

What do you think, Mike?

[Mike Herbert:]

Well, from Q4 – I mean, Q1, they definitely declined significantly as we made an assessment of the economy. And as I said, they are starting to go up now. The challenge for us is, as we see a slight increase in demand versus Q1, a lot of people are not carrying inventory. So, is this a small inventory buy going on or is this really the economy getting better? And that’s very difficult to say.

[Keith Johnson:]

Okay. I just want to make sure I understood, the annualized savings from the latest round of cost reduction, did you say $60 million?

[Mike Herbert:]

$67 million.

[Keith Johnson:]

$67 million, okay. And could you help me understand a little bit better the timing – I think you kind of described it as an A plan that you did, a B plan, and then you still have the C plan on reserve. But the timing of how the changes of A and then B occurred as we come to the last few quarters?

[Mike Herbert:]

The layoff occurred really over the last – primarily over the last nine months as we’ve picked up more in Q4 to Q1. On the pension plan, reduction was decided by the Board in the first quarter. The home office cut their budget here substantially. We identified all those areas. We are ahead of track for that for the year right now. Europe has done similar reductions and all of the actions have already been taken. Those happened in Q4 and Q1 again. We’ve delayed some software departments. So, got savings there, so we will not be spending that money. So we – Q4 and Q1 were, I’d say, more of an emphasis in Q1.

[Keith Johnson:]

Okay, okay. And I guess given the end market demand environment, have you guys gotten back into the steel market in any way over the last several months?

[Barclay Simpson:]

No.

[Keith Johnson:]

Okay. I just want to make sure I understood your comments related to the steel in gross margins, I guess I would have – I might have thought that maybe there was some impact on your gross margins as you kind of dealt with some higher cost steel that may have been layered on three or four or five months ago.

[Barclay Simpson:]

Well, yes, the absolute factor.

[Keith Johnson:]

Okay. So when I look at 25.7% gross margin, there is some impact because of the timing of cost coming out of inventory versus what’s going on in the market.

[Barclay Simpson:]

Correct.

[Keith Johnson:]

Okay. So if we kind of look forward in a more stabilized environment, much lower steel price environment, as inventories correct themselves, would we – I mean, is there the potential in that scenario that you see your margins start expanding again?

[Barclay Simpson:]

Well, it’s out of ways because we’re not going to get rid of the high price steel right away. It’s going to take several months yet.

[Keith Johnson:]

Okay.

[Barclay Simpson:]

This is part of our constant culture that we’re never going to run out that one thing that our customers can count on that if one of their customers has a job site where they have forgotten to order the connectors or whatever, they don’t have them there and they have carpenters they are paying, we want to be able to get the goods there in a hurry. And so we are not going to run out. Now, that does – when something like this happens, when steel demand goes down and the price goes down, that hurts, yes.

[Keith Johnson:]

Okay, all right. Thank you for the answers.

[Barclay Simpson:]

All right, Keith.

[Operator:]

And our next question comes from Mr. John Kohler of Oppenheimer & Co. Please go ahead

[Barclay Simpson:]

Yes, good morning. John Kohler – Oppenheimer & Co. Good morning. Maybe I missed this, but I was wondering if you had a record of the US business as a percent of commercial versus residential?

[Barclay Simpson:]

No, we don’t. The problem there is that the vast majority of our distributors sell everybody. And they don’t keep track for us. So we really don’t have accurate numbers on that. John Kohler – Oppenheimer & Co. Okay. And I, as a shareholder, appreciate the long-term focus. Keep up the good work. Thanks.

[Barclay Simpson:]

Thank you. Yes. I haven’t – just coming back from China; I haven’t been this excited about the future in a while.

[Operator:]

(Operator instructions) Our next question comes from Mr. Barry Vogel with Barry Vogel & Associates. Please go ahead.

[Barclay Simpson:]

I knew you would be back, Barry.

[Barry Vogel:]

Mike, I have a couple of little questions for you. The Aginco, I would assume since it was done in April, but I’m not sure. That transaction was not your balance sheet as of March 31?

[Mike Herbert:]

That’s correct.

[Barry Vogel:]

The second thing, on the first quarter of ’09, can you give us any general idea of the impact of Liebig and Ahorn on your operating profit?

[Barclay Simpson:]

Well, negative.

[Barry Vogel:]

Can you give us an idea of the amount of negative?

[Barclay Simpson:]

No. Can’t do that right now, Barry.

[Barry Vogel:]

All right. Thank you very much.

[Operator:]

And our next question comes from Mr. Chris Harrow [ph] of Capital Asset [ph]. Please go ahead.

[Barclay Simpson:]

Good morning, Chris.

[Chris Harrow:]

Hey, Barc. I wanted to clarify something. I thought that Mike said earlier that the gross margins were primarily or perhaps totally driven by the under-absorption rather than passing through the high steel costs. And I think you just said that the high steel costs were in fact impacting gross margins. So I wonder if the two of you could clarify what was impacting gross margins.

[Barclay Simpson:]

I don’t think Mike said they weren’t.

[Mike Herbert:]

The majority of the impact on the margins was due to the under-absorption. As I mentioned last quarter, I believe, is that we – the type of deals did go up. And in 2008 we were able to raise prices to compensate for that.

[Chris Harrow:]

Right.

[Mike Herbert:]

So those price increases have taken care of this quarter, Q1 as well.

[Chris Harrow:]

So it sounds like the high steel costs are not a factor in gross margin in any significant way?

[Mike Herbert:]

Not in a significant way.

[Chris Harrow:]

Okay. That’s what I was trying to clarify asking to you. I was confused by the last answer. Okay, thanks.

[Operator:]

And it appears we have no further questions at this time, Mr. Simpson.

[Barclay Simpson:]

Okay. Thank you.

[Operator:]

And this does conclude today’s program. We thank you so much for your participation today and you have a great day.