Marine Products Corp (MPX) 2008 Q2 法說會逐字稿

Good morning, and thank you for joining us for the Marine Products Corporation Second Quarter 2008 Conference Call. Today's call is hosted by Rick Hubbell, President and CEO, and Ben Palmer, CFO. Also present with us, we have Jim Landers, VP of Corporate Finance. (OPERATOR INSTRUCTIONS) I would like to advise everyone that this conference is being recorded. Jim will get us started by reading the forward-looking disclaimer.

Thank you, Andrea, and good morning. Before we get started today, I'd 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 2007 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, please call us at 404-321-7910 and we will fax or email one to you immediately.

We'll make a few comments about the quarter this morning and then we will be available for your questions. At this point, 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 2008, 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 almost 18% compared to the first quarter of last year. This was due to a 25% decrease in the number of boats sold during the quarter, partially offset by a 7% increase in the average selling price per boat. Unit sales of our new Chaparral Sunesta Wide Techs and Xtremes were much higher than the unit sales of the old Sunesta model, but unit sales of our other models declined significantly compared to last year. Average selling price per boat also increased dramatically of the new Sunesta model.

Our gross profit margin of 20% was lower than the 22% gross margin that we realized in the second quarter of 2007. Ben will discuss the reasons for that in a few minutes. Operating income decreased by 37.2%, and pre-tax income decreased as well. Net income decreased by a little over 26%, and our diluted earnings per share decreased by $0.03, or 21%.

The retail selling season was very weak. Fuel prices escalated during this year's retail selling season and made daily news headlines, which of course, kept this issue dominant in boat consumers' minds. The declines in residential real estate increased and are especially acute in important boating markets. This is the worst environment for our business and our time as a public company and the worst time in the recreational boating business that most industry veterans can remember.

With that overview, I'll turn it over to our CFO, Been Palmer.

Thanks, Rick. For the quarter ended June 30, '08, we generated net sales of $55.7 million. That's a 17.9% decrease compared to a year ago. Our unit sales declined by 24.8% compared to last year, as we reduced our production during the quarter in reaction to the weak retail selling season and the resulting increase in dealer inventories.

Unit sales increased among our new Sunesta products, as Rick mentioned, but declined in all of our other model lines. Average selling price increased due to the success of our redesigned Sunestas as well as slightly higher average selling prices in our Chaparral signature cruisers.

Because of the continued weakness in the US dollar, international sales comprised 37.9% of consolidated net sales this year, compared to 27.9% in the second quarter of '07. Our international business is strong, relative to our domestic business, but we believe that it too is showing signs of slowing.

Gross margin as a percentage of net sales was 19.8% for the quarter compared to 22% last year. Gross margin declined because of the inefficiencies we experienced at lower production volumes and the extension of the retail incentive program that we announced last quarter, for a few more months. And as we discussed last quarter, this incentive is designed to try to reduce boats in dealer inventory, which will eventually help generate additional orders of '09 models.

Selling, General, and Administrative expenses decreased by 16.4% in the second quarter of '08 compared to the prior year, due to the variable nature of many of these expenses, including incentive comp, which varies with sales and profitability as well.

Our interest income the second quarter was roughly equivalent to the second quarter of last year and our cash and marketable securities balance was similar to last year as well, and we still have the same type of short-term, tax-exempt securities that we had a year ago.

Our effective income tax rate during the quarter was 22.6%, which is lower than the 31.1% during the second quarter last year. The effective rate was lower primarily because tax exempt interest on the marketable securities in the second quarter of '08 was higher in relation to our pretax income.

Diluted earnings per share for the quarter were $0.11, a 21.4% decrease compared to $0.14 diluted earnings per share in the prior year. Our average share count was lower, resulting from the open market repurchases we have made over the past 12 months, but this did not impact the calculated diluted EPS during the current quarter.

Turning to the balance sheet, we still maintain a healthy and liquid balance sheet. Inventories decreased by $7.7 million compared to a year ago, due to lower production volumes and because of our efforts to try to reduce our working capital requirement.

Despite the very challenging business conditions of the last 12 months, our total of cash, short-term and long-term marketable securities at the end of the second quarter, increased to $60.7 million compared to $57.8 million at this time last year.

We continue to closely monitor our key indicators, our dealer inventories are higher than last year and our order backlog is lower than at this time last year. These two metrics are among the main drivers behind our decision to extend our retail incentive programs and continue lowering our production levels until we see tangible evidence and improvements in retail demand.

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

Ben, thank you. The retail selling season is approaching its end in many parts of the country and as we have stated, it was very weak. Our dealer meeting will be taking place in the next few weeks and as always, it is an important opportunity for us to assess upcoming dealer demand. However, we are not very hopeful about dealer and consumer demand until at least the winter boat show season, which begins in the fourth quarter.

High fuel prices and economic weakness continue to make daily headlines. Uncertainty about the upcoming presidential elections and continued falling home prices in most parts of the country compound the negative headlines and force consumers to be very cautious about large discretionary purchases such as pleasure boats. Against this negative backdrop, we continue to be pleased with our position in the industry and our ability to generate positive net income and generate cash in times such as these.

Very recently we announced the largest of our popular new Sunestas won the Powerboat Magazine Boat of the Year award. We also learned recently that Chaparral and Robalo received the National Marine Manufacturers Association Customer Service Index award, which are given based on customer feedback on product and service quality. This recent recognition is conformation of our ability to build quality products that appeal to boaters.

I would like to comment briefly on some preliminary boat unit sales data that we mentioned in our press release. While the data are preliminary, they indicate a tremendous decline in sales this year. Some of the large boating states such as California and Florida are much lower than the national average, which is negative for our company, because of our presence in these markets. One bright spot is that our Chaparral brand seems to be holding its own, and in fact, has gained some market share. But in general, the available retail sales data points to a continued weak market.

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

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Kurt Frederick.

Good morning, guys. I was wondering if you could expand a little bit on what you're seeing in the international market? You said it was a little bit--kind of slowing. I was wondering if that was kind of like a region, was that like Europe or Asia, or what are you seeing there?

This is Ben. That's a reasonable question. Our international sales, obviously getting up in the upper 30% is pretty significant, but in terms of our regional, we really don't have great coverage throughout the international market, everywhere, so I don't know that there's any particular area that we would comment on at this time that's showing particularly or that we would have data points to really be able to provide you any good answer there.

Okay. And turning a little bit to the rebate program, I was wondering how effective that is in like clearing out the prior model year boats? Are you going to have those pretty well worked down, do you think, by the end of summer or is it going to carry over into next year?

That's very hard to say. It's very, very--as we tried to indicate, and think a lot of evidence is, it's a very, very difficult environment. We have never in our, certainly public company history, ever had to have a retail incentive program in the second and third calendar quarter like this. So it's sort of unprecedented. It's hard to say. We designed it to try to achieve that and I think it's just going to take some time. Whether it will--how long that will take is again, it's pretty uncertain right now.

Perhaps a little bit on the magnitude of how much dealer inventories are up over the prior year?

High single digits, so it's not up tremendously, but clearly with sales being down, we would prefer that inventories be certainly flat or down at this point, but they're up in high single digits.

Kurt, this is Jim. Remember and as you know, that is one of our main metrics, so we watch that very closely and are pleased that it's not up more. But it's certainly something we have to manage to.

I think also in terms of our working our inventory down, a big determination of how successful we're going to be is how much inventory other manufacturers have in the field as well and how aggressively they might be discounting to move all those boats. So, that's another variable that is difficult to predict exactly how long it'll take to work things down. But, I will say that the incentive program that we did, we increased it a little bit in terms of the specifics of the incentive, but basically just extended what we had in place for a few more months.

Did you guys repurchase any shares during the quarter?

We did not.

All right, thanks.

Your next question comes from the line of Brandon Taylor with Raymond James.

Good morning, guys. Just a quick clarifying question. In terms of the backlog and the dealer inventories, is that in units and dollars, or just in units or just in dollars? Can you just clarify a little bit?

Brandon, this is Jim. The inventory that we talk about, the changes are in units and dollars, and they're similar, order of magnitude change is similar.

And what about the backlog?

Backlog is down, and that is both in units, dollars, that sort of thing.

Okay, great. Thanks a lot.

Your next question comes from the line of Paul Swinand with Stephens Incorporated.

Good morning. This thing will turn some time, we just don't know when, right?

That is correct.

First, just a question, are there any--can you point to any bright spots, like maybe fuel economical models? I know like in the auto business some small cars are actually selling over invoice. Is there anything like that going on?

Not in terms of fuel efficiency, Paul. This is Jim. Boating is not a fuel efficient endeavor.

Is there any attempt by any of the manufacturers to make something more fuel efficient, or is it just forget about it?

Not really. I think we try to have as efficient design as possible, but it, at least up to now, has never been a concern in the marine business. And you know, there's talk of diesels, but as far as designing boats for better fuel efficiency, no, we've not taken that into consideration yet.

Some people may be doing some of that on the engine side, but that will take quite a while for any of that to flow through to have any real benefit.

The design phase started six months ago and it's going to take three years to get it in the water?

I don't know how long, but I think it will take quite a while.

We don't even have catalytic converters yet in all the boats, and that should be a requirement or will be a requirement in the next year or so.

Okay. With the increase in fuel prices, I know marine fuel, if you fuel up at your marina is significantly above what you see at your gas pump. Has that ratio changed, or in other words, if you go from $2.00 to $4.00 and marine fuel is usually 50% more, is it still 50% more or is the ratio actually higher or lower?

I believe that margin is down.

In other words, Paul, the differential between the automobile gas pump and the marina is a constant. And right now that's, at least in our part of the country, around 20 or 25%.

Okay, so the percentage stays constant. It's not like a fixed dollar amount.

No, I'm sorry. It is more of a fixed dollar amount. In other words, the higher fuel goes, the lower that differential is.

Yes, so relative to automobile sector getting a little better?

Relatively speaking, yes.

Is there any indication--and I know I've asked this before, but any indication of deterioration of marine paper that's extended to consumers or local banks' willingness to extend credit to either the dealer or to the end consumer?

Paul, as you know, we're not on that end of it. What we know anecdotally from our contacts in the industry, or what we've been told is that consumer lending standards have tightened in the form of higher down-payments and higher credit scores that the lenders are looking for from a consumer side. I don't know anything really on the floor plan side, that that's been tightened. Certainly everybody's watching inventories very closely. But in terms of lending standards, I don't know of anything that's gotten tighter.

I would say, I think if it's gone either way, it's certainly tighter. If it's the same, I think we'd be lucky, but I think everybody's cautious.

Yes, it's affecting sales to some extent.

Probably.

Okay. And then I often ask a question about this, but I'm hoping something's going to move, but on the manufacturing side, do you think the field is spinning? [In our field] we saw Brunswick's announcements. Do you think that supply is coming down? I mean, you guys are managing it correctly, but are the other manufacturers finally saying uncle, I'm going to take supply down? And does that give you an--at some point do you get more opportunities on the acquisition side?

I think other manufacturers certainly are working to try to bring inventories down. I think everybody is experiencing what we're experiencing and it's a very, very, very difficult environment, so I don't think there's anybody out there that hadn't gotten the message yet. Could it result in acquisition opportunities? Sure, it could.

Okay, thank you.

(OPERATOR INSTRUCTIONS) There are no further questions at this time.

Okay, thank you. This is Jim Landers. We'd like to thank everyone for listening in and for your questions. We appreciate it. Have a good day.

Thank you, ladies and gentlemen, this concludes today's conference call. You may now disconnect.