Marine Products Corp (MPX) 2009 Q1 法說會逐字稿

Good morning and thank you for joining us for Marine Products Corporation's first quarter 2009 conference call. Today's call will be hosted by Rick Hubbell, President and CEO, and Ben Palmer, Chief Financial Officer. Also present we have Jim Landers, Vice President of Corporate Finance.

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 questions. I would like to advise everyone that this call is being recorded. Jim will you get us started by reading the forward-looking disclaimer.

Thanks operator and good morning. 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 2008 10-K and other SEC filings that outline those risks. All of these 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 email 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 first quarter of 2009 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 almost 79% compared to the first quarter of last year. The decrease in net sales was due to a 78% decrease in the number of boats sold and addition costs recorded during the quarter related to our winter retail incentive program. Average gross selling price per boat was virtually unchanged from the prior year. Our unit sales decreased so dramatically because of the depressed recreational boating environment and the fact that we are focused on helping dealers sell from their existing inventory. We must reduce field inventories before we will see any meaningful increase in orders of newer models.

We realized a slight gross loss for the quarter. Ben will discuss the reasons for that in a few minutes. Our operating loss during the quarter was $4.8 million compared to operating income of $5.2 million for the first quarter of last year. Our loss per share was $0.07 compared to diluted earnings per share of $0.11 in the first quarter of last year. The first quarter of 2009 continued the depressed environment that the recreational boating business has been in for over three years. The financial crisis and steep economic declines of the past six months or so have forced consumers to halt virtually all discretionary purchases such as pleasure boats. Credit, both for consumers and our dealers, continued to be tight.

The residential real estate market, especially important to boating markets, is still depressed. All of these factors combined to continue to depressed conditions in the boating market, with no near-term improvement in sight. Not surprisingly, the winter boat show season was weak overall again in 2009. Attendance and sales industry wide appeared to have been down by more than 30% compared to 2008. We are working diligently to manage our relationship with the dealer floor plan providers for the current and prior model years, as well as the upcoming 2010 model year. Our exposure to any additional repurchase obligation will depend upon the success of reducing dealer field inventory levels.

Our current strategy is to produce an appropriate number of 2009 models in order to satisfy retail demand and preserve the value of our brand names, while at the same time continuing to reduce field inventories as dramatically as we have over the past year. We are also working to support and strengthen our dealer network and develop new models for the 2010 model year so that we are prepared to perform better when the boat market rebounds.

Marine Products is very well capitalized but the execution of these strategies requires us to conserve capital. As a result, our Board of Directors voted yesterday to suspend our quarterly dividend. We believe strongly in paying a quarterly dividend and have done so every quarter in our eight years as a public company, but we believe suspending the dividend is in the best interest of the company shareholders at this time.

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

For the quarter ending March 31, 2009 we generated net sales of $13.8 million, which is a 78.9% decrease compared to last year. As mentioned earlier, part of this decline was due to the additional cost recorded during the quarter for our winter retail incentive program, as well as the fact that our dealers were ordering few current year models, because they are selling to retail customers out of their inventory. I'll talk more about these additional program costs in a moment.

The decrease was due to a 77.9% decrease in the number of units sold. Unit sales declined across all of our product lines. On a consolidated basis, the average gross selling price per boat was virtually unchanged.

International sales were 35% of consolidated net sales for the quarter, which was slightly higher than the 32.3% in the first quarter of 2008. We realized a gross loss in the first quarter due to the financial impact of the inefficiencies of very low production levels, as well as the additional cost of our winter retail sales incentive program. We continue with a stringent cost control effort and we benefited from the reduction in the prices of several raw materials used in our manufacturing processes, but these benefits were vastly outweighed by negative factors.

Selling, general and administrative expenses decreased 43.1% in the first quarter of 2009 compared to 2008 due to the variable nature of many of these expenses, including incentive compensation and warranty expense. Also, our salaries, R&D and advertising expenses were lower due to cost control measures instituted during the past year. These decreases were partially offset during the quarter by approximately $370,000 in additional warranty expense recognized during the quarter related to boats sold in prior years and the cost recorded during the quarter of boat repurchase obligations of approximately $560,000.

As a percentage of net sales, selling, general and administrative expenses were 34% of net sales in the first quarter of 2009 compared to 12.6% last year.

Interest income in the first quarter decreased by 19.2% compared to last year. This decrease was primarily due to a decrease in short term interest rates compared to last year. To a lesser degree it was also due to a small decrease in our total cash and marketable securities balance from $57.1 million in the first quarter of 2008 to $55.5 million this year.

We recognized a tax benefit for the quarter because we incurred operating losses. Diluted loss per share for the quarter was $0.07, a decrease of $0.18 per share compared to $0.11 diluted earnings per share in the prior year.

Turning to the balance sheet, we continue to maintain a very strong and liquid balance sheet. I mentioned a moment ago that our cash and marketable securities were $1.6 million lower than at the end of the first quarter last year. In addition, our inventories were $19.4 million compared to $32.4 million last year. Our accounts receivable declined from $4.3 million to $1.2 million this year. Both of these declines in working capital requirements were due to lower sales volumes and our management of these working capital items.

Now I'd like to make a few comments about our dealer inventory. As we stated in the press release and in our comments this morning, we are placing strong emphasis on reducing our dealer field inventories so that when the retail selling environment improves, our dealers will order higher volumes of current product. Reducing these dealer inventory levels will enable us to realize the benefits of our strong product development efforts and preserve the value of our already solid brand names. As a result of these efforts, our dealer inventories declined by 11% compared to the end of 2008 and by 35% compared to the same time last year. Our finished goods inventories and stock boats have also declined. This is one of our principle strategies during this time and we believe it will make us a stronger company in the future.

We are incurring cost to accomplish this strategy. In connection with our winter retail incentive program that took place during the first quarter, we were successful at selling many more boats from dealer field inventories than we had estimated. Therefore, the first quarter net sales include additional incentive costs totaling approximately $1.1 million, making the total program cost for units in dealer inventory of approximately $2 million.

Our recently developed retail incentive program, which was announced on April 17th for the 2009 spring selling season, was designed to sell a significantly higher number of boats, primarily from dealer inventory. We have increased the per-boat retail incentives compared to the winter programs so these costs, to be recognized primarily in the second quarter, could be significant but will ultimately depend on the number of boats sold under the program. While these actions, coupled with maintaining low production levels produce negative financial results for us in the short-term, we believe they are necessary in order to assist our dealers in selling existing inventory and more importantly, to thrive when the market returns.

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

Ben, thank you. During this extended depressed environment, Marine Products is focusing on the strong position in our market and our unique strengths as a company. We have the financial resources and long-term management expertise to endure during this time and to do so while developing new products, preserving the quality of our brand names and supporting our dealers. Many other manufacturers do not have these enduring qualities and we believe that we will continue to attract quality dealers who want a partnership with a good manufacturer as well as good retail customers who want high quality, stylish products that can be serviced in the future by a dealer and manufacturer that are still in operation.

We do not know when the pleasure boat business is going to improve, but we believe that it eventually will and when it does, we believe that we will be among the premier manufacturers that retail customers, dealers and financial partners want to do business with. I'd 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 is from Hayley Wolff.

I was wondering if you could give us a little more color on your retail inventory levels, at what point do you think you'll better match your sell-in to sell-through and then maybe a little bit of color on 2008 versus 2009 inventory?

Maybe I'll start with a quick answer. As Ben was outlining, we have some pretty ambitious plans to reduce our field inventory during the remainder of the 2009 model year and I don't think we're openly disclosing where we are now and where we want to be, but we want to reduce it significantly over the next few months.

Based on the [access] you have in place, do you anticipate when we rollover to model year 2010 that you'll be in a better -- you'll be matching the rate of retail?

Well, we hope so. That's what we would like to think. We, again, developed a program to -- that's what we're trying to achieve and that's what we hope we achieve and again, that obviously ultimately will depend on the environment out there and how successful we are and consumers' appetite for buying the field inventory. So that's what we're shooting for.

Okay. Can you give a little color on what your repurchase obligations look like and is it a big -- the whole floor plan environment and how that's affecting dealer orders and your repurchase obligations?

Well, in terms of how it's affecting dealer orders, we can't really point directly to those obligations or so forth in affecting things. Obviously the whole environment is such that we're producing at very low levels because there's not a lot of retail demand. There are very few orders that we're receiving that probably don't have a retail customer's name attached to it in the end. In terms of the obligation, those typically run during the model year. The model years typically end on or about June 30th, so between what occurred in the fourth quarter and what has occurred in the first quarter, we have substantially satisfied the repurchase obligation under our existing contracts. And those repurchase obligations for the most part apply to more current models. So we feel like contractually we're in pretty good shape relative to the repurchase obligation.

As it relates to going forward, as Rick talked about, we're currently in discussions and negotiations with our floor plan providers and there's been nothing finalized. The credit markets, as you know, are in a lot of turmoil and we don't know exactly where that's going to end up, but at this point, again, with the very low production volumes we have, the focus continues to be on getting build inventory down and not that we're not worried about it now, but we'll see where those obligations turn up going forward. And the exposure on those obligations will be minimized by how successful we are at selling down our field inventory and then we can kind of go forward from there.

Are there any geographic regions that are starting to show some stabilization?

Good question, but there's really nothing notable that we've seen.

(OPERATOR INSTRUCTIONS) Your next question is from Kurt Frederick.

Just a couple of questions. I was wondering if you could talk a little bit about what you're seeing thus far in Q2, maybe as far as retail sales, then a little bit about -- it's only been like 10 days or so as far as the new inventory reduction sale, kind of what you're seeing there?

It's a little bit too early to tell. As you probably know, the statistical surveys data come three months in arrears and clearly we haven't closed April yet, so it's just kind of too early to comment on that.

I would say during the first quarter though, as we indicated, we sold more boats in the first quarter than we thought we would, which is good news. I mean we incurred addition cost for that, but that's the good news. Good news, bad news. The more cost we incur here over the next few months, the better off we're going to be long-term. So if the first quarter is any indication, we hope going into the spring selling season that again, the sales will be higher than they were during the first quarter, but as Jim said, it's much too early to really have any real sense for it.

And just wondering, when do you plan to introduce the 2010 model year; is that going to be in July or is that getting pushed back?

That's something we're currently looking at. That's a critical factor, so again, I hate to keep repeating it, but it will very much depend on what kind of sales we have from existing inventory, because the preference is you don't -- we don't want to come out too quickly with a new product; we want to try to get the dealers' inventory down. So that's very much what we're focused on. So there's been no definitive dates established for the new model year.

Okay. And then I was just wondering, what was the order backlog at the end of Q1?

It's low, Kurt. We only disclose it once a year; that's in our 10-K, but it's low at this point. It's kind of the law of small numbers; when you're doing small numbers, statistics like that become less meaningful.

We're sort of building similar numbers of units as we have been. We're not operating on a full schedule; we're not necessarily manufacturing every week, so as I said in my comments, we're not expecting any meaningful increase in orders from dealers, so we don't expect any meaningful change in our production levels for the near-term.

Your next question is from Eli Lap.

I'm looking at -- I'm not sure if I'm looking at this correctly, but I was wondering if you guys could maybe help me. If I look at the sales change, the year-over-year sales change of about 79% and then the inventory reduction I think you guys are saying let's say it's in the 40% area, could you give us a sense if you use the same trajectory of sales change versus inventory change, can you get a sense about timing for when you have a more balanced position?

It's kind of back to an earlier question. To get more balance between what our dealers are selling and what we're producing, we've got to work down a lot of inventory in the next few months and that's the goal. We don't know -- it's hard to say how many boats our dealers are going to sell in the next few months, so it's hard to put a real good number on that. Our goal is to get it done by the end of the model year.

Okay, so it's hard to use like the same trajectory and say well if we use the same sales rate, then we'll get to balance in X timetable?

It's hard math to do, yes.

Clearly, each year, and I think it will hold through again this year unless there's some other significant change in the economy, which certainly there could be, that clearly, historically, everyone sells many more boats in the second quarter than they do in the first quarter. So we see no reason why that won't continue.

Your next question is from Joe Hovorka.

A couple of quick questions. One, any sense of your market share in the first quarter; did you roughly maintain share?

As you know, the statistical survey data come out late. We don't have any sense for things in the first quarter. 2008 data has kind of just come out and we're still scrubbing that, trying to understand it. Anecdotally you hear about a lot of manufacturers having some pretty pronounced plant shutdowns, but of course we're not producing a whole lot of boats either, so very hard to say at this point. One of our theses is that over the long-term, since we don't plan to go out of business, our market share will grow, but I don't have any data to show you right now about that.

Okay. But you don't think your retail sales in the first quarter were that significantly different than what was going on in the rest of the industry; if anything it might be a little bit better?

Yes, we think probably a little bit better.

Right, okay. And you mentioned that you satisfied your repurchase obligation. Can you kind of explain that; how did that happen? I mean, do you have no repurchase obligation at this point with your floor plan lenders?

Well, again, the programs in general, run until about June 30th. We had some repurchases in the fourth quarter, we had some in the first quarter and at this point we don't see any more that are eminent. So contractually, we are less than three months away from the end of that period. That's not to say that something couldn't arise at this point, but there's an awful lot of monitoring going on right now. And in terms of any additional -- and our exposure, our P&L hits, our exposure to the repurchases has not been that significant. We've been pretty successful at any that we've had to repurchase, we've been able to move them out with relatively little cost.

So good question, but we're not right now feeling that the repurchase obligation itself is a big issue. And I hate to beat a drum here, but what we're focused on is getting that dealer floor plan down. That benefits the dealers, that benefits us, that benefits the floor plan providers, everybody is going to be in much better shape as we pay those down. So, that's not to divert the answer to your question, but that's much more important, that's much more of a focus and what we need to do. We're worried about that much more than we are any repurchase obligation.

Sure. And how much did you repurchase in the first quarter and the fourth quarter?

Let's see, during the first quarter -- we ended the quarter -- I think the end of the year I think we had like $2.1 million in our inventory that we had repurchased and at the end of the first quarter it was about the same number. It didn't change a lot, but we did have I think it was a little over $3 million of repurchases during the first quarter, so we were able to move that amount out. We didn't move everything that we repurchased, but what was there at the end of the year moved out and some new came in. So there's about $2 million sitting on the balance sheet at the end of the first quarter.

Okay, and like you said, you moved that basically at no loss in the first quarter?

Some loss, but not significant.

Just small.

I indicated the cost of repurchases during the quarter was about $560,000, so that's the P&L hit we took because of the repurchase obligation.

Oh, I'm sorry I missed it. You said $560,000?

Yes. That's in SG&A.

I must have missed that number. And then on your floor plan, can you just tell us where you're at on that right now? I mean, if I recall you had one floor plan lender that was doing most of your dealers that was ending its relationship, is that correct?

The biggest one is still in the business. The secondary or the smaller lender has exited the business.

Okay, so how many dealers is that affecting and where are you in getting another floor plan lender for those dealers?

Well, when they exited the business, they're not funding many additional boat sales and we're not shipping many, so it's not a huge issue. And I don't have the numbers in terms of the dealers impacted. Some dealers have gone to local banks, some dealers have maybe signed up with other national floor plan providers, so we haven't seen any, that I'm aware of, a lot of direct impact from that lender going out of business. There are other options. But really again, and that particular lender is not saying you must pay off your loans now; they're working themselves out of their portfolio; they're not asking people to pay off the loans immediately. So there's no immediate, direct impact there.

There are no more questions in queue.

Okay everyone, we appreciate you listening in this morning and also we appreciate your questions. Hope everyone has a good day. Thank you.

This concludes today's conference call. You may now disconnect.