Marine Products Corp (MPX) 2009 Q2 法說會逐字稿

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

At this time, all participants are on listen-only mode. Following the presentations, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for the questions.

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

Good morning, and thanks for joining us. Before we get started today, I'd like to remind everyone that we're 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, the 2008 10-K, and other SEC filings that outline those risks, all of which are available on our website, 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're going to make a few comments about the quarter, and then we'll be available for your questions.

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

Jim, thank you. We issued our earnings press release for the second 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. First, net sales for the quarter were significantly lower than the second quarter of last year due to a large decrease in the number of boats sold during the quarter, partially offset by an increase in the average gross selling price per boat.

In addition to selling several of our Premiere Sport Yachts. The average gross selling price per boat increased on our Sunesta Wide Tech and Xtreme models.

Gross profit for the quarter was $462,000, or 3.7% of net sales, compared to $11 million, or 19.8% of net sales, in the second quarter of 2008.

Our current strategy is to assist dealers in meeting retail demand through their existing inventory rather than our current production. Therefore, we have maintained very low production volumes in the quarter.

Operating loss for the quarter was $6.3 million, compared to an operating income of $4.4 million in the second quarter of last year. Operating profit declined due to lower gross profit and higher SG&A expenses during the current quarter due to $4.3 million of expenses related to our dealer inventory reduction efforts.

Net loss for the quarter was $3.8 million, compared to net income of $3.9 million last year. Our loss per share was $0.11, compared to diluted earnings per share of $0.11 in the second quarter of last year.

One of our primary goals this year has been to produce and sell fewer boats to our dealers and to support them in their efforts to sell existing inventory. We have the financial resources to do this, and we believe it benefits our dealers in the short and long term by enhancing their short-term financial results.

We also believe that this strategically benefits Marine Products and our shareholders over the long term, as it will eventually allow us to increase production of new models ahead of the competition, thus increasing the value of our brand name in the marketplace.

However, the substantial inventory reduction costs incurred in support of our dealers, coupled with lower production, have hurt our short-term financial results in the second quarter, as reflected in the operating and net losses we are reporting today.

The quarter results reflect the continued depressed state of the retail selling environment. Weak domestic and international economies, continued real estate weakness in key boating markets, and cool, rainy weather in the Northeast have made the 2009 retail selling season even weaker than last year.

This continues to be the worst environment for our business in the time -- in our time as a public company, and the worst time in the recreational boating business that most in the industry can remember.

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

Thank you, Rick. For the quarter ended June 30 of '09, we reported a net loss of $3.8 million, compared to net income of $3.9 million last year. Our unit sales declined by 80.4% compared to a year ago as we reduced our production during the quarter. This was in reaction to the weak retail selling season and was also in conjunction with our dealer inventory reduction efforts.

Unit sales declined in all of our model lines. Average selling prices increased due to a favorable model mix in our Sunesta models and the sale of several of our Premiere Sport Yachts.

International sales comprised 22.5% of consolidated net sales in the second quarter of '09, compared to 37.9% in the second quarter of last year. Our international business declined in the second quarter at a greater rate than our domestic US business.

Gross margin was 3.7% of net sales for the quarter, compared to 19.8% last year. The gross margin declined because of the inefficiencies arising from significantly lower production volumes. Although we've worked to control and reduce direct expenses during this downturn, the tremendous decline in production during the quarter made it impossible to absorb direct costs effectively.

Selling, general and administrative expenses increased 2.3% in the second quarter of '09 compared to the prior year due to the expenses that Rick mentioned that we incurred to support our dealers through inventory reduction efforts. These expenses totaled almost $4.3 million. If you excluded these expenses, SG&A would have declined 62% compared to the prior year--again, because of our ongoing cost reduction efforts.

Interest income in the second quarter was $382,000, or 39.3% lower than the second quarter of last year. This is due to lower interest rates and a somewhat lower marketable securities balance. Our cash and marketable securities balance, though, remains very high at $55.7 million at the end of the second quarter. This compares to $60.1 million at the end of the second quarter last year. Our investment portfolio is very similar to last year. It includes short-term, high quality tax-exempt marketable securities.

We recognized an income tax benefit during the quarter because of our pre-tax loss. Our loss per share for the quarter was $0.11 -- again, compared to an $0.11 earnings per diluted share last year.

Turning to the balance sheet, we still maintain a healthy and liquid balance sheet. Inventories decreased $13.7 million compared to the second quarter of '08, and this is consistent with our lower production volumes. We have a minimal number of finished goods in the inventory, as we continue to build based on firm orders that can be financed.

As I mentioned above, our cash and marketable securities have declined over the past year due to lower operating results, but have increased by $4.3 million since the end of '08 because of our working capital management efforts.

We continue to closely monitor our key indicators. At this time, the most important indicator continues to be dealer inventories. As a result of ours and our dealers' efforts, dealer inventories at the end of the second quarter of '09 are 38% lower than at the end of the first quarter, 45% lower than at the end of '08, and almost 50% lower than this time last year. We now believe that field inventories are at a manageable level, and have positioned our dealers to order current models for inventory when retail demand resumes.

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

The decline in the recreational boat business is almost four years old. The downturn and its causes are no longer news. One recent development, however, is that this protracted downturn has impacted the recreational boat business very profoundly and, perhaps, permanently. Both large and small manufacturers are seeking bankruptcy protection, trying to sell their business to competitors, or quietly ceasing operations.

During this historically difficult time in our business, our industry expertise, financial strength and stamina have served us well. We believe that our decision to directly support our dealer network in reducing field inventory will benefit all of our current business partners.

We also believe that this turmoil will allow us to form relationships with new, strong dealers in underserved markets. Also, we believe we will gain increased recognition among retail customers as we continue to come to the market with new and innovative model design and prove that we are a company that will continue to be around to service their needs and build our brands.

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

(Operator instructions). We'll pause just for a moment to compile the Q&A roster. And your first question comes from Hayley Wolff from Rochdale Securities. Your line is now open.

Hi, there.

Good morning.

Hey, Hayley.

Morning.

Hey. I have two questions. First, can you give a little more color on the international markets? And the second question has to do with the inventory draw-down in the channel, which the market -- looks like you're starting to see some stabilization in the rate of decline, and you're shipping in at half the rate. So as we stopped seeing this drawdown of inventory, what does it mean for your shipments in the channel as dealers need to start sort of taking orders?

Hayley, this is Jim. Maybe the second question we have a little more useful information for you, which is on inventory. And we've reduced dealer inventory a whole lot. I mean, our dealers sold almost six times as much to retail consumers as we shipped to them during the quarter. So I mean, the implication is simply that dealer inventory is very low right now, so we're ready for a pickup in demand. I think that's -- I think our dealers are ready for a pickup in demand, too. So that's probably the best way to put it.

And I would add -- this is Ben -- that we're going to be -- we do think we're set up well, that when retail demand resumes, that the dealers are in good shape and we'll be able to increase production. We're going to keep -- probably for the time being keep production pretty low, because we certainly don't want to get ahead of ourselves. And this is typically -- obviously the third and fourth calendar quarters are typically very slow quarters anyway. So we -- and as you pointed out, we've been shipping at a very low level in the last couple quarters, and I don't expect that's going to change significantly here in the short term.

But as we get out toward the latter part of the calendar '09 and into early 2010, we'll just have to see how demand is and how directly -- how firm the orders are that the dealers have that they're sending us, and we'll react to that. But that's kind of the issue that we're focused on right now, is what is the correct production levels for us that we don't get ahead of ourselves but we certainly serve the need of our dealers and the retail customers.

Okay.

And on the first point, relative to international sales, yes, we're -- our sales here are at such a low level right now that, honestly, I'm not sure how relevant that is. I think said it just says that the European economy is -- the demand there is very low, just like it is here in the US.

Okay. Thanks.

Uh-huh. Thanks.

And your next question comes from John Reilly from Sigma Capital Management. Your line is now open.

Yes, good morning.

Good morning, John.

I had a question. Do you -- what's the average age of the inventory that's at the dealer level right now?

That question -- I don't know, we don't have a calculated number. Certainly much older than it normally would be in normal times. Anyone else want to (inaudible - multiple speakers)?

I don't want to say that it's irrelevant. It's a good question. But dealer inventory is so low that it's almost irrelevant.

I think that's a good point. I mean, there still is some older inventory out there, but we designed our program such that we were giving larger incentives for the older models. So we, again, feel that we're at pretty reasonable, manageable levels at this point.

So of the roughly $4.3 million that you broke out as dealer inventory reduction, was that all to facilitate sales, or was any of that to help offset the increase in rates as inventory ages? We've seen congressional testimony from boat dealers about how floor plan lenders such as GE are drastically increasing rates relative to prior practices as inventory ages on the floor. Was all of that done to facilitate sales, or what's the current status in terms of helping dealers carry inventory to next year? Because I imagine that even though it's low, it's going to be egregiously expensive to hold it for another 12 months.

Again, good question. It's really -- if they sell their boat, their interest payments stop, We were focused primarily on the retail incentive side to get the inventory cleared out and stop the interest accruals, and that was the way we were to help them in that respect.

Okay, got you. All right. Well, thank you very much, gentlemen. I appreciate that.

Absolutely.

Thanks.

And your next question comes from Kurt Frederick from Wedbush Morgan Securities. Your line is open.

Hey, good morning, guys.

Morning.

Morning.

Hey, Kurt.

I had a question on, I guess, the dealer network. I was wondering if you guys are looking at doing acquisitions and are buying some of these companies you're talking about that are doing like bankruptcies or asset sales.

Kurt, this is Jim. Talking about manufacturers?

Right.

Yes, we're ready to look at some good acquisitions as they become available. It's been a long time coming. We're not going to be aggressive, though, because there aren't that many buyers and it's hard to really find value in a boat manufacturer sometimes, especially one that may not be a going concern. So we're certainly receptive to looking, but, again, we're not overly aggressive right at this moment, but may find some opportunities in the coming months.

Okay. And then I guess along those lines too, you talked about some of the dealers coming and talking to you about maybe picking up the Marine Products line. I was wondering if you've already added any or you're still in the process of working through that?

We've added a few, and we've had a fair number of conversations, but it hasn't been at any great level.

Okay. And then, sorry, I missed the international sales number. Did you say it was 22.5%?

I believe that's correct. Yes.

Okay. All right, that's all I had. Thank you.

Down from 37.9 last year.

Yes. Okay, thank you.

Thanks.

Thank you.

And your next question comes from Kent Holden from HAM Funds. Your line is now open.

Good morning, gentlemen.

Morning.

Morning.

I wanted to ask about seasonality effects. I'm in the Northeast, and I know in most parts of the North, kind of the saying is, if you don't sell it by the Fourth of July, you're going to carry it over winter. I was curious on ordering patterns of the dealers. If we don't see an up-tick by late this year, will they be ordering for spring season next year?

If we don't see an upturn?

If things aren't better by Halloween, are dealers going to be placing orders for spring inventory?

Maybe to put it this way -- first of all, you just gave us the answer. In the Northeast, if you don't sell a boat by July Fourth, you're not going to. And as you also know, it's been cool and rainy in the Northeast, so that doesn't help. Maybe the better answer to the question would be that the upcoming model year is starting shortly, and our dealers will start ordering in the fall in order to have inventory when the winter boat show season comes, which starts in late December or early January and starts in the Northeast, and they'll be ordering from us for the dealer -- I'm sorry, the boat show season and the upcoming retail selling season.

So I think a better way to answer the question is that we gauge demand as the winter boat show seasons start, not really in October and November.

But we don't expect the dealers to be very aggressive at all. Most of our production are sold boats rather than inventory boats.

So we're prepared that that demand will not be very great at all.

Yes. And then how does the used market affect sale of new product? I looked and saw 935 Chaparrals for sale on Yacht World as of this morning.

Good question. I will tell you just in summary form that the used boat market is a factor.

It is unbelievable.

There's someone else on the phone. The used boat market is not unbelievable, it's a factor, and it's around 72% of total sales in good years, bad years, everything else. So I think now, with probably some personal bankruptcies, you have a little more used boat units for sale on the market, but it's not something that we necessarily focus on, again, because it's a constant factor.

This is so not about you, so don't take my -- I am so (expletive).

Sounds like she has a more interesting call.

Yes.

My last question would be what would you use as an average selling price, or how many units did you ship this past quarter?

Gosh, we don't really disclose that, except once a year, to be honest with you. In general, though, our average gross selling price is in the upper 40s, low 50s.

Okay. All right. Thank you very much.

Thank you.

(Operator instructions) Your next question comes from Chris [Harrell] from [Capital Asset] Management. Your line is now open.

Good morning.

Hey, Chris.

I was wondering if you all could just go through a little bit more discussion of the different segments of the industry and where they stand, I mean, in terms of manufacturer bankruptcies, for example, or shutting down lines quietly, as you referred to. Can you go through some of the major ones that are kind of no longer operating?

Chris, hey, this is Jim Landers.

Hey, Jim.

Hey. Some of them -- we all read the same news, so we know some of the ones that have filed for bankruptcy protection or whatever. I think the whole industry is being painted by the same brush. I don't think any particular segment is doing any better or any worse. There are a few very small specialty boat manufacturers that, as Rick mentioned, are not doing high-profile bankruptcies, they're just kind of ceasing operations. So there's no real way to characterize it in a way that would help you analyze things, in my opinion.

Would you characterize it in terms of a percentage of prior volume, where you say, well, maybe 10% of the manufacturing capacity is shut down or 20% is shut down or going bankrupt or -- ? Is there any --

Again, impossible to characterize because of --.

It's very fluid.

Yes, it's very fluid. And if a manufacturer has idled their plant for six months, that's effectively taking things off the market. If the manufacturer has filed for bankruptcy, that's effectively taking things off the market as well.

Sure.

So they're all sort of versions of the same thing.

Okay. How about --.

(Inaudible - multiple speakers.) We've had selective furloughs just to control our production, so --.

Right.

-- it is hard to calculate.

How about on the dealer side? Have you lost -- or how many have you lost at this point to bankruptcies from the Chaparral network?

We've been very lucky. We've had only a very few. We've had no noticeable ones in the latest quarter.

Okay.

More of it was one, two quarters ago, where we had, again, just a few handful.

Right.

Again, I think that's testament to our aggressive inventory reduction efforts. I think that's helped out our dealers tremendously. But that's not to say -- again, the third and the fourth quarter of every calendar year is always a very slow sales season, so there's going to be pressure on everybody in the industry, including our dealers again this fall. But they're in a much better position than they would have been if we had not undertaken the efforts we've taken.

So we feel good about where we are. And we think there will be, just like cars -- you hear a lot of people say that there's going to be pent-up demand for new models. It's only going to be so large. The industry hasn't changed dramatically, and maybe permanently, as Rick indicated. But there will be demand for new models. And we feel like we're going to be in a great position to be able to fill as much of that void and as much as that demand that comes along over the next, whatever, six to 12 months and beyond.

And I think to get back to your question about the bankruptcies we've seen, that -- in the retail side, that is a case where those particular manufacturers will not be able to help their dealers push those boats [at] retail, so that's even a better advantage for us.

That's right. Really, it's a challenge because to the extent there is all that other inventory out there we have to overcome that, too. But again, we're ready to sell current models -- new boats, current models, recently designed, innovative models, so we feel very, very good about that.

How would you characterize the overall channel inventory compared to what Marine Products has been able to achieve? I assume it's in worse shape?

Yes. Yes, there's no doubt. We feel like we're in the best shape of anybody at this point.

But you still have to compete with all of that other inventory out there --

Correct.

-- that's still slower moving, too. So we've still have got a ways to go, probably, on that.

That's correct. Those are the older models. Again, I think our primary benefit is we will be prepared to sell new models.

Right. Okay. And how about on the financing side? Where does that stand in terms of the provision of financing, for floor plan financing as well as consumers?

Well, there's recently been some positive developments. We have signed a new agreement, which is good news, but the financing market overall -- just because we have that agreement doesn't mean that all dealers are, whatever, going to get financing in this environment today. But I think as things improve, I think that will become more readily available. But things are better today than they were just a few months ago, so we feel good about that. And from here--

Who is the new agreement with?

GE is really the primary player, so we signed a new agreement with GE.

Okay. All right. And is there any aspect of sort of the marina business that comes into play, which is also under a lot of pressure -- a lot of them for sale and struggling. Does that have any role for you guys in terms of making things significantly worse, or the turnover there isn't going to really matter?

Not directly, Chris, no.

Okay. All right, thanks.

All right, thanks.

And your next question is from John Reilly from Sigma Capital Management. Your line is now open.

Hey, guys, sorry. I just wanted one follow up. There were one or two things I just wanted to make sure I understood. What is the level of your dealer inventory right now in terms of absolute dollars?

We don't normally disclose that, but again, it's down significantly, and we feel good about the level that it's at right now.

Okay. Just so I can gauge, I mean, Genmar, when they went in, they had about roughly 300 million on their floor plan with GE. Would you say you are significantly below that?

Absolutely.

Significantly.

Okay. All right, I just wanted to make sure. And then in terms of how much of the sales price was subsidized, I mean, is it as simple as taking the 4.255 you've disclosed, adding that to the net sales and saying, okay, on average it was a 25% subsidy? Or how should we look at it in terms of how much of a price discount your dealers had to give to move inventory?

No, John, the way to look at it is you'd have to know how much the dealers sold to the retail customers, not how much we sold to the dealers.

Okay, so we make --

Your math is correct, just the denominator would be the dealer sales, not our sales.

Okay, so closer to 25?

25%?

No, 25 million, because you said the dealer sold two times the amount that you shipped to them, so if you shipped 12.6, that would imply they sold roughly 25, correct?

We don't have their P&Ls. I mean, that's roughly what we believe, but we don't have their income statements, so I can't say that.

All right. I appreciate it. Thanks so much.

All right, sure. Thank you.

John, thank you.

Bye.

(Operator instructions) Okay, so there are no further questions at this time. Mr. Landers, you may continue.

Okay, thank you. We appreciate everybody calling in to listen to our conference call today. We hope everyone has a good day. Thank you.

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