Marine Products Corp (MPX) 2006 Q2 法說會逐字稿

Good morning and thank you for joining us for Marine Products' second quarter 2006 conference call. Today's call will be hosted by Rick Hubbell, President and CEO, Ben Palmer, CFO, and Jim Landers of Corporate Finance and Investor Relations.

At this time, all participants are in a listen-only mode. Following the presentation, we will conduct the question-and-answer session. Instructions will be provided at that time for you to queue up for questions.

I would like to advise everyone that this conference call is being recorded. Jim will get us started by reading the forward-looking statement. Please go ahead, Jim.

Thank you, operator. Good morning.

Before we get started today, I'd like to remind everyone that we're going to be discussing some things that are not historical facts. Some of the statements that will be made on this call will be forward-looking in nature and reflects a number of known and unknown risks. I'd like to refer you to our press release issued today, our 2005 10-K, and all of our other SEC filings that outline those risks. You can find these on our web site, which is located at www.MarineProductsCorp.com.

If you have not received our press release for any reason, please call us at 404-321-7910 and we will fax or email one to you immediately.

This morning, management will make a few comments about the quarter that we just completed, and then we will be available for your questions.

Now I will turn the call over to our President and CEO - Rick Hubbell.

Jim, thank you.

We issued our earnings press release for the second quarter of 2006 this morning. Ben Palmer, our CFO, will discuss the financial results in more detail in a moment.

At this time, I will briefly discuss our operational highlights. Net sales for the quarter decreased because of lower sales volume, partially offset by higher average selling price per boat. The decrease in unit sales continued the trend of lower retail demand that started in the fourth quarter of last year.

Our focus in average gross selling prices was the result of our continued focus on selling larger boats and, to a lesser extent, on price increases instituted during the '06 model year.

Our gross profit margin fell during the quarter as well from 25.6 last year to 22.5 this year. It was primarily due to continued cost increases. Price increases have been instituted for the '07 model year boats that we're currently shipping.

Managing our dealer inventory and order backlog are very important during periods of uncertain levels of demand. Ben will talk more about that in a few moments but I am pleased to mention that the backlog is up and dealer inventories are down compared to where they were last year and last quarter.

At this time, I will turn it over to Ben Palmer.

Thanks, Rick.

For the latest quarter, we generated net sales of 71.7 million - that's a 7.5% decrease compared to 77.6 million last year. Our unit sales volume decreased 22% compared to last year. This decrease in sales is in response to weaker demand - especially with the smaller boats - which started in the fourth quarter of last year.

Average gross selling prices increased by 17%, however, as we continue to focus on selling larger boats. The increase in gross selling prices was most pronounced in our Chaparral SSI Sportboats and in our Robalo fishing boats.

Gross margin as a percentage of net sales, again, was 22.5% for the quarter compared to 25.6 last year. The reduction in gross profits as a percentage of net sales was due primarily to increases in the cost of raw materials and components. This was caused by additional increases in the price of certain metals and the price of petrochemical-based raw materials.

Our gross profit margin also declined to a lesser extent due to production inefficiencies resulting from lower production volumes.

Our Selling General & Administrative expenses declined in the second quarter, compared to the prior year due to decreases in costs that vary with sales and profitability of primarily incentive compensation. As a percentage of net sales, however, SG&A increased slightly to 11.8% compared to 11.6% last year.

Our effective tax rates in both periods reflect reductions of tax liabilities. The '06 reduction was due to favorable resolution of tax examinations increased diluted earnings per share by $0.02. The 2005 adjustment resulted from end of tax returns increased diluted earnings per share by a penny.

Diluted earnings per share for the quarter were $0.16 - a 19% decrease compared to $0.20 diluted earnings per share in the prior year. Our share repurchases over the 12 months decreased average daily shares outstanding by about 4%. We repurchased about 15,700 shares during the latest quarter.

In the current retail environment, we are happy with the directional changes in field inventory and order backlog. At June 30th ',06, dealer inventories were 22% lower than they were at the same time last year. And they are 47% lower than they were at the end of the first quarter. Order backlog was 35% higher than it was at the end of second quarter last year.

Inventories on our balance sheet increased primarily due to higher inventory of finished boats at the end of the quarter compared to the prior year. And this was basically is due to the timing of some shipment deliveries.

We announced this morning that our Board of Directors declared a regular quarterly dividend of $0.05 per share. And with that I will turn it back over to Rick.

Ben, thank you.

We believe that higher interest rates in fuel prices have caused retail demand to decline. Consumers have reacted to higher cost of ownerships by delaying the purchases, especially for the smaller boats. Experience has taught us to react decisively to developments like this and we have done so, as evidenced by our higher backlog and lower field inventory.

We have continued our focus on larger boats. Discussed several of these during our first quarter conference call, and as our financial results show this quarter, these larger models continue to sell very well for us.

Looking ahead we're pleased with the new models that are coming out for our 2007 model year. We will continue our strong Research & DEVELOPMENT efforts which we have recently supplemented with talented personnel with tremendous industry experience. We just completed a successful Robalo dealer conference and the Chaparral dealer meeting begins in a few weeks.

As always, we continue to monitor dealer inventories, order backlog, and other indicators of retail demand as well as closely monitoring our costs. We stand ready to make the necessary adjustments to our business during this period of uncertain demand.

I would like to thank you for joining us this morning and at this time we would be happy to take any calls you may have.

(OPERATOR INSTRUCTIONS). Mimi Sokolowski with Sidoti & Co.

Thanks for taking the call. Two questions. Can you explain to me how your backlog orders are up if demand is softer? Does that just mean you take more time to build a single boat because you ratcheted back productivity a bit or is that a fair question? Can you explain that to me?

That is the primary corollary there. We have reduced production levels and -- but our dollar backlog is actually up. That is again due to the larger boats.

Okay.

Yes.

So it is not -- you are not seeing an increase in volume down the road. Inferring from the backlog it more has to do with dollars up because the boats are bigger?

The boats are bigger and we have reduced production levels.

Production. Okay.

This is Jim. When we talk about backlog being up we mean in dollars and also in weeks of production. That is how we manage the business.

Okay. And I wanted to ask about the raw material cost scenario as well. Rick, I think you were saying it was maybe the fourth quarter it started to hit you last year or maybe sometime in the second half but in looking at 2005 it looks like your gross margin fell in three out of the four quarters.

What went on in the second, third, and fourth quarters of last year?

As far as the gross margin is concerned?

Yes.

Some of it has to do with the price increases. Some of it has to do with the fact we started reducing our production volumes and then we lost some efficiencies in doing that. Some of it had to do with the retail market where we had to increase some of our discounts.

Okay.

You can imagine that it's a lot easier to manage your manufacturing costs when production volumes are increasing as opposed when they are decreasing. So that's just part of the difficulty in this type of environment.

Okay. And can you talk a little bit about the raw material costs that take, I guess, the exposure to petroleum via resin perhaps? What percentage of your cost of goods, or percentage of revenue? Has that typically been in the past? Where is it now? What sort of cost increases have you seen on a more quantifiable basis?

In terms of - let me comment first on going forward - we think the price increases at this point is moderated to some degree, which is good news.

When you say moderated does that mean they are abating or they are flattening out?

Flattening out, we believe. Could be something (indiscernible) in increases, but right now we think they have begun to decline or no longer as much of an increase.

The impact on our margins, we are talking percentage points. So the percentage of those costs or our total costs over time has not changed that dramatically. Copper also is something that has been greatly increasing in price.

This is Rick. We get it from actually [curators]. Certainly the raw materials and a lot of them are petroleum-based or in the case of fiberglass they are high-energy cost to produce (technical difficulty) --

I understand.

-- fiberglass. And then also probably the biggest single component are the engines we buy. And we're seeing price increases on those.

Then, I don't know if this is a question for you or Ben but can you comment on how you are looking -- how you're seeing prices on the engines in the next six months or so? Are you seeing a similar moderation? Is that what you were alluding to, Ben, when you were saying before --?

Not really. More on the raw materials and obvious that the engines are -- we buy all of our engines from a very few number of vendors, especially on the stern-drives. They pretty routinely increased those prices during the year. That has been the pattern over the last few years and we don't necessarily expect any change in that.

But they have gotten more expensive recently, correct? The price increases have been more than what they have been historically?

On the engines, not tremendously greater but maybe somewhat so.

So on the raw material cost side of the business then, what is killing you guys if it is not the engines?

It is the engines to a certain extent but on the raw materials as you said before the resin, fiberglass - just most of those as I said before - most of those components are petroleum-based.

Okay. I'm hogging the mic. I will give it up. Thank you.

Joe Hovorka. Raymond James.

Couple of questions. Just to clarify your backlog, your order backlog. That is up in dollars?

That is correct.

And when you say you are - in weeks of production - up 35%, how far forward does that go? Is that one quarter's worth of backlog or is it -- are we looking six months into the future?

This is Jim. It's more than a quarter but less than two quarters.

Okay. Right. And did you adjust production any other time this year? You had actually a couple small production increases earlier in the year. Have you since backed off on those or are you still running at the same rate you were at the beginning of last quarter?

It has declined a little bit since those two increases. As Rick mentioned earlier we are in the middle of the dealer conferences right now and taking orders. So we'll see after those dealer conferences happened what we're going to do for production.

Okay. And your 22% decline in dealer inventories, is that in dollars or in units?

That is in units.

In dollars is it down as well or no?

That is not as readily available. I would expect that -- probably similar.

Similar?

Yes.

Your comment on retail sales for the second quarter. Can you take a look at -- I don't know if you draw a line maybe at 30 feet or something like that. Is there any section that is actually up in units sales?

It's hard to tell. I mean, obviously you have got a mix shift towards larger boats but is it because smaller boats are falling faster than larger boats or because larger boats are up and smaller boats are down?

This is Jim. On the retail sales data, that is too far in arrears for us to really talk about second quarter at this point. But we will -- you know, from SSI and everything.

What we can say is that we know our biggest Sportboats like the 276 have been selling well. And that volume is up. But it is hard to really talk about it at a retail level.

Okay. So your -- I will just do it on the wholesale level then. In the quarter were boats 28 feet and up? Up versus last year or -- I don't know where you want to draw the line. You know?

Yes. Don't have that readily available (MULTIPLE SPEAKERS).

I would say at 27, 28 feet and in particular the 276 SSI that we talked about in the first quarter, that boat is selling very very well. That was - and in the SSI line about 27, 28 feet.

One final question on your factory inventories. You mentioned that they up and I guess in part due to timing. Is there anything else in there? Is that a reflection of the increase in the backlog that you see? Anything else driving that number?

It was just an operational thing. For the end of second quarter, we usually finish up, finish our shipping by the end of June. We kind of -- we didn't do that until through July 4th week. So when you do the cutoffs and close the books you end up with some finished goods inventory on the balance sheet that wouldn't have been on the balance sheet otherwise.

Okay. Great. Thanks, guys.

Rommel Dionisio. Wedbush Morgan.

Good morning. Just a question on some of the floor plan financing. Given some of the slackening demand in the channel and those rising interest rates, are you seeing any sort of increased risk or do you feel any increased risk of potential dealer defaults going forward?

In this type of environment, certainly, there is an increased risk with that. At this point, we have been pretty lucky. In situations where we've had defaults historically, we -- it's worked out very very well for us. I think that's a testament to the demand for our product not only in the short-term but dealers - the ones that want to the associated with Chaparral and Robalo - so we are typically able to find replacement dealers pretty readily. And it is simply transferring that inventory from one dealer to another.

Obviously you don't want that to occur but actually in numerous cases -- that doesn't happen that often but when it has happened, you can point to situations where we actually end up with stronger dealers for the long-term than we had previously.

So in many cases, again, it's pretty -- it's a good thing for us in the long-term.

But you haven't seen any sort of notable events like that take place in last quarter or two?

We have not.

Thanks very much.

(OPERATOR INSTRUCTIONS). Brian Rayle. Keybanc Capital Markets.

Good morning. Just kind of a longer term strategic question. In terms of, obviously, you guys have been moving further upscale in terms of the size of your boat -- boats that are out there. What is the plan as to where you can take Chaparral and what you guys are thinking about doing if that brand is capped out in the 40 range, what are the plans to get bigger? And maybe the time frame of doing that?

This is Ben. We are currently -- we mentioned earlier on the call that we've hired some new R&D people that are really going to help across the Company but we believe especially on the upper end. In terms of the timing it's something that you don't enter into lightly, going above the range where we currently participate.

So we are going to -- I can't be real definitive on the timing but it's something we are taking very very seriously and we are going to be moving into. I expect we will have begin to have some larger boats certainly for the '08 model year and the question of the speed or velocity in the number of units we have at the upper end will just depend, again, on -- of course, on the market and how quickly are they able to assimilate and change our process and do things like that.

But we are very very excited about that for the long-term.

Is it fair to say that maybe you are starting to look a little bit more organically versus doing acquisitions on the front?

I think for the bigger boats as you mentioned above the 40 we would rather do it through acquisitions with buying a good brand name. We continue to look for that.

Okay. So that hasn't changed?

No. It has not.

Thank you.

Mimi Sokolowski with Sidoti & Co.

Thank you. Two more questions. Jim, you and I had talked maybe about a week or so ago about hurricanes, the hurricane season this year, how '05 hurricanes might have impacted this year. And if we get through the season - this season - without a major hurricane like we had last year could be more promising for 2007.

Could you talk a little bit more about that? Rick and Ben, maybe you guys want to chip in too?

Yes, Mimi. You and I did have that conversation. I mean, just a couple of things and we are here in the Southeast so it impacts us more. We just feel that one reason for soft retail demand is everybody is afraid that there is going to be a bad hurricane season. Every time you turn on CNN, they talk about how '06 is going to be a bad hurricane season.

Also the other thing is that, here, people who have vacation homes are just now getting those vacation homes fixed again from Hurricane Ivan - which was almost two years ago. Then we had some other hurricanes, one that hit South Florida in October of last year and that is -- five of our major markets are there. There's still damage there being fixed.

I can't point to any number of boats that would have been sold if people's condos were operational again. But it's just a feeling about consumer sentiment.

Nobody knows, including the people on CNN, what kind of hurricane season we are going to have in '06. But my feeling and this is just my opinion is that if we don't have a bad hurricane season, people who got insurance checks from the last hurricanes when their boats were destroyed will buy new ones. And also people who are thinking about it but worried about this hurricane season might loosen up the purse strings a little bit.

Having said that, we believe anyway that the people buying replacement boats after hurricanes with insurance checks seems to be coming slower than it would have been in prior hurricanes. And again I doubt have any definitive data for you. It's just a sentiment as much as anything.

Okay.

One little comment I will add to that is, I think with the hurricanes in the Gulf too that what that could cause and what is in the back of people's mind is, again, that could cause further gasoline price increases.

So I think with lower hurricane volatility, if you will, I think that that would make people feel better about -- it would lessen that risk of increased fuel prices, which can certainly have an impact on (MULTIPLE SPEAKERS) decisions as well.

That's a good segue into the second question that I have and that is regarding more energy efficient engines. Is that something that's a buzz about in the industry when you talk about your R&D department? Is that something that they are looking at? I guess, playing it up similar to how all the car manufacturers are talking about hybrid vehicles and etc. Does that also extend to the boating world, as well?

No. There's very little talk. You hear talk about going from gasoline to diesel more than you do trying to make the gasoline engines more fuel-efficient. Plus over the last several years has been more on emissions control and to a lesser extent fuel economy.

And of course for us, we really have very very very little impact on (MULTIPLE SPEAKERS).

Of course. Yes.

But, yes, I think that's true.

Okay. That's all I have. Thank you very much.

Todd Solomon with Halcyon.

Thank you. Speaking from the big picture what needs to change to reverse the declining trend in both sales? Boat unit sales?

For the industry or for us?

If you could comment on the industry and then why you might be different, why you might have a different trend in the industry?

I think from the industry's prospective the various trade groups within the industry are trying to - through a public relations campaign - get people more involved in boating, similar to what the RV industry did a few years ago.

As far as we are concerned, we have such a small market share compared to a lot of our competitors that even if the overall industry is falling, we have seen our growth by just gaining market share.

We expect to continue to be able to do that.

I think from an industry's perspective as Rick indicated with some of these industry campaigns and just I think doing away with just some of the economic uncertainty around consumers, in many respects, the consumer has have been very resilient and not all aspects of the economy have yet been impacted.

But boats is one of those things that are one of the first things that can be impacted, but I think with maybe, again, some moderation in gasoline prices and through consumer sentiment, we are hoping that will provide additional foundation going forward for sales.

So basically we have to wait until we get a nice turn in the economy or declining boat prices, declining insurance costs and better consumer sentiment before we can see another bullish cycle for small-, medium-sized boats?

That would be (MULTIPLE SPEAKERS) for the industry.

For the industry?

Right. For us, we have been able to grow our market share and. in the larger boats, grow our unit sales in spite of a reducing market.

The good news for us that we are positioned in this type of environment exactly where we want to be. Again, we reacted very quickly to the softening demands last year. Some of our competitors recently announced that they have just recently cut back on their production. We don't know what their field inventory levels are like. We hope they are not excessive because that is certainly not good for the industry.

But we are well-positioned again with our backlog and even with our dealer inventory that when things turn, we are prepared to ramp up production and immediately capture those benefits. We won't have to work through a great deal of field inventory.

And it looks like you have been more successful going larger, higher price boats so congratulations.

In trying to understand the industry - the prior cycles - the history says that first small boat demand starts to fall off and larger, more expensive boat demand stays pretty strong but eventually the larger boats -- the demand for larger more expensive boats starts to wane as well as you go through the different cycles.

This cycle might be different than in the past; but are you seeing any evidence that -- we are seeing the lower-priced boats cycle similar to the historical trends. However, have you seen any indications that we might be beginning to see the larger more expensive boats demand starting to weaken?

No. We have not seem that yet. And as I mentioned before, we are in the process of going to our dealer conferences and we will know more certainly by the end of August, after we have met with all of the Chaparral dealers.

Again and another thing that drives our business again is new innovative products and we are continuing to invest in that particular area. Again strategically long-term, that is where we want to be. We are not going to cut back in that particular area, given some near-term (indiscernible). We are going to continue forward with those initiatives and that will serve us well in the long-term.

Thank you very much.

At this time, there are no further questions. Are there any closing remarks?

Appreciate everybody calling to listen in today; and I appreciate your questions. Have a good day. Thank you.

Thank you for participating in today's conference call. You may now disconnect.