Marine Products Corp (MPX) 2007 Q3 法說會逐字稿

Good morning and thank you for joining us for Marine Products third quarter 2007 conference call.

Today's call will be hosted by Rick Hubbell, President and CEO, Ben Palmer, CFO and Jim Landers, Vice President of Corporate Finance.

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 to ask a question. 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.

Thanks, operator, and good morning.

Before we get started today, I want 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'd like to refer you to our press release issued today, our 2006 10-K and other SEC filings that outline those risks all of which are available on our Web site at www.marineproductscorp.com. If you've not received our press release for any reason please call us at 404-321-7910 and we will fax or e-mail one to you immediately. We will make a few comments about the quarter and then we'll be available for your questions.

Now I'm going to turn the call over to Rick Hubbell, our President and CEO.

Thank you, Jim.

We issued our earnings press release for the third quarter of 2007 this morning. Ben Palmer, our CFO will discuss the financial highlights in more detail in a moment. At this time, I will briefly discuss our operational highlights.

Net sales for the quarter decreased due to lower, overall lower unit sales volume, partially offset by an increase in the average selling price per boat. The decrease in unit sales continued the trend of lower retail demand which began in the fourth quarter of 2005. Average selling prices increased during the quarter in almost of our different model lines due to a model mix, which included higher unit sales of our largest boats.

We continue to see strength in our larger SSI Sportboats and our new SSX Sportdecks. Also, our redesigned Sunesta Wide Techs are receiving great feedback from our dealers and customers. Production and sales of these new models will be increasing in the fourth quarter.

Our gross profit margin declined during the quarter due to production inefficiencies related to lower production volumes. This was partially offset by price increases instituted at the model year changeover, which began in the fourth quarter.

Marine Products recent financial results reflect continued weakness in the recreational boating market. We believe that demand has been impacted by continued high fuel prices, increased insurance costs and a weaker housing market, none of which show signs of improvement.

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

Thanks, Rick. I'll provide a financial overview at this time.

For the quarter ended September 30, we generated net sales of $52.5 million which is an 18% decrease compared to last year. Our unit sales volume decreased 24.7% compared to last year which was partially offset by 7.2% increase in average gross selling price per boat.

Our SSI Sportboats are our top selling boats by volume and continue to perform very well with strength in the larger models. Robalo also continues to benefit from selling its larger models but overall volumes are being impacted by these difficult market conditions. International sales remained relatively stronger because of the continued weakness in the U.S. dollar.

Gross margin as a percentage of net sales was 21.5% for the quarter compared to 23% last year. This margin decline due to lower production volumes result in lower fixed costs and labor absorption.

In addition, we're continuing our long-term strategy of investing in our people and systems, primarily directed to enhance our design and quality capabilities. Prices for many of the commodities used in the manufacture of our products remain high but have not increased compared to last year.

Selling, general and administrative expenses decreased slightly in the third quarter of '07 compared to '06 due to the variable nature of many of these expenses, including warranty, incentive compensation and sales commission. As a percentage of net sales they decreased from 12.5% last year to 12.3% this year.

Diluted earnings per share for the quarter were $0.08, a 33% decrease compared to $0.12 diluted earnings per share in the prior year.

Our effective income tax rate during the quarter was 40% which is higher than the 38% during the third quarter of '06. The third quarter typically includes true ups to our tax returns and that increased the provision by about 7 percentage points. Our estimated tax rate is about 33%.

The order backlog and field inventory levels are favorable relative to prior periods and reasonable in light of the current demand environment. Order backlogs are up and dealer inventories are down compared to both the prior quarter and the prior year.

With our expectations of positive sales results of our new boat models, along with the reality of an uncertain growth in the industry for the '08 retail selling season, we have decided to increase slightly our production levels going into the fourth quarter. We will review the ongoing indications of interest from our dealers based on the upcoming boat shows and make production level adjustments as necessary.

Our balance sheet remains very strong as we continue to generate strong cash flow. At the end of the third quarter we had approximately the same level of aggregate cash plus marketable securities compared to one year ago. The classification of these balances have changed due to a change in investment managers but we still maintain a portfolio of high quality, liquid, low duration marketable securities.

Inventory increased slightly due to the timing of boat shipments together with some volume purchases of certain high dollar components near quarter end, and also the purchase of new components to support increased production of the new Sunesta Wide Tech models.

As announced a few days ago, we purchased 276,800 shares under our open market share repurchase plan. And obviously we have plenty of liquidity to continue these repurchases as the price and the market conditions warrant.

With that, I'll turn it back over to Rick.

Ben, thanks.

Our dealer conferences for the 2008 model year took place in late July and early August. Our dealers have confirmed to us the belief that retail demand is going to continue to be weak.

On a more positive note, we are encouraged by the recent interest rate cuts and another mild hurricane season in the Southeast, which make boat ownership less expensive and may boost consumer sentiment. Two large boat shows last month reported slightly higher attendance from last year, which is also encouraging. For these reasons we are looking forward to the upcoming boat show season and are excited about introducing the new boat models to the boating community.

We continue to manage and invest for the long-term at Marine Products. We are using our financial strength, design talent and marketing expertise to develop exciting new models for the 2008 model year including the entirely new Sunesta Wide Tech model line, as well as the 40-foot Chaparral sport yacht which will be introduced later in the 2008 model year.

The new Sunesta Wide Techs have been very well received by the market. Currently the model line features four new models which features the patent pending Wide Tech hole design which incorporates maximum deck space and offers other innovative features.

We are also featuring two Sunesta Extreme models which are designed to offer (inaudible) level wakeboarding experience with new color schemes, our perfect past cruise control system, enhanced graphics, water ballast and more. Again, we're extremely excited about all of our new models and improvements that we have made in the existing models and we are looking forward to a warm reception from the boating community.

We'd like to thank you for joining us this morning and at this time we'd be happy to take any questions you may have.

(OPERATOR INSTRUCTIONS) We will pause for just a moment to compile the Q&A roster. Your first question comes from Kurt Frederick with Wedbush Morgan Securities.

Good morning, guys.

Hey, Kurt.

Good morning.

I just had a quick -- I missed the SG&A comments. Can you repeat those?

Yes, what we said was that our SG&A is down year-over-year because a lot of those costs are variable with sales, it includes things like warranty. So as sales decline, warranty typically declines and we've also had some recent improvement in quality so the warranty's gone down a little bit more than it normally would, just a slight amount.

Incentive comp is also lower and sales commissions are lower. So as a percentage of revenue, too, there was a slight decline year-over-year.

Okay. All right. Thanks.

Then I was wondering if you could just comment quickly on the health of the dealers?

Well, the dealer network is still very strong. They're hanging in well. Clearly, in this weak environment, you know, there's certainly heightened concern.

But what we have done in this decline in sales as we've always done in the past is try to carefully manage our field inventory. That's both in the aggregate, but also on a dealer by dealer basis the best we can and we feel like we've done a pretty good job with that.

As we'd indicated, our dealer inventories are down from a year ago, down from last quarter. And because of that situation, and the new models we have, we're actually increasing production because dealers are comfortable with their levels of inventory on an overall basis and are accepting of the expectation to take additional deliveries going forward. So I think for us it's in good shape, again, relative to the current industry environment.

Okay.

From your comments it seems like you're starting to get slightly more positive as far as the '08 model or the '08 boating season being incrementally better than '07. Is that accurate?

Well, I think we are for us. We're not sure that's true for the entire industry. I think with our new models, we believe that we should do better, but I'm not sure the industry in total will.

Okay.

That will only provide us, this is Ben. So that will only provide us realistically only a certain amount of upside if we're, in fact, able to capture that, just because, as Rick indicated, the overall industry continues to be pretty weak.

Right. And then I was wondering if you could maybe comment quickly just on your expectations for gross margins going forward, just kind of how I guess directionally go maybe in the '08 year?

Well, we don't typically give guidance but our gross margin, if we're successful with these new models, we expect they will have nice margins. They are relatively larger boats, so that continues our strategy of focusing on the larger boat segment. All things being equal, that should help us.

Increasing production to some extent and going into the fourth quarter, it's really only a slight increase, but all things being equal, that should help us. Another uncertainty that we have to deal with is the price of commodities and as we'd indicated earlier, that year-over-year has stabilized but they still are at very high levels.

So depending upon the dynamic of our production volumes and the direction of commodity prices, you know, we could certainly, we could have a nice improvement in margin but in this environment, certainly, not expecting a large increase.

Okay. Thanks a lot. That's all I have.

Thanks, Kurt.

Your next question comes from Joe Hovorka with Raymond James.

Thanks. A couple questions.

In regards to the increased production going into the fourth quarter, can you flush out a little bit more where are you increasing it, I mean by product line? And maybe simple question, why?

Sounds bad, but I mean, if given, you talked about kind of a pretty negative outlook here. Is there -- are you trying to reduce your backlog? Is it an increase in orders from where you were maybe three months ago or what's the reason for the increase?

Joe, this is Jim Landers.

We are increasing production in the Sunesta Wide Tech because it has been favorably received among the dealers and we thing there's just an opportunity for us there. We are happy with backlogs. They are high.

They're high, as Ben commented, they're higher than they were last quarter and last year. So in this environment, we're very happy with that. But we do see an opportunity to get this new Sunesta out in the market and that's where the increased production's coming.

Got it. Okay. Now, if you look at it, I'm assuming you're talking about increase sequentially or is it a year-over-year increase?

Sequential.

Okay. So year-over-year we're still down on a production basis or will be in the fourth quarter?

Actually, I think it's up slightly as well.

Oh, will be up slightly, okay.

Last year, see again, that (inaudible) managing our order backlog and field inventories I think played out, especially fourth quarter last year. Fourth quarter last year was quite weak and we had a pretty significant reduction in production fourth quarter last year. So our increase sequentially and year-over-year, again, has to be compared to that particular quarter.

But I would encourage everybody to go to the Chaparral Boat's Web site and look at that new Wide Tech model, the Wide Tech and the Extremes. They really are nice looking boats and I think will do very well.

When you're talking about production increases it's in units, not in dollars?

Both.

Both. Okay.

And then your backlog I know is a function of production, right? I mean, if your production goes down, your backlog all else being equal would actually inch up a bit.

We adjust production based on backlog.

Right. Okay. Is that, if you look at, because I know the units declined here in the third quarter was greater than the unit decline in the second quarter.

Uh huh.

Is the absolute number of boats in backlog higher than it was at the end of the second quarter or the end of the third quarter a year ago or is it in weeks of production?

Joe, this is Jim.

It's higher than it, to state it explicitly, the number of units in our backlog at the end of September was higher than it was at the end of June.

Okay. That's good. Okay. Okay. That's what I had had for now. Thanks, guys.

Thanks, Joe.

Your next question comes from Mimi Noel with Sidoti & Company.

Hi. Good morning. Two questions. I dialed in a minute or two late so I apologize if this is repetitive.

Did you comment on the acceleration in unit sales declines in the September quarter from June? And if not, would you mind adding some color?

We didn't comment on that (inaudible) results for us, you know, a good question or appropriate question, but is not always relevant for us. The third quarter always for us is model changeover, dealer inventories, you know, kind of wrapping up the prior model year so it's nothing in particular.

It could be the timing of deliveries was a little bit of it in the second quarter. I think we tried to get some things out of the way to prepare for model changeover. I think it was just a timing thing. It may have been managing inventories but we're where we want to be. We think we're in pretty good shape at this point.

Okay. And then one easy question. The tax rate seemed like it was a little bit high. Is that accurate?

Yes, (inaudible) comment on that. That is a tax return true up. It's not a very big number but when you apply it to the level of pretax it increased the rate about 7 percentage points above what our estimated rate is.

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

Thanks, Mimi.

(OPERATOR INSTRUCTIONS) Your next question comes from Stephanie Haggerty with Register & Akers.

Good morning.

Hey, Stephanie.

At least it's raining here.

Indeed.

Yes.

I just -- most of my questions have been asked but let me just ask an overall general question.

What particular things are you looking for that would make you get more excited about the industry, obviously dealer inventories are a factor, but what other things, macro things?

Stephanie, this is Jim.

Rick alluded to it a little bit. The recent interest rate cuts are helpful. We believe that approximately 80% of our buyers finance their boats, so that's helpful. People that are payment buyers.

And here in the Southeast, as you know, we had another mild hurricane season. That's two in a row and that helps. Florida's a major market for us.

And then some sort of easing or at least resolution to the residential mortgage crisis would certainly be helpful. Southern California is a big market for us, as is Florida. Those places have both been hit pretty hard.

Right.

Those are the --

You mentioned, talked about the rain here. Obviously the water levels in the Southeast are problematic right now. There's a lot of negatives right now for the industry.

Well, it's a tough industry environment and I think you guys are doing a great job.

Well, thank you.

Thank you.

That's it.

Okay.

Thank you. Appreciate it.

Your next question comes from Chris Harrell with Capco Asset Management.

Good morning.

I was hoping to hear an update on the Robalo, the progress with Robalo, the potential to pick up new dealers, whether that's making any headway, whether your new sales rep is gaining traction.

Chris, this is Ben.

It continues to be a focus area for us. As I indicated in my comments, some of the larger models at Robalo are doing pretty well but they're certainly not bucking the industry trend by any means.

It's a difficult environment and I think in some respects probably a little more difficult on those types of boats industrywide. So I think we're doing the right things. And we think it's going in the right direction but nothing meaningful to report at this point.

Have you been able to gain any additional dealers this year?

This is Rick.

We've gained a few, not anything dramatic, but we have a couple more on the West Coast that we didn't have this time last year.

And then I guess in particular, the issues in Florida and California would presumably be particularly more difficult for Robalo?

Because of the housing markets?

Housing market, consumer demand.

That is correct.

As a matter of fact, when you track and compare boat sales to home sales, they track just about one for one.

We had had somebody do that in California and Florida and it was a very, very, very close correlation.

Okay. Thanks.

Thanks.

At this time, there are no further questions. I would like to turn the call back over to Jim Landers for closing remarks.

Thank you, operator. Thanks to everyone for calling in and have a good day.

Ladies and gentlemen, this concludes today's Marine Products third quarter 2007 earnings conference call. You may now disconnect.