Good morning, ladies and gentlemen, and welcome to the Second Quarter 2012 Simpson Manufacturing Co., Inc. Earnings Conference Call. In this conference call, the company may discuss forward-looking statements such as future plans and events. Forward-looking statements like any prediction of future events are subject to factors, which may vary and actual results might differ materially from these statements. Some of these factors and cautionary statements are discussed in the company's public filings and reports. Those reports are available on the SEC's or the company's website. Please note today's call may be recorded. Now, I would like to turn the conference over to Tom Fitzmyers, the company's Chairman. Please proceed.

Thanks, everyone, and good morning. Welcome to Simpson Manufacturing Co., Inc.'s Second Quarter 2012 Earnings Call. Our earnings press release was issued yesterday. It's available on our website at simpsonmanufacturing.com (sic) [simpsonmfg.com]. Today's call is also being webcast and that webcast will be available on our website as well as a replay of the call. Joining me in Pleasanton for today's call are Karen Colonias, Simpson's CEO; Brian Magstadt, Simpson's CFO. I'll lead off, followed by Karen and Brian, and then we'll be happy to take your questions. We had a good quarter considering the state of the world's economies and our continued investment in our newly acquired operations that support our strategy of being less dependent on U.S. housing and more diversified geographically. As we have mentioned in the past several quarters, we've expanded our operations and product footprints. Sales increased slightly, due primarily to new acquisitions. They contributed $9.7 million in sales for the quarter. We are a long-range company and are committed to investing in our businesses. We are devoted to supporting our customers, our employees, shareholders and a very strong financial position. Our net income for the quarter was good, but we are working diligently to improve it. As you see in the press release, total company sales increased 2.2%. Sales for the quarter were up nearly 4% in North America, Europe was down 4% and Asia-Pacific was down 3%. Within the North American region, the U.S. was up 4%, while Canada was up slightly. Sales in most countries in the European region were down, particularly France, which was down 21%. That was offset by S&P sales. Most of the European sales decline, which was nearly $6 million, an incremental increase in sales. We believe that some sales were pulled into the first quarter, which benefited…

Thanks, Tom. Over the past couple of quarters, we've discussed our long-term strategy, and I'd like to reiterate that. We'd like to strengthen our core products, and we'd like to expand globally with our footprint to be less dependent on U.S. housing. We are excited that we're on that path with our recent acquisitions. We manage our business from a geographic segment perspective that you've seen in our 10-Qs and 10-Ks. But within those regions, we have 2 broad product categories: wood construction products and concrete construction products. Wood products are comprised of connectors, fasteners, shearwalls and truss plates. Concrete products include adhesives, mechanical anchors, specialty chemicals and other repair and strengthening products such as FRP. The Automatic Stamping business falls under our wood construction. Fox, CarbonWrap and S&P are categorized as concrete construction. For Simpson, these new concrete products are essential to help us diversify away from residential construction. The new acquisitions bring us products that are highly specified and have worldwide applications and will increase our margins in concrete construction products. As we've said before, these acquisitions include their management teams and we are excited about the market knowledge and product expertise they bring to Simpson. As always, we are dedicated to our core products and we work very hard to ensure that we continue to meet our customers' needs for service, support and product availability. We continue to invest in truss software development, adding features and improvements requested by the industry. We are increasing our truss plate manufacturing capacity and have just added a warehouse base to our North Carolina facility. We remain very excited about the prospects for the plated truss industry. And while impacting us for a while, we will continue to devote resources to this opportunity. As with any new newly acquired business, we are spending considerable time and resources to integrate these operations. This process is never easy, but we have a strong belief that these additions will add long-term value for the company and help us meet our strategic objectives. We are 6 months into multiple integration efforts that are expected to take 12 to 18 months, and we feel we're on track with our integration plans. As Tom mentioned earlier, the recent acquisitions contributed $9.7 million in sales for the quarter, but generated an operating loss of $2.6 million. I'd now like to turn the call over to Brian, who'll serve some of the financials.

All right. For Q2 2012, our gross margin was 45.6% compared to 47% in Q2 of last year. Our variable production cost, labor and material primarily, were higher but were partly offset by lower factory spending. Our product mix also affected gross margins. The relative sales mix of the 2 product groups, the wood and concrete, affected gross margins and that we sold more lower-margin concrete products relative to the total, about 14.5% this quarter compared to last Q2, which was about 10% of the total. Those are compared to the higher-margin wood construction products, which went to 85% of the total this quarter as compared to 89% last Q2. We're also seeing an increase in revenues and gross margins in our concrete products as we're adding highly specified and engineered products. There were no significant atypical charges in the quarter, although I wanted to point out that we, as Karen mentioned, continue to invest in our new acquisitions and that is evident in the R&D engineering spending with a million and a half, $1.5 million, going toward developing the truss software offering. That outsourced amount is expected to be the quarterly run rate going forward. Stock compensation, which include stock options and restricted stock, was $2.1 million in Q2 '12 versus $0.9 million last Q2. The increase is due to having another year of grants expense as the awards vest over multiple years. As we've mentioned before, if the company meets its operating targets then I would expect grants in the following years to have a similar effect to expense. Cash profit sharing is a function of operating income and return on assets and it decreased $2.8 million in Q2 compared to the last year Q2 as operating income decreased 13%. The amount of cash profit sharing decreased better,…

[Operator Instructions] And we'll take our first question from Garik Shmois with Longbow Research.

The first question is just now that you're providing a bit more visibility with respect to the wood and the concrete products, so I'm just wondering if you could maybe give us some additional color with respect to the margins within those 2 businesses, either the percent margin that the 2 business segments are generating right now? Or maybe give us an idea what the margin spread is between wood and concrete so that theoretically, if concrete margin start to expand, we get a better sense of what the differential would be and what the spread narrowing would look like?

Sure. I'll take that question. The spread in Q2 of last year was 17%. And in Q2 of 2012, it's 13%.

Okay. And then just on demand trends in the second quarter. You mentioned that there was some price competition in 2Q, but I was wondering if you could discuss some of the unit volume trends that you saw in the second quarter? That would be helpful.

Maybe we're not -- it's not clear to us exactly what you mean by the unit volume trends.

Let me ask it, I guess, in a different way. Stepping aside maybe from unit volumes, but you had sales that declined into home centers in the second quarter and they were flat at distributors. So maybe you could provide some color as to what you saw in the second quarter with respect to sales into those 2 channels?

Yes, this is Karen. So I -- we definitely are seeing the sales fairly flat into those channels. I think, as we mentioned earlier, we saw what we believe is some pull-through of Q2 business into Q1, and we think that's also a function of what we're seeing in those sales channels.

Okay. Can you discuss maybe what your expectations are for the third quarter? Are you seeing some improved trends as a result of maybe some normalization downstream?

I think what we're seeing, and everybody certainly has seen, the home starts are starting to increase, at least from a publication standpoint. What we have to keep in mind is as we look at increase in home starts, certainly, our business lags that. And I would say it lags by typically at least a 6-month time frame. We are starting to see a little bit more of an increase in construction when we look at multi-families as we work with our branch managers and get their input. So around the regions, we're seeing a little bit more construction in those multi-families. But again, I'd say from the single-family residentials, again, we're probably about a 6-month lag from some of those home start numbers.

And we'll take our next question from Arnold Ursaner with CJS Securities.

I guess, as a follow-up, if I've done my math right, your organic sales, the ones excluding acquisitions, were down about 3% in an environment where housing is getting better and your pricing actually has gone up. And you also specifically mentioned home centers were down 6%, but your largest customer up 12%. Should we correlate those 2 in some form to explain some of the revenue shortfall you're seeing in this quarter?

I think that's a -- Yes, that would be correct. As we mentioned in the last quarter, we lost the Lowe's business, which is in that home center area. And that took effect mid-quarter.

Were it not for Lowe's, would your organic sales have been up? I'm trying to get some sense of the magnitude of the shortfall from -- specifically from the customer you've parted ways with.

Right. Probably flat and maybe up or down just a little bit, but I would probably characterize it as flat.

Okay. And again, to be clear, given you did have price increases, in a follow-up to the previous question, did you actually have volume improvement in Q2 in North America?

It's unclear to us, Arnie, about the price increase information, we're not sure. Is that something that you got from us, something we published or discussed?

Well, I think, again, most of the industry trade presses have discussed price increases. You guys, I think, put it in the latter part of Q1.

But I don't think so. No. Okay?

No. We did not put any price increases in. There have been no price increases in this year.

Okay. You mentioned you had a $2.6 million loss in the quarter from the acquisitions you've completed and you indicated at least some of the run rate expenses for R&D will continue, should we assume the losses from acquisitions should continue with a similar manner through -- you mentioned, I think, in your prepared remarks, this is not a 3-month process but more of a 12- to 18-month process. How should we think about the losses from the acquisitions you've made?

I think the -- I would anticipate those through the end of the year.

Thank you. Maybe just to stress, again, what Karen had said before, we have a very detailed plan for acquisitions and we're on track. We feel good about the progress we're making.

And we'll take our next question from Peter Lisnic with Robert W. Baird.

This is Josh Chan, filling in for Pete. When you talked about price pressure and losing some business in North America, were you explicitly referring to the Lowe's business, or should we interpret that as more broad-based than just that one customer?

Well, certainly, as we mentioned, we lost the Lowe's business and I think we discussed that a little bit last quarter. But we are certainly seeing pricing pressures broad-based.

So would you characterize yourself as having lost other businesses outside of that customer?

We have lost one other customer outside of that but we believe we've gotten a pretty good portion of that business back to setting up some other customers.

And we've also increased our business in other sectors too, so...

Right. That makes sense. And going to your comment about demand having pull-forward into the first quarter, do you believe that with the second quarter being more moderate growth that the pull-forward demand has sort of worked its way through the system and that third quarter can resume a higher rate of growth, if you will, or do you believe there will be some lingering impact?

No, I think we certainly saw that demand on Q2 pulled into Q1. And we're seeing what I would say is a more normalized Q3.

Okay. Great. And the last question for me, I think in the Anchor Systems business, one of your competitors was recently acquired by a much larger company. Do you expect any changes in the competitive landscape or dynamics there?

Well, we are always analyzing what's going on in the industry and certainly what our competitors are doing. And so we will definitely need to be very diligent on it as we look at that business and certainly service our customers. We certainly pride ourselves on all the services that we offer, which go well beyond pricing and that certainly is our engineering support and our sales support or distribution are certainly having that code-tested product available to our customers. So -- but we will certainly be diligently looking at all the actions of our competitors in our various markets.

We'll take our next question from Trey Grooms with Stephens.

I guess, looking at R&D, Karen, is this -- it's a little bit inflated relative to last year. This is a good run rate for the back half of the year as well and, kind of, as we look forward or -- I know the first quarter had, I think, some kind of one-time items in there, but is this a good number that we should, kind of, be expecting going forward, kind of, this $9 million per quarter range.

Yes. So let's say that the Q2 run rate should be something very similar throughout the rest of the year.

Okay. And kind of sticking on the operating expenses, the same with, kind of, the selling expenses to first quarter maybe a little bit higher than, on a year-over-year basis, second quarter kind of levels out, is this still kind of the way we should be thinking about your sales expenses there as well?

Yes. So I think what you see in the second quarter is obviously, from a selling expense, we acquired several sales people from these acquisitions and you're seeing those -- that group obviously, incorporated in those expenses and I would anticipate that, that is a reasonable run rate throughout the rest of the year.

Okay. Then my last question is on the concrete -- and thank you, guys, for giving a little more clarity on that -- on those 2 items. But the lower margin that you were talking about on the concrete business, is this -- you've obviously made some headway on bringing or, kind of, narrowing that spread, is this a business that we can get up closer to the wood products, kind of, margins? Or is this just an inherently lower-margin business, kind of, going on a long -- I'm thinking about it more long-term?

Well, certainly, the acquisitions that we're currently integrating are highly specified products and they are things that we think will really be able to contribute and enhance our margin in the concrete products area. As we have a bigger portfolio of products, again, the acquisitions are -- have basically tripled our portfolio of products. That really gives us more opportunities to go into the customers and the specifiers and provide the full line. And so, yes, we are absolutely expecting the margin expectation for the concrete products to increase. It will certainly take some time. As we've mentioned, it takes time to integrate these products and certainly to run our testing, get our code reports and provide our sales people all the tools they need to work with the specifiers. So I don't know if they'll quite get to the wood construction products. But certainly, I think they will be much closer to those numbers.

We'll take our next question from Steve Chercover with D.A. Davidson.

Two quick questions. First of all, continuing on the R&D line of questioning, you're still doing -- you're doing a lot and is that acquisition related in order to -- I know some of it's to get the software going, but can we also expect to see your content per start price in your legacy connectors?

Well, we have obviously a huge focus, as I mentioned. We broke up some things here in the concrete areas, and we're certainly not going to lose focus on the core business. When you look at, certainly the R&D expenses, we are continually working with getting code reports, expanding our line, development testing, new equipment to be able to expedite our development testing. And so we will continue to focus in that area. And that focus in R&D will not only help us, again, with these new concrete products and those acquisitions and developing that market, but they will continue to help us develop and improve products and services in our wood products market.

And with respect to the competitive pricing you've been encountering, I assume that's due to the MiTek acquisition of your biggest competitor. I mean -- and now you're focusing on truss plates, which I think is a market that MiTek truly dominates. Are they going to let you enter the market?

They probably won't let us enter the market, but we're going to try to make inroads into that market.

I mean, it certainly seems like a natural for you. You're pretty good at poking holes into pieces of steel but...

That's a really good way of saying it.

And also, the -- our portfolio of customers that we've sold to already is something that we know a lot about the customer relationships and we think we have a substantial opportunity to, in a way, if you look at it, broaden our product offering to these same customers.

Okay. I mean, like I said, I was trying to diminish the intellectual property you bring to what you did -- you're very good at it. Last quick question, I think you had some significant managerial issues in China and obviously, broadening your geographic footprint is a key priority. How is that going now?

Yes, so that's the -- we did have a little bit of a turnover of a few sales people in China. Our manager there, Robin Patelski [ph] , has done a fantastic job of organizing our sales team and certainly doing some training within the entire group so that we don't lose perspective as we're working on subway jobs versus tunnel jobs or bridges and that sort of thing. The group in China is now very active in looking at these products from the new acquisitions when they're in training modes. We're certainly looking at opportunities for those products there.

How long do you think it might take for Asia to become profitable? It's not a 10-year process like Europe, right?

I'm sorry, could you say that one more time?

Just I'm wondering how long you anticipate it will take for China or Asia to be contributing to profitability?

I think we have shortened our timeframe for them to be profitable with these new acquisitions. China is pretty much a concrete world, not a lot of wood construction there. So the concrete acquisition products that we've -- that we were currently working in integrating on, we are actively pursuing putting those products into the China market. And as they have a larger product offering, that will help them get to that profitability. The other thing I've mentioned about China is our manufacturing plant is running very smoothly. It has very -- we have a great management team there, and those operations are certainly running quite nicely now and very similar to our other manufacturing facilities.

Are they shipping products back to the U.S.?

Yes. So our China manufacturing facility ships to our North American, European and Asia-Pac operations.

[Operator Instructions] We'll take our next question from Barry Vogel with Barry Vogel & Associates.

Brian, I have a couple of little questions for you. Some of these trends but some transparency we're getting in the second quarter, I don't believe the certain numbers we had before, so could you give me, on the gross margins, you gave us in the release, gross margins in North America, in the second quarter of '11 and the second quarter of '12 and you did the same for Europe, could you give us the gross margins in North America in the first quarter of '11 and the first quarter of '12? And can you do the same for the European gross margin?

So can I -- let's see here. Bear with me for a second. Barry, how about if I give you year-to-date?

That's not what I want. You had year-to-date in the press release. I just want to look at the each -- the quarters.

So I don't have Q1 broken out in front of me.

Okay. If you can't get that, maybe I could get it from Tom? Okay? And my second question has to do with the tax rate. I think I heard, I guess, the mid of 41% to 45%, was that correct?

I probably think it's 42.5% to 44%.

Okay. And as far as these valuation allowances that you claim were responsible for the higher tax rate -- well, most of the higher tax rate, was that -- when you talked about the French acquisition, was that SOCOM?

Correct.

I thought that, that's pretty successful. So why are you having to take a valuation allowance?

Well, what we're doing there is, as we are transitioning the SOCOM business from private label to a strong Simpson Strong-Tie label, we've had some of those private label customers choose a different supplier a little quicker than we thought and our sales have been pretty decent. The integration efforts have been good. I'm not sure that in the past we've added a lot of clarity on their net income per se but they've had some -- as we've integrated other businesses, they've had some losses. And what actually happened with those guys was we took the valuation allowance in Q2 and -- as an extra conservative measure.

Okay. And going back to your commentary in this quarter about the recent acquisitions, kind of, the $9.7 million in revenue and had an operating loss of $2.6 million, could you give us those numbers for the first quarter as well?

So the first quarter of '12 was $5 million in revenue and $5 million in operating loss.

Okay. Because I don't remember seeing that number before.

It may not have been on the press release, but I believe it was part of the Q&A on the Q1 call.

Yes, I was on the call but I guess I missed that.

So it's, again, $5 million revenue and $5 million operating loss.

And did I hear it correctly that you're sort of expecting the $2.6 million operating loss to continue in the third and fourth quarters, for the acquisition?

Correct.

[Operator Instructions] We'll take our next question from Robert Kelly from Sidoti.

The acquisition and characterization of the second half, why are the losses so big? I mean, you paid a pretty good amount for these businesses. Is it something that you're doing internally that's depressing the contribution there? Were they businesses that needed fixing? I'm just trying to understand why the losses are going to be so heavy in Year 1?

So the -- we acquired 4 separate companies and each acquisition is extremely different on the things they need from an integration standpoint. As we look at the truss business, of course, we've given you some information there on what's necessary to work on our software, and that's a key element to be able to provide service to our customers. So that's certainly a piece of it. Some of the other acquisitions we've added sales people. There's marketing and expenses. There's QC on the current processes. There are some environmental health and safety issues that we needed to take into place. When we go to take a look at these -- acquiring these companies and putting a product under our brand, we spend a lot of time ensuring that we put everything into them that we need just as we have to establishing our brand with the connector side. So it comes from many applications. Again, it could be manufacturing, more equipment, R&D services, marketing. IT is another big piece. And those are all what you're seeing in those operating expenses.

Okay. Is there anything in that bucket of cost you laid out that are one-time or like a non-cash that starts to go away in the next calendar year? And I understand that there are some direct cash costs that you're laying out to tie the business together and amp up the sales in marketing. But like software, that's -- is that like an amortization-type cost or is that an outright cash cost?

Cash cost. One of the -- this is Brian, so one of the other things that we're seeing there is, as Karen mentioned, as we integrate the -- these businesses into our North American branches, there is a fair amount of time that we spend training our people. So on our specialty chemicals acquisition, that was Fox Industries, there is a fair amount of technical training that's going on. So we're not turning on those product sales through our branches as heavy today as we expect in the future. So one of the key components of an acquisition that we look at is how can we utilize our strengths and -- in adding value to these and some of those strengths, like engineering, but also distribution. And it takes a fair amount of effort to get the products re-branded, get the people trained. So what we're seeing there in sales is primarily sales [indiscernible] businesses but we would expect the top line revenue from those to grow as we're able to move those through our branch network. But the spending is what we're doing to get those ready to run through that distribution network.

Okay. One final one on the acquisitions. Is the spending heavily front-loaded in your one, into this -- the cost that you're laying out? And if you could quantify it, that would be great. Did they drop substantially in year 2?

I'm not sure if they're going to drop substantially. I mean, they're heavier in year 1 and they should tail off a bit. But there is ongoing cost as far as R&D, testing, software development. I mean, the -- so there will be a fair amount of things that were done initially to get the plants ready but I couldn't tell you what that dollar amount is.

Okay. Fair enough. Switching over to just market conditions, particularly in North America. The public builders are saying very positive things on the order front. Is that were to hold -- continue over the balance of '12, when would you feel that revenue impact from a pickup in builder orders? I mean, have you felt that already? Is there a pre-loading in the channel ahead of that? Or do you start to feel it right now?

Well, as I mentioned previously, certainly, we see the numbers of the housing starts, as they are published, are increasing and there's about a 6-month lag from when you might see those housing permits to when we actually see jobs breaking ground. We are seeing some improvement with our customers from the standpoint of this year over what they've seen over the past couple of years, but nothing from a standpoint that's forcing them or making them want to think that they're going to be stocking all their shelves up. So we're not seeing much difference from the standpoint of where we're providing products to our customers. I did mention to you we are starting to see some of these multi-family jobs and maybe they're breaking a little bit sooner than some of the residential jobs. We should see some of that impact from those new housing starting some time this year. But again, there is some lag time as permits go through the system and then we get to the foundation and start using our products.

So roughly 2 quarters between permit and you've -- you feeling a sale?

About that timeframe, yes.

[Operator Instructions] And it appears there are no further questions at this time.

Thank you very much.

Thank you.

This concludes today's teleconference. You may now disconnect and have a great day.