Marine Products Corp (MPX) 2008 Q3 法說會逐字稿

Good morning, and thank you for joining us for the Marine Products Corporation third quarter 2008 conference call. Today's call will be hosted by Rick Hubbell, President and CEO, and Ben Palmer, CFO. Also present, we have Jim Landers, VP of Corporate Finance.

At this time, all participants are in listen-only mode. (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, Jean, and good morning. Before we get started today, I need 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 can be found 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 forward one to you immediately.

This morning, we're going to make a few comments about the quarter, 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 third 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 40% compared to the third quarter of last year. Unit sales of new Chaparral Sunesta Wide Techs and Xtremes were constant with last year, but sales of our other models declined significantly. Average selling prices per boat also increased in the new Sunesta models, which served to increase the overall average selling price per boat for the Company.

Our gross profit margin of 16.2% was lower than the 21.5% gross margin that we realized in the third quarter of '07. Ben will discuss these reasons for that in a few minutes.

Operating income decreased by 79%, and our diluted earnings per share decreased by $0.06, or 75%.

The retail selling season was very weak, and we have serious concerns about the upcoming winter boat show season. The same macro economic and industry-specific factors that have been problems for us over the past three years continue to be in place, and have recently deteriorated even further. During the third quarter, and now into the fourth quarter, the credit crisis and turmoil in the financial markets have negatively impacted us as well. The lack of reliable credit availability for both consumers and our dealers has surfaced as yet another issue for our industry to overcome. This is the worst environment for pleasure boating during our time as a public Company.

With that overview, I will turn it over to our CFO, Ben Palmer.

Thanks, Rick. Just a little, few more details on the financials. For the most recent quarter, we generated net sales of $31.6 million, a 39.8% decrease compared to last year. Unit sales declined almost 48% compared to last year, as we reduced our production during the quarter in reaction to the weak retail selling season and the level of dealer inventories.

Unit sales in our new Sunesta products were maintained compared to last year, as Rick mentioned, but declined in all of our other model lines. Average selling prices increased due to the success of our new Sunestas and a favorable model mix at Robalo.

Although international sales in the third quarter increased from 18.3% to 27% compared to prior year, international sales decreased 10.9 percentage points sequentially from the second quarter of '08. Global economic issues and the increase in the dollar compared to the euro over the last three months have negatively impacted international sales. And although international business is strong relative to the domestic business, it too is showing signs of slowing.

Gross margin as a percentage of net sales was 16.2% for the quarter compared to 21.5% last year. Gross margin declined because of inefficiencies we experienced at the lower production volumes, and extension of the retail incentive program that we announced last quarter, for a few more months. This incentive is designed to reduce boats in dealer inventory. One small bright spot is that the recent decline in prices for oil, steel, and copper should have favorable implications in the future for the cost of raw materials used in the production of our products.

Selling, general, and administrative expenses decreased by 36.9% in the third quarter of '08 compared to the prior year because many of these costs are variable in nature, including incentive compensation, which varies with sales and profitability.

Our interest income in the third quarter was slightly higher compared to the third quarter of last year. Our cash and marketable securities balance increased slightly compared to last year's, and we have the same type of highly liquid investment-grade tax-exempt municipal securities that we had in the third quarter of '07.

Although the estimated effective tax rate for the full year of '08 is about 30%, the effective income tax rate during the quarter was 58%; this increased because of items that we recognize for financial statement purposes, but not for tax purposes, the most significant of which were non-deductible losses of assets held in a non-qualified benefit plan.

Diluted earnings per share for the quarter were $0.02, a 75% decrease compared to $0.08 diluted earnings per share in the prior year.

Now, turning to the balance sheet, we still maintain a healthy and liquid balance sheet. I mentioned that our cash and marketable securities balances were higher than last year. Also, inventories decreased by $8.3 million compared to the third quarter of '07, in line with our lower production volumes and our efforts to reduce our working capital requirements.

Despite the very challenging business conditions over the last 12 months, our total of cash, short-term and long-term marketable securities at the end of the third quarter increased slightly to $57.6 million compared to $56.7 million last year.

We continue to closely monitor our key indicators that we've talked about in the past. Dealer inventories are approximately the same as they were at this time last year, which is a direct result of all the hard work and the disciplined management of our production levels and our incentive programs. However, we're watching this statistic, as well as order backlog and are prepared to adjust production further as necessary.

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

Ben, thank you. Over the past three years, we have worked diligently to support our dealer network, while protecting long-term shareholder value. We will continue to do so, and the deteriorating environment in which we find ourselves at the end of the third quarter may require us to consider additional incentive programs to move inventory, additional workforce reductions, and temporary plant consolidations. Given that our production levels at the end of the third quarter were lower than the beginning, some of these actions are very possible.

While we are doing things to manage the short term, we have not lost sight of the goal of supporting our position as a strong Company with a good brand name and solid fundamentals. We have the resources and skill to invest in the development of new products, and we have continued to do so, most recently with the introduction of Chaparral's 400 Premier sport yacht in August, as well as redesigned models for the '09 model year. As we have reported over the past few quarters, and as industry observers have recognized, our new models have been well received in the marketplace.

A minute ago, Ben mentioned a decline in commodity prices and the favorable impact that it may have on our manufacturing costs. High fuel prices have been one of the industry's major issues over the past three years. If the current decline in fuel prices lasts into the winter boat show and spring retail selling seasons, we will no longer have that issue of high fuel prices to deal with.

In summary, although we are in the most protracted downturn in anyone's memory, we are continuing to do the right things and leverage our position as an experienced, high-quality manufacturer of two strong brand names in the pleasure boat business. And with the financial crisis making daily headlines, there is no better time than today to have a debt-free balance sheet and a lot of cash.

In summary, we are in a good position to take advantage of the opportunities when things do improve in this business.

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

(OPERATOR INSTRUCTIONS).

Joe Hovorka, Raymond James.

Hi, thanks guys. Just one question; you talked about your inventory at the dealer level being flat with this time last year. I mean, how do you feel about that given that retail sales are down 40%-plus? Are you still, do you want that to be lower still so production will actually be below retail sales for the next couple of quarters, or how are you thinking about that?

No, absolutely that's, we're always focused on that. Clearly with retail sales much lower than they were at this time last year, we prefer that the field inventory be lower. So, yes we are, again, constantly looking at production levels, and all things being equal, yes, they'll probably be declining.

And then you made a comment in the release about floorplan credit to dealers being less available that it had been. Can you comment on that, and any changes that have occurred there in the last three months?

Hey, Joe, this is Jim. I think it's probably no surprise to anybody in the past month-and-a-half with all the credit tightening, and obviously you know who the floorplan lenders are, yes they have been much more restrictive with floorplan lending than they have in the past, and it's probably, it's kind of a developing situation. That's probably all we ought to say at this point. We renew those floorplan agreements each year, and we're looking at those renewals at this point. Nothing is finalized yet, but we certainly have reason to anticipate that the floorplan agreements are going to be more restrictive than they were in the past, but hard to say too much else at this point.

Well, when you say "more restrictive", is it higher cost, is it lower availability, or lower limits, or do they, how are they restricting it?

Well, it could be all of those things. Like Jim indicated, we're currently negotiating and going through that process, but as you can imagine, any and all lenders with their problems with funding and the increased cost of even short-term funding, that's putting pressure on them, and so we're having to negotiate hard.

And you negotiate for all of your deals, is that-- or most of them?

Well, we negotiate the overall floorplan program that our dealers have the choice to elect to participate in, so in essence, we do in some respect, but the relationship is between the dealer and the floorplan provider.

How many of your dealers use your floorplan, roughly?

I think it's probably pretty high -- mid-80s to 90%.

Okay, and when does that agreement and when do you expect it to--?

Joe, this is Rick. We have a couple of floorplan providers, and those are different contracts and so they have varying expiration.

Okay.

And we're looking to try to extend that out, typically they're annual, we may go out a bit further. Again, all that's being negotiated right now.

Okay great, thanks guys.

Rob Henderson, Rutabaga Capital Management.

Hi, good morning. I think in the fourth quarter, I think you normally have a downtick, a seasonal downtick in sales which you didn't have last year because it was such a good model year for the new boats. Would you expect to have a normal seasonal downtick from the third quarter, or even a greater than normal in fourth quarter '08?

Latter, the latter.

Okay.

Rob, this is Rick. I don't think there's anything normal right now going on, so nothing in the past will dictate what's going to happen in the future.

But one thing it is true, yes it's always a seasonally slow period, but right now with all the tremendous uncertainty, it's that much-- that will put that further down pressure on things.

Okay, and is there any sort of rule of thumb you might have for revenues, like how bad would revenues have to get for, say, operating margins to get down to the break-even level? Is that something you can tell us?

No, that's not, we don't disclose that type of detail. Reasonable question, but that's something we're making adjustments very frequently, if not daily, looking at it, what level do we want to be at relative to production levels, and what we need in this environment going forward. I mean, we're trying to look a little bit longer term and see what we need, but again, it's just highly, highly uncertain right now.

A lot of it depends on the model mix because we have so many different models, and they have varying gross profit margins. So a lot of it is not just total revenue. It's the model mix within that total revenue.

That's true, that's a good point.

Right, okay thank you.

(OPERATOR INSTRUCTIONS).

Kurt Frederick, Wedbush Morgan Securities.

Good morning. I have a question just on the dividend. Your earnings have come down, the pay-out has kind of gone up. I was just wondering if you guys had any plans to cut the dividend if you're just going to use the cash that's on your balance sheet and then continue to pay.

That's a decision that the Board looks at each quarter, and they'll look at it again next quarter, and so again, obviously, you see that we've declared the same dividend this quarter, and we'll just have to wait and see what the Board decides.

Okay, and then I had a question on the, like your tax rate, the change for the non-qualified plan assets. Is that run through the SG&A like the write-down? Is that how that works?

It's a funded, non-qualified plan where employees can defer their compensation. So basically, the P&L impact as pretax is relatively small because both the increase and the decrease is within SG&A, but the asset value change is not a tax event. It's excluded from tax.

Okay.

Because of the large decline in the financial markets, we had a rather steep and quick decline in the value of the assets, and so projecting that out over the total year, it sort of all, whatever that impact is sort of caught up in the third quarter. And with the low pretax income, it made it look like a big percentage number.

Right, okay. All right, thanks a lot. That's all I had.

Joe Hovorka, Raymond James.

Thanks, just a follow-up to one of the other questions; how much of your gross-- I'm sorry-- your cost of goods is fixed versus variable?

Cost of goods, direct cost Joe?

Yes, right.

Well, I mean, I don't want to sound flippant. In the long run, none of it is fixed. In the short run, it's kind of, we know the components, it's kind of hard to get at because there are some "fixed costs" in there. Certainly, our plant supervisors, and there's an overhead allocation, things of that nature.

I mean, even a rough number; is it 30% variable? Is it 60% variable?

It's probably 20%.

20% variable?

Yes.

And then on the SG&A line, I know there's a lot of variable numbers in there, but there's also a fixed component on a quarterly basis. What does that run roughly? Like if you had paid none of your profit share earn-out, your incentives, and the bonuses paid on the profits, is there a core number that we could look at?

Joe, there are sort of a few layers of cost there, because some of the things like warranty accruals and things of that nature do vary with sales.

Right.

And I know you know that. I'm just kind of reminding you and others about it. I mean, our-- probably--.

We have certain public Company costs that aren't-- compliance costs-- that aren't variable. Probably--.

I mean, at some point we're going to stop expecting--.

Probably a third to a half of the SG&A is fixed I would say.

How much?

A third to a half.

Okay.

Of this quarter.

Yes, of this quarter.

Okay, great thanks.

(OPERATOR INSTRUCTIONS).

I show no more questions in the queue at this time, sir.

Okay, well we appreciate everybody calling in this morning, and thank you for your questions also. And have a good day. Thanks.

This does conclude today's conference call. You may now disconnect. Thank you.