Marine Products Corp (MPX) 2009 Q3 法說會逐字稿

Good morning and thank you for joining us for the Marine Products Corporation third-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 Corporate Finance.

At this time, all participants are in a 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 conference call is being recorded. Jim will get us started by reading the forward-looking disclaimer.

Thank you, Mindy 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'd like to refer you to our press release issued today, the 2008 10-K, and other SEC filings, all of which outline those risks. These are available on our website at www.marineproductscorp.com.

We issued our press release about 30 minutes ago. If you've not received one for any reason, 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 our quarter, and then we'll be available for your questions.

At this time I'd like to 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 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 were 72% lower than the third quarter of last year, due to a large decrease in the number of boats sold, and a slight decrease in the average selling price per boat. The decrease in average selling price was caused by our model mix. Unit sales to our dealers were extremely low, because one of our principal strategies this year has been to allow our dealers to sell out of their existing inventory rather than take delivery of new units from our production.

Gross profit for the quarter was 13% of net sales, compared to 16% of net sales in the third quarter last year. Gross profit was lower because of production inefficiencies resulting from our very low production levels.

Operating loss for the quarter was $3.3 million compared to an operating income of $1.0 million for the third quarter of last year. As in prior quarters, we incurred costs to support our dealers in a targeted inventory reduction program. While the short-term financial impact is negative, we believe this type of support at this critical time is a valuable investment in our future. These and other steps we have taken will insure our dealers' viability and prepare them to sell our new models.

Net loss for the quarter was $1.6 million, compared to net income of $684,000 last year. Our net -- our loss per share was $0.04 compared to diluted earnings per share of $0.02 in the third quarter of last year.

This quarter's results certainly reflect the continued weakness in the retail selling environment. More than that, however, these results reflects the cooperation between Marine Products and its dealers and our successful efforts to reduce field inventories and prepare for the future. I am pleased to report this morning that our field inventory, in units, is at its lowest level in the past 13 years. An immediate result of these low inventory levels is that we have increased our production in the fourth quarter of 2009, and are producing exclusively 2010 models for our dealers to sell during the upcoming boat show and retail selling season.

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

Thank you, Rick. For the quarter ended September 30, 2009 we reported a net loss of $1.6 million compared to net income of $684,000 last year. Our loss per share for the quarter was $0.04, compared to $0.02 diluted earnings per share this quarter last year. Our unit sales declined by 75.7% compared to last year. During the quarter we continued our strategy of producing a minimal number of units to achieve lower dealer inventory levels. Unit sales declined in all of our model lines.

Average selling prices decreased by 2.5% compared to the prior year due to model mix in our Sunesta models, partially offset by increases in the average selling prices of other models. Sales of our Premiere Sport Yachts helped to offset this decline in average selling prices as well.

International sales comprised 26.1% of consolidated net sales in the third quarter of '09, virtually the same percentage as the third quarter last year, as our international revenues have declined at about the same rates as our domestic sales.

Gross margin was 13% of net sales for the quarter, compared to 16.2% last year. Again, gross margin declined primarily because of inefficiencies resulting from our very low production volumes. It continues to be a challenge to absorb direct costs effectively at these levels.

Selling, general and administrative expenses increased by 9.6% in the third quarter of '09 compared to the prior year. This SG&A increase of about $401,000 was due to $1.753 million that we recorded in incentive costs that were incurred to support our dealers through inventory reduction efforts. If we had not incurred these expenses, SG&A would have declined by 33% compared to the prior year, because of our ongoing cost reduction efforts in all areas of our business, and the fact that much of our SG&A varies with sales and profitability. Year to date, SG&A includes approximately $6 million of inventory reduction costs.

Interest income in the second (sic - see press release) quarter was $420,000, or 32.6% lower than the third quarter of '08, due primarily to lower marketable securities balance. Our cash marketable securities balance was $48.5 million at the end of the third quarter compared to $57.6 million at the end of the third quarter last year. Our investment portfolio is very similar to last year and includes shorter-maturity, high-quality, tax-exempt marketable securities.

We recognized an income tax benefit during the quarter because of our pre-tax loss, and we expect a full-year effective tax rate to be approximately 39 to 40%.

Turning to the balance sheet, we still maintain a healthy and liquid balance sheet, which presents opportunities unavailable to many other manufacturers. Inventories decreased by $8.6 million compared to the third quarter of '08, consistent with lower production volumes. Inventories increased by $3.4 million compared to the second quarter of '09, due to our preparation for higher production volumes in the fourth quarter. We have a minimal number of finished goods in inventory, as we continue to build based only on firm orders that can be financed.

We are pleased to report some favorable progress regarding dealer floor plan lending availability. We have executed our agreement with a major floor plan lender in the pleasure boat business, and this lender is in the process of executing agreements with many of our dealers to provide floor plan financing for the 2010 model year. Floor plan lenders recognize both our financial strength and the large amount of support we have provided to our dealer network and, accordingly, the lenders themselves. In addition, dealers are successfully approaching local bank lending relationships to develop specific dealer floor plan arrangements.

Other positive developments we mentioned in our press release include a market share increase in the 20-to-40-foot sterndrive category and an award we received during the quarter from the National Marine Manufacturers Association for customer satisfaction for both our Chaparral and Robalo product line. This recognition from our customers and other third-party observers is confirmation that we are doing the right things to build quality products and provide good service, which will allow us to benefit as the market improves.

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

Ben, thank you. I mentioned earlier that we have increased production during the fourth quarter. This increase reflects the success of our strategies and is in response to low dealer inventory levels, favorable developments regarding dealer floor plan lending and our confidence in the quality of our 2010 model lineup. Our dealers and other business partners have started to confirm this. And while the winter boat show season has not yet started, the early read from several shows in New England and the Mid-Atlantic are that attendance and potential sales are at least slightly better than last year.

This has been the most protracted downturn in our industry's history and we do not yet know what the business dynamics and competitive landscape will be in the future. However, we continue to believe, and have certainly demonstrated, that our long-term focus, experienced management, and financial strength will allow us to thrive.

I'd like to thank you for joining us this morning. And at this time we'd be happy to take any questions.

Thank you, Mr. Hubbell. (Operator instructions.) Joe Hovorka; Raymond James.

Hi, guys. Two quick questions, one on the gross margin. How is the gross margin as good as it was, given what you did in the first half, on lower sales volume? Were there costs in the first half that weren't there in the third quarter?

Not really. There's probably -- there may be a little bit of an impact from true-up of some incentive costs during the third quarter that had some impact on the margin.

And what allowed you to post a positive gross margin in the third quarter on less sales than the first half? Was there --

Well, just ongoing cost reduction as well, I guess, in our employee base.

Okay.

A lot of those actions have taken place fully in the third quarter.

Okay.

Yes. And, Joe, this is Jim. Also, it's kind of a tempest in a teapot, but raw materials costs are a little bit lower. That doesn't have a huge impact, because of extremely low production volumes, but that did help.

Right. And how much of your cost base now is fixed, now that you've taken out -- or all these costs have rolled through in the third quarter? On the cost of goods line, I'm talking about.

More than before, by definition. As you know, from cost accounting we do have an overhead allocation that's above the gross profit line and other "fixed expenses" would be our supervisors and the people who run the plants who are there. I know you know all that, but just trying to get you a good idea. Let's see. I don't know. It's a very valid question. Should we --

Yes.

-- maybe get back?

That's fine. I could follow up afterwards. And then the other question was, on the production increase in the fourth quarter, are you talking about an increase relative to what you did in the third quarter or year over year in the fourth quarter?

Third quarter.

Relative to third quarter.

Relative to the third quarter?

Yes, it's a sequential increase.

Right. Okay. Thanks, guys.

Robert Henderson; Rutabaga Capital Management.

Good morning. Could you tell us if you have any update for us on the Genmar bankruptcy and what it might mean for your business or Brunswick's business?

I don't know of any specific update. I know there's been some delays in some of the court proceedings and so forth. And come to think of it, yes, we haven't really heard any -- I haven't heard any anecdotes about who might be buying it or what's taking place, and how it's working through.

In terms of the impact on us, it's -- Genmar, based on looking at their results, certainly they didn't have the margins or the results anywhere near where we have and some of our other larger competitors. It's hard to say. I think that they probably haven't been able to provide as much incentive to help their dealers clear inventory out. So that's something that we'll be -- we'll have to continue to compete with that over the coming months and quarters. So that's certainly going to be headwind there that we can't ignore or can't expect is going to have some impact on us. But we expect, and have seen some indications, that some of their dealers may become disgruntled and maybe want to find other manufacturers to represent. So that certainly would present, I think, a very good opportunity for quality manufacturers.

Okay. Thank you.

Kent Holden; HAM Funds.

Good morning, gentlemen. You talked about the field inventory being the lowest in 13 years. Do you -- can you quantify that, how many units?

We only quantify that, actually, once a year in our 10-K, so we traditionally don't give that out. But it is low. I mean, it's very low.

Yes. We've mentioned here or elsewhere that we had a goal by the end of the third quarter to get it to a certain level and we've exceeded that very nicely. We're proud of that and, again, that's one of the reasons that we have decided to increase our production as much as we have in the fourth quarter, given that opportunity. And we feel very good about that.

And then, that was the next question. How much are we increasing production?

And that's typically -- we don't give those specific numbers, but we're coming off a very, very low base. So it is a significant increase but it's off a low base --

That's right. The percentage is higher, but it's -- (inaudible) small numbers.

Yes. Yes.

How does it compare to production of last year's same quarter?

See, that would be telling you the answer if we told you that. No, we are going to be, continue to --

I don't know what the big secret is, I guess.

Well, it's just our policy, our internal policy, on what we report and don't report. But we, clearly, we feel good about the fact that our inventories are low. We are comfortable increasing production, again, percentage-wise over the third quarter, pretty dramatically. And we are going to proceed cautiously. We're not going to -- we have reduced our headcount now, as we talked about earlier, based on the first question. And so we're going to slowly -- again, percentage-wise it's a big number, but we're going to slowly build things up. We're going to make sure that we maintain the quality. But we want to get the boats to the dealers to support them for the winter boat shows that are coming up. But we certainly don't want to begin -- certainly our floor plan lenders are not interested in rapidly increasing the amount of inventory that's in the field. So we're going to monitor it. And we're going to proceed in a thoughtful manner.

And then, have you set a production schedule for next year?

No. We set it -- we set our production levels actually weekly. I mean, we look at it constantly, but every week or two we make adjustments. So we're only now sort of looking out to the next six to -- and it could be modified. We're only looking out for the next four to six weeks, is really all we're doing. And we're responding to the market. We're responding to the orders we have in hand. And so that's the way we've always managed the business. Again, we only build to firm orders and ones that can be financed as well. It does us no good to build boats based on order, then if the dealer can't take delivery, so. So we're very mindful of that.

And I think we can say that, even with this increased production, we still have a very healthy backlog that will carry us into next year.

Yes. And, again, we know -- again, to remain cautious, though, we understand that we had a backlog of some amount last year when things turned down. And, of course, a lot of that, they were firm orders at the time but they ended up being cancelled. So, but right now, as Rick indicated, we do have a nice looking order backlog and, assuming things don't turn back or people don't become really nervous, it looks promising moving into next year.

Okay. Thank you.

Kurt Frederick, Wedbush Securities.

Hey, good morning, guys. I just had a question on the international business. I'm assuming there's some year-over-year impact from, I guess, FX. So if you're seeing the decline is similar in dollars, does that mean in units it's actually doing a little bit better than the US market?

Well, we don't -- we get cash up front on all the deliveries, so we're really not subject directly to the FX effects. Now, certainly you'd like to think with the weakness in the US dollar that things overseas may pick up more. But, again, things have been weak overseas, continue to be. And as we indicated, sales decline is about the same internationally as it is domestically. So hopefully that's responsive to your question.

Okay.

It may be that, all things being equal, if Europe continues to improve and the dollar remains weak that, yes, we may see some upside benefit. But at this point, coming off the base and where we are operating, that we see no real direct impact from that right now.

Okay. And then just one last question on that -- on the inventory side, I guess. So the increase in production -- are you still planning on, I guess, increasing it to kind of like where retail sales are? Or are you still planning on bringing down inventory even a little bit more?

I would expect field inventory will probably increase some, at this point. Yes, what our dealers are doing -- we will continue to be focused on, obviously, the older field inventory, trying to get that cleared out, working with our dealers. And hopefully it's at a low enough level that they can take care of that in due course. And we're right now -- yes, the dealers are excited about the new 2010 product line. They're interested in getting current product. That's one of the things that -- you know, earlier this year, when we were going through and reviewing the appropriate strategies, we very much wanted to clear out the older inventory, knowing that if we're successful in doing that, there's certainly going to be some demand, I think, for new product. And we've got the new product available to people who -- you know, finally we've got that pent-up demand. And the dealers are excited about that. They want to go in with new product, into the boat show. And that'll probably able to allow them another avenue to sort of differentiate themselves from some of the other brands. So I expect field inventory in the next few weeks will increase some. Because this is still a traditional slow retail selling season as well. So there is some ordering of product, not only to support the boat show, but to prepare for the retail season next year.

We should point out that we're one of the few manufacturers that even had a dealer meeting this year. And we were able to show all of our new 2010 models. And so we think because of that we're off to a great start for 2010.

That's right.

Okay. That's it for me. Thank you.

(Operator instructions.) There are no further questions at this time. Mr. Landers, I'd like to turn the conference back over to you for any additional or closing remarks.

Well, thank you, Mindy. That's it for us. We appreciate people listening to the call this morning, and your questions in the discussion. Everyone have a good day.

That does conclude today's conference. A replay of the conference will be available beginning 10/28/09 at 11:00 a.m. Eastern Time, through 11/4/09 at 11:00 a.m. Eastern Time. To access the replay, please dial 719-457-0820, or toll-free, 888-203-1112. And enter the replay code of 2762840. Thank you for your participation.