Marine Products Corp (MPX) 2006 Q3 法說會逐字稿

Good morning and thank you for joining us for Marine Products third-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 listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for your questions.

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

Thank you, operator. Good morning, everybody. Before we get started today, I would like to remind everyone that we are going to be discussing things that are not historical facts. Some of the statements that will be made on this call will be forward-looking in nature and reflect a number of known and unknown risks.

I would like to refer you to our press release issued today, our 2005 10-K, and our other SEC filings that outline those risks, all of which are available on our website at www.marineproductscorp.com. If you have not received our press release for any reason and would like one, please call us at 404-321-7910 and we will fax or e-mail one to you immediately.

This morning, management will make a few comments about the quarter, and then will be available for your questions. Now I will turn the call over to our President and Chief Executive Officer, Rick Hubbell.

Jim, thank you. We issued our earnings press release for the third 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. First, net sales for the quarter decreased slightly because of lower unit 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 increase in average gross selling prices was the result of our continued focus on selling larger boats and price increases instituted at the beginning of the 2007 model year, which began this quarter. The net sales comparison was also negatively impacted by higher dealer and retail discounts.

Our gross profit margin declined during the quarter from 26.4% to 23% this year due to increases in the price of raw materials and components, production inefficiencies, higher labor costs and higher sales discounts.

Managing our dealer inventories and order backlog remain a high priority. Ben will talk more about that in a few minutes. But I am pleased to mention that the backlog in dollars is slightly higher than a year ago and dealer inventories are lower than last year.

We are very pleased to report that Chaparral's marketshare increased to 8.53% during the first six months of this year compared to 8.27% during all of 2005. Even though we are in a soft market, we view this as confirmation of the quality and consumer appeal of our products.

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

Thanks a lot, Rick. For the quarter ended September 30, we generated net sales of $64 million, which was a 1.6% decrease compared to last year. Our unit sales volume decreased 12.5% compared to last year. This decrease in sales is in response to weaker demand, especially with the smaller boats. Average gross selling prices increased by 11.6%, which is a continuation of our success in selling our larger boat models with more features, and because of the model year price increases instituted at the beginning of the quarter.

Gross margin as a percentage of net sales was 23% for the quarter compared to 26.4% last year. This reduction was due to several factors, including higher cost of raw materials and components. This resulted primarily from the higher price of petrochemical-based raw materials compared to one year ago. We recently have experienced generally flat to only slightly higher pricing from our suppliers in the third quarter compared to first half of the current year. That is the good news.

Our gross profit margin also declined due to production efficiencies resulting from the lower production volumes and the fact that we are carrying additional personnel in both manufacturing and manufacturing support functions compared to one year ago. This, however, is consistent with our stated strategy to invest in our people and systems to allow us to produce innovative models with greater efficiency and high quality.

In addition, our discounts are higher than one year ago for a couple of reasons. First, we announced our winter boat show incentive program in the third quarter this year compared to the fourth quarter last year. We recognized the estimated incentive cost on third-quarter sales one quarter earlier than last year. We established an additional cash incentive for dealers that achieved targeted customer service index scores.

For selling, general and administrative expenses, they increased slightly in the third quarter of '06 compared to '05, and as a percentage of sales, increased from 12% last year to 12.5% this year. This was principally due to an increase in warranty expense that was not offset by lower incentive compensation. The warranty reserve was adjusted this quarter based on an updated review of our recent claims activity and warranty program changes. We are aggressively working to better manage our warranty through quality initiatives and, more importantly, work on our approaches to warranty claims management.

Our effective tax rate for the third quarter was 37.9% compared to 24.9% in '05. The increase in the current quarter was due to provision adjustments required after filing the prior year tax return, and also the effect of nonrenewal of the research and development tax credit.

The related tax benefit for R&D will be recorded if the credit is renewed by Congress prior to year-end. Prior-year effective rate included reductions to the tax provision after filing the tax return, and also reflects the manufacturing deduction that was put into place third quarter last year.

Diluted earnings per share for the quarter were $0.12, a 33% decrease compared to $0.18 diluted earnings per share in the prior year. We repurchased a little over 91,000 shares during the latest quarter.

We are pleased with the continuing improvements in order backlog and field inventories, which have improved sequentially and compared to the prior year. At the end of the quarter, unit inventory at dealers is 12% lower than one year ago, but it is 11% higher than we were at the end of the second quarter because our dealers have started to build '07 model year inventory.

Order backlog in units is 7% higher than it was at the end of the third quarter last year and approximately 3% higher than it was at the end of the second quarter. This is a reasonable indicator that our dealers are in a good position to increase their boat orders if boat show traffic and related sales are positive.

Inventories on our balance sheet decreased due to lower sales volumes, as expected, since we do not build stock boats. You may have also noticed this morning that we announced that our Board of Directors declared a regular quarterly cash dividend of $0.05 per share. With that, I will turn it back over to Rick.

Ben, thanks. We believe retail demand has declined because of higher interest rates and fuel prices. Consumers have reacted to higher cost of ownership by delaying their purchases, especially for smaller boats. We have continued our focus on selling more of the larger boat models by increasing the number of models and improving existing ones.

Our incentive and dealer training programs will continue to contribute to our long-term success. We are pleased with the new 2007 models and, despite recent retail trends and dealer uncertainty, we will continue our new model development efforts, which we expect will pay off in future marketshare gains.

Our backlog and production days scheduled for the fourth quarter are being carefully reviewed. We may take actions similar to last year, when we closed productions for set periods of time in order to manage our manufacturing costs during the fourth quarter transition period until we get more clarity from the late fall and winter boat shows.

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

(OPERATOR INSTRUCTIONS) [Dick Kumar], [Soundpost] Partners.

Great quarter. Quick question. In terms of selling larger boats, are you seeing any weakness in demand there or does that continue to be strong?

I think right now -- this is Ben -- I think right now there is a lot of uncertainty across many of the models and sizes and so forth. I think the dealers right now, given this time -- we call this kind of the transition period before we go into the boat show seasons -- I think they are --right now at this very moment, there is not as much acceleration as we had seen. But again, we are looking forward and hoping that the fall and winter boat show seasons will be positive, and that will turn into additional sales momentum.

One more question. What sort of price increases did you have instituted at the start of the quarter, and was that generally accepted by consumers?

This is Jim. Our model year begins in July, so that is the fiscal and calendar third quarter. About 3.5%.

In terms of being accepted, that is the price to the dealers, and the ultimate acceptance by consumers will depend on what the dealers are able to sell at. Again, we're sort of in that period where retail sales are not that high at this point.

This is definitely a time where the dealers build up inventory for the sales period rather than a lot of retail sales.

Got it. Thanks. Those are my questions.

Mimi Sokolowski, Sidoti & Company.

I have a couple of questions. The volume decline in this latest quarter, is that consistent with the first half of the year or did you see an acceleration and deceleration?

Hmm, let's see.

I can look it up.

I don't know that I have that in front of me. I think it is somewhat similar.

Mimi, this is Jim. Let's go back to high school calculus. The rate of decline is decelerating. In other words, the decline for third quarter year-over-year is less than the decline for the year-to-date period. That is the number I have right at my fingertips here.

Okay. How is the dynamic between Chaparral and Robalo boats trending these days? If I recall correctly, the Robalo boats are more expensive, perhaps higher end. Are you seeing those turn over more quickly than Chaparral Boats or decline less than the Chaparral Boat? Can you comment on that?

It is a completely different market that we're selling to, from pleasure boats compared to fishing boats. So far through the year, I think we're seeing a greater increase year-over-year in Robalo -- in Robalo sales. However, right now, that is beginning to slow down, as it is with Chaparral. But the Robalo numbers are small and --.

I understand. Okay, then you did comment on SG&A in that you pointed out that it not only went up as a percentage of sales, but also in the dollar amount for the first time this year. Can you explain again why that occurred?

It primarily related to warranty. Warranty, as you can imagine, we warrant many parts of the boats from five and in some cases up to ten years. But the majority of the warranty claims come in usually within two, 2.5 years and really begin to trail off after five years. So it is a complex calculation that we go through.

Over recent periods, we have had to look at things like rates that we pay dealers on warranty work and things like that. So we're having to look at the frequency and the size of our claims and what is driving that.

And so we took a close look at that, as we do every quarter, but we took a renewed look at it and decided to increase that reserve at a faster rate than we have been. We think that is a catch-up. We do not think that is a recurring number.

Okay, so it does not have anything necessarily to do with the decline in the quality of your boats? There is no implications?

No, we do not believe so. As I had indicated, we have a lot more people on the payroll today relative to our production volumes than we would have historically. And the reason for that is our continued focus on quality and trying to make sure that we are doing everything we can to put out a high-quality product.

So I think it is just more of realizing the aspects of warranty and what some of the rates are we are paying and things like that, and how that is manifesting itself in our warranty expense.

That's helpful. I do have couple more, if you guys would indulge me. First, on the interest income, how are you generating that rate of income on a cash balance about $50 million?

Well, we don't do anything special.

It is real conservative, investment-grade stuff. Let's see. And it is not $51 million either. It is $51 million in cash. Then we have [$405,000] in marketable securities. And then if you go down to the long-term section of the balance sheet, you've got marketable securities of $4.5 million.

Yes. That might be what you're (multiple speakers).

That's what I'm missing.

If you add all those up -- and we're not supposed to, because it is non-GAAP -- but if you add those up, the total of cash, short-term, and long-term marketable securities is $60 million or so.

Okay. Then I wanted to ask you about the tax rate. Very choppy so far this year.

Yes, frustrating.

Yes. What assumptions should I make and to what should I attribute the choppiness?

We had been talking about an estimated rate. As you know, the difference between an estimated rate and the effective rate is when we have to record discrete items. This quarter, we had about a 2% increase to the rate because the R&D credit was not renewed by Congress.

We had to do year-to-date catch-up for that; so again, that was about 2% in the quarter. Hopefully, that will be renewed and the benefit of that then will flip back into the fourth quarter and we'll have a big year-to-date benefit. But that is the way the tax accounting goes.

Another piece of that this year was some negative effects from just filing our prior year tax returns and doing some true-up adjustments, which usually occur in the third quarter.

Then in the prior year, what we had was the manufacturing deduction was instituted a year ago this quarter. So it was effective for the entire year, so we got a big benefit last year. So we had to record three quarters' worth of benefit last year, and there were some other positive tax return adjustments last year.

So it does get very choppy and that is frustrating. But to look at it, if the R&D credit does not renewed, we're probably looking at about 34%. If it is renewed, we would probably be at about 32%.

Okay. And one more question if you don't mind. The fourth-quarter sales comparison, it looks like it is easier this quarter than it is last year, and also fourth quarter last year, it looks like it was one of your lowest quarters since 2003. How do you feel about the comparison? Maybe, Rick, this is a question for you. How do you feel about how the Company is positioned relative to the year-over-year comparison?

Certainly, as you said, for the fourth quarter, it is going to be easier to hit that number. I think we have confidence that we will be able to do that.

But we reserve the right that if some of these late fall and early winter boat shows -- for example, Fort Lauderdale is this weekend, and is going to be somewhat of an indicator of the consumer mood. But we are going into the quarter believing we will do better.

Okay. Now you had a dealership meeting sometime at the end of August, didn't you?

We did. That is when we usually have our annual dealer meeting.

What was the sentiment at that time?

The sentiment was similar to what it is now. The dealers liked all the new models and thought they were great if there were retail buyers around. And I think the mood we got was a very conservative one as far the dealers loading up on inventory, trying to guess what the consumers were going to do.

So they, like us, are just waiting for these boat shows to see what the retail activity is going to be.

That is why, Mimi, the dealer inventories are down in the field. Really in this sort of environment that is -- we think that is a positive. As we indicated, if the sales do pick up, if the indicators do become positive, dealers will immediately submit orders. They will not be selling as much out of their existing inventory and trying to sell that down. They will be able to take new boats, and that benefits us as well.

And we don't push product on our dealers. I think maybe some other manufacturers might do that. We do not. We are a partner with them and we do not want them to get in financial trouble because we're trying to keep our manufacturing going.

You mentioned manufacturing a couple of times before in the context of, I guess, adjusting production. Can you go out on a limb and say whether you are leaning towards pulling back on production or would your bias be to increase production? If you could hazard a guess?

Our production level is less this year than it was last year at this time. So we have already made those cuts in production. We typically do not build stock boats, so we look at our dealer orders very carefully to see what is out there, and we try to manage that and have a number of weeks in advance to plan that production.

Mimi, this is Jim again. Remember, our backlog in weeks is way up there. Now, that is because we have cut production, as Rick said, but we've got orders for the boats we're producing now. I just want make sure everybody remembers that. And the backlog in weeks is historically high at this point.

Of course, we could bring that number down if we increase production. But we don't want to do that because we don't want to run out of orders.

Got you. All right. I have monopolized enough. Thank you very much.

Rommel Dionisio, Wedbush Morgan.

A question on the gross margin side. You talk about during the quarter higher raw material prices as well as higher component costs. And I could see the raw material price moderating, but what about components? Is that engines specifically, and would you expect that to moderate somewhat as raw material prices come down, or is that something that may remain high for a while?

Engines are a significant component of materials, and they have tended over the last few years to increase steadily, but not at nearly the rate of increase that we were experiencing with basic commodity prices. So I would expect that prices will increase, again, subject to what industry sales are.

But us being optimistic, we hope things will -- that retail demand will pick up, and so we expect there will be the ability to continue to raise prices on engines. That is not something we look forward to and ask for, but I expect that that will continue to some degree. But not as fast a rate as the petrochemical based commodities.

Okay. Also, just one follow-up question. On new products, in the call about a year ago, you talked about 30 new models and five new Robalo models. Can you just characterize the pace of new products that you are launching for the '07 model year this time around?

Rommel, this is Jim. It actually wasn't 30 new models; it would have been probably 30 total models, if memory serves. We do not introduce that many new models a year.

For the '07 model year, Chaparral -- there's just a couple things to talk about. Chaparral has introduced a new model called the Sport Deck, and it combines the features of our SSi sportboat and our Sunestra deckboat that people think are attractive, so it is a little bit of a hybrid of the two. And as Rick said earlier, our dealers like it and think there will be some strong retail demand for it. It is a good boat.

The other main thing to talk about in broad terms is that Robalo continues to increase in size. We now have a 30-foot Robalo out there. So that is fairly strategic and long-term because it allows us to have a fuller offering for the dealers. So those are kind of the two main pieces of news for the year.

With regard to the acceleration or the pace at which we can come out with new product, we had talked about the fact that we are carrying some additional personnel than we historically would have at these production levels. And that is a strategy of ours that we have added more people in our engineering department. We are adding systems, computer systems and so forth, that we believe will allow us to accelerate new product development and enhancements to some existing models.

We do not really have any stated numbers that we're putting out there in terms of how much more quickly we can put new product out there. But we are quite confident that it will be beneficial to us. And there are other ancillary benefits internally too with regards to purchasing and materials management and things like that that we believe we can achieve with a more automated engineering department.

Great. Thank you very much.

Joe Hovorka, Raymond James.

I actually have a couple questions. First, on the warranty expense, can you give us the warranty accrual and then the actual charge-offs in the quarter? I know those will be disclosed in the Q, but --.

It will be in the Q. The warranty expense was about 2.9% of net sales.

Okay. What was that last year?

I think 1.7%.

Okay. And we will just get the charge-offs then in the Q?

Yes.

Okay. Your current production levels right now, are they above or below where they were in the fourth quarter of '05?

The mix continues to change as well, but --

I think in the number of boats built per week, we are down compared to fourth quarter last year on a recurring basis. But fourth quarter last year, we shut production down several days. So the effective boats built for the quarter was down lower than the weekly, normal production would have indicated.

You're going to have more production days this year is what you're saying?

That's what we hope, yes.

If you are down in units, is the dollars down as well or is it up, versus where you were producing last year?.

Well, said another way, our order backlog is slightly higher than it was a year ago in dollars.

Your order backlog has actually been up, I think, in dollars and week's production in every quarter so far this year, but we have not seen that flow through to the sales side. How should we read that? I mean, what does that mean, that your backlog up and when does that show up as higher wholesale shipment in a given quarter?

I think that shows that we have been reducing production so that we can keep our backlog higher, rather than blowing through all those orders. So we hope we will not have that -- that if the boat shows, these winter boat shows turn out very favorable, then we will start increasing production.

I guess another way -- that is a very good question, Joe, and I guess the way we run the business, so much of it depends on four to six months from now -- is what we have in production four to six months from now, as opposed to what we have the view of right now. So we constantly adjust production to keep a sufficient lead time out there.

So I think we do have backlog and that it is increasing is net positive. But really, again, in this transition period, it depends on, as you know, with the other manufacturers on how the boat shows go.

When you talk about your backlog, what is the duration of that? Are we talking about -- I know you do have two order cycles a year, roughly, right? Are we talking about a six-month backlog at this point or is it shorter than that?

Joe, it is about 19 weeks at this point. I think it's historically high. In terms of weeks, it is the highest it has been in a number of years.

Okay. And going back to the retail sales in the quarter, if you looked at boats, let's say, 28 or 30 feet and up, were those positive in retail sales or were they down as well?

We do not have the information by length at our fingertips. Our cruisers probably performed relatively okay. The good-performing boats for us tend to be that 27-foot sort of sportboat. And I know that is halfway in between the big boats and the little boats, so that's (multiple speakers) straight answer. But that is where our strength continues to be, in the upper 20s.

Okay, so with the shift towards -- because your ASPs are going up -- is it going up because large boats are -- your wholesale shipments are falling slower than small boats, or they are actually up? Like, are you shipping an equal amount of cruisers, for instance, in the third quarter this year than you did last year?

No, our average sales price increases relate, first of all, to the model year price increases. But also, again, it is kind of within that SSi sportboat category. Fewer 18, 19, and 20-foot boats and -- I'm speaking in relative terms -- and relatively more of the 27, 28-foot SSi's. That is where the pendulum is.

Right, okay. You mentioned boat shows in specifically Fort Lauderdale. Last year, Fort Lauderdale was delayed a week because of the hurricanes. And Fort Lauderdale, I think, still had limited airport access and electricity and all that stuff. How are you --?

Year-over-year comps should be good.

You hope so, right? How are you going to read that? Does it just cloud things a little bit? We have to wait until kind of the next big show to really get a good read on what's going on in the industry? Or will we be able to divine something from what is going on at Fort Lauderdale?

You could certainly compare it to '04. That is an easy thing.

I think, Joe, from a macro perspective, you're right -- it will be difficult. But we will have lots of people there on the ground, talking to people and just getting a sense for -- whether it is this year compared the last year or whether it is this month compared to last month, what sentiment seems to be (multiple speakers) benefit will come from.

And that show actually has a reputation for being a big show for big boats.

It is not that big a show for us. It is more of a consumer mood reflection than anything else.

Okay. Then on the lower gas prices, have you heard chatter from your dealers or have any kind of evidence that either traffic or sales improved in the last six weeks or whatever it has been, where fuel prices have really fallen? Has there been any anecdotal evidence to that or is it just the off season, it's hard to draw anything?

I think we would like to think that that is the case, but we really haven't heard much of that yet. And whether it's because it's not coming through or whether it is because it's kind of a slow period, it is hard to know. But that is not coming through to us, unfortunately.

Right. Great. Thanks, guys.

(OPERATOR INSTRUCTIONS) [Jim Martindale], RBC Dain Rauscher.

Just had a quick question on -- back to this tax rate. Did you quantify what the difference would've been between projected and actual tax rate in terms of cents per share?

Now, we did not.

I was just looking at Street consensus versus what that might have cost you, and you might have been a little closer to that number.

I've done that from an EPS perspective. Maybe you have done that. You want me to confirm your number?

The other question I had is everybody is talking about the headwinds that you had here for the last year, that being high cost of fuel, high financing costs, lack of storage facilities that were destroyed down there in the Gulf.

When you talk to some of your dealers, are they seeing just a bit more optimism in terms of those three items put together?

I think it varies geographically. Still I don't think the southeast, there is a whole optimism in the southeast. And on the West Coast, there is not whole lot of optimism. But I think the Middle Atlantic gets a little better.

And there, of course, is talk now that the Fed's going to be reducing rates early part of next year that could be another tailwind, hopefully.

Right.

That's all I had.

In response to that question we just had, if the effective tax rate was 3% lower, that would be about a little more than $0.005, so --.

Thank you.

At this time, there are no further questions.

Okay. This is Jim again. Thanks to everyone for calling in. We appreciate your interest and your questions. Have a good day.

This concludes today's Marine Products third quarter 2006 conference call. You may now disconnect.