Marine Products Corp (MPX) 2013 Q3 法說會逐字稿

Good morning, and thank you for joining us for Marine Products Corporation's third-quarter 2013 earnings 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 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.

Thanks, Debbie. Good morning, everybody. Before we get started today, I would like to remind everyone that some of the statements that we will make on this call may 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, the 2012 10-K, and other SEC filings that outline those risks. All of these are available on our website at www.marineproductscorp.com.

If you've not received our press release for any reason and would like one, please visit our website, again, at www.marineproductscorp.com for a copy.

We will make a few comments about the quarter, and then we'll 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 2013 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.

Our net sales increased by a little more than 9% during the third quarter compared to the third quarter of last year. Net sales improved due to higher average selling prices for our boats. Consolidated unit sales were unchanged during the quarter compared to last year.

Average selling prices increased primarily because we sold many more of our Robalo sport fishing boats this year than last year. And the average selling price of these boats is higher than our consolidated Company average.

Gross profit increased by almost 5% during the quarter due to higher net sales. As a percentage of net sales, however, our gross profit declined by 80 basis points during the quarter. Operating profit increased by less than 1% compared to the prior year due to slightly higher SG&A expenses.

Our diluted earnings per share for the third quarter of 2013 were $0.05 compared to $0.06 for the third quarter of last year. The continued strong reception to our new 2013 Chaparral models by our retail customers has been a catalyst for additional increases in market share. The market share data for the six months ending June 30 show that Chaparral moved to a number-one position in the 18- to 35-foot sterndrive boat market, with a market share of 14%. We are very proud of this market share gain, and I'd like to point out that this is the first time we've achieved this number-one position.

Year-to-date data through September are preliminary at this point but continue to reflect a similar market share and number-one position. We also announced this morning that, in addition to our regular quarterly cash dividend of $0.03 per share, our Board of Directors yesterday voted to pay a special year-end dividend of an additional $0.03 per share. This special dividend rewards our shareholders for the continued support of our Company and leaves a strong and liquid balance sheet to pursue strategic opportunities that will enhance shareholder value over the long term.

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

Thank you, Rick. For the quarter ended September 30, 2013, we reported net income of $2 million, a 5.1% decline compared to $2.1 million last year. Our diluted earnings per share for the quarter were $0.05 compared to $0.06 last year.

Our unit sales to dealers during the quarter were essentially unchanged compared to last year. Rick just mentioned that, within our product offerings, we sold a lot more Robalo offshore fishing boats. These models carry higher average selling prices than the Company average in this quarter. The model mix within Chaparral changed within -- Robalo also changed to shift to higher-priced models.

Average selling prices in our Chaparral models increased as well due to model mix and 2014 model year price increases, which began shipping in the third quarter. As a result of this change in model mix, our parts and accessory sales were also higher during the third quarter of 2013 compared to the third quarter of last year.

Gross profit in the current quarter was $7.7 million, an increase of 4.8% compared to the third quarter of last year. Gross margin in the third quarter was 18.4% compared to 19.2% last year. Gross margin declined due to higher employment costs compared to the third quarter last year as we trained new employees.

The impact of higher labor costs was partially offset by lower materials costs as a percentage of net sales, as a shift in model mix to larger boats generates higher margins. Selling, general, and administrative expenses increased by 7.3% in the third-quarter of 2013 compared to the prior year and were 11.8% of net sales compared to 12% of net sales in the third quarter of the prior year.

These costs increased due to higher promotional advertising costs and higher research and development costs this quarter as well as higher costs that vary with sales, such as warranty expense and sales commissions.

US domestic net sales increased by 15.5% in the third quarter of 2013 compared to the third quarter of last year, while international sales declined 19.6%. International sales comprised 13.5% of consolidated net sales in the third quarter of this year, a significant decrease compared to 18.4% of consolidated net sales last year. These declines were primarily outside of North America, as sales to our Canadian dealers declined only slightly.

Interest income during the third quarter was $83,000, a decrease compared to $196,000 in the third quarter of 2012. This decrease was due to lower marketable securities balance during the third quarter, as compared to the prior year, from liquidating a portion of our marketable securities portfolio late last year to fund our special year-end 2012 dividend.

Marine products income tax provision during the third quarter was $877,000 compared to $859,000 in the third quarter of last year. For the full-year of 2013, we currently project an effective tax rate of approximately 25%.

Our balance sheet remains strong. Our cash and marketable securities balance decreased to $43.9 million at the end of the third quarter compared to $62.4 million at the end of the third quarter of 2012, again, due to the special dividend repaid at the end of 2012, which totaled about $20.8 million. Total cash and marketable securities increased by $3 million during the third quarter of this year.

As we announced this morning, that Rick just mentioned, our Board of Directors has declared as $0.03 per share year-end dividend in addition to our regular $0.03 quarterly dividend. We will pay both of these dividends on December 10; to shareholders of record as of November 8. This special dividend will only minimally impact our balance sheet, and our projected cash and marketable securities balance will continue to support our working capital and capital expenditure needs and provide for continued new-model development efforts.

As of September 30, 2013, our dealer inventory in units has increased only slightly compared to the end of the second quarter of 2013. We believe dealer inventories remain at reasonable levels. Unit order backlog remains strong. Order backlog, as expected, is higher than at the end of the second quarter of 2013 and comparable to this time last year. And we are comfortable with our current production levels, given the positive feedback from our dealers toward our 2014 models at our dealer conference a few weeks ago.

With that, I'll turn it back over to Rick for a few closing comments.

Thanks, Ben. As we have discussed before, we believe that the market for our products continues to improve, although slowly. The 2013 retail selling season improved compared to 2012 but fell short of our expectations, due in part to cool, rainy weather in the spring and delayed replacement of boating infrastructure that was destroyed by Hurricane Sandy in the Northeast.

In this retail selling environment, we're very proud of our market share gains. As stated earlier, Chaparral currently holds the number-one market share in the 18- to 35-foot sterndrive boat segment. I believe that this is the result of listening to our dealers and customers and using our financial strength and industry experience to consistently invest in new product development that have produced very appealing products.

We're also pleased with Robalo's recent successes. Robalo unit sales for the third quarter increased almost 50% compared to the third quarter of last year. Robalo is now solidly in the top 10 manufacturers of offshore, sport fishing boats. We held our annual dealer conference during the third quarter, and we are gratified by our dealers' reception to our products for the 2014 model year. The new models presented at the conference included our Chaparral 307 SSX sportdeck, which bridges the gap between our 277 and 327 SSX models.

We are also adding a larger 21-foot Chaparral H2O for the 2014, and at Robalo we're introducing three bay boats. Our first model, the 206 Cayman, is available now, and two larger bay boats will be available in the first quarter of 2014. We and our dealers are excited about introducing these boats to retail consumers during the upcoming winter boat show season.

We continue to work on the development of the Vortex, our new jet boat line that we discussed last quarter. Testing of the initial jet boat designs have been encouraging, and the Vortex will be available for our dealers late in the first quarter of 2014.

We continue to have a good opinion of the market potential for this new fiberglass product line.

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) Jimmy Baker, B. Riley and Company.

Congrats on the quarter and, more importantly, on the market-leading position at Chaparral.

Thanks, Jimmy.

So, you've had a lot of success with the H2O line, and now you're expanding into jet boats, which are relatively low-ASP categories. But, I mean, given the success that you've had there along with the substantial market share gains all the way up to 35 feet, do you think there's an opportunity to extend your line the other direction into higher ASP categories than you currently participate?

Jimmy, this is Jim. That is a weaker market right now, the large boats seem to be. I mean, if you're talking about higher ASPs, you're talking about bigger boats; and that is a weaker market for us. We are there and want to be there, but we're kind of focusing another direction.

That is historically has been our strength. And, again, that segment of the market is weak. I think we still have some very good products. What's selling is the smaller boats and entry-level boats. I think we hit those points of interest by retail consumers very well. That's where we're focused now because we think that's where the growth opportunities are. But we'll continue to monitor the large boats and the demand in that segment, and we certainly can respond.

We've got some awesome boats above the 24-foot, 26-foot range, and I think we would be able to capitalize on that if it did bounce back. But right now we're focused on smaller boats.

We currently have a 42-foot product right now.

That's right. And Jimmy, this may come up later, but one thing with the H2O is that the average H2O buyer is more likely to be a first-time buyer than a buyer of another Chaparral product. So we're bringing people into the market that way.

Then also, the average jet boat buyer is younger than the average sterndrive boat buyer, so we're catching people earlier in their boating lives. And if they have a good experience with their first product, then they'll stay with us throughout their boating career. And we know demographically that that's important as well.

Okay, that makes sense. So the favorable model mix within Robalo, can you just talk about the drivers there? Is that reflective of stronger retail demand and higher-priced offerings there, or more like an inventory adjustment at the dealer level? And then the 50% growth at retail in that line, can you just remind us of the geographic concentration there? Is that more Southeast than East Coast centric?

To answer the latter part, yes, it is more concentrated sort of the Northeast, Southeast, or the coastal areas and not the West for sure. And the -- again, they typically, on a similar size, do carry higher ASPs. And all of this is really relative. Again, we're not -- we're selling a few of the slightly larger Robalos; but, again, we're just having a lot of success with sort of the larger of the entry-level Robalos, and that's really what drove things.

And the 50% increase -- almost 50% increase is wholesale to our dealers. We don't have specific data available on the retail side. But I would think it would be similar, but that is shipments to dealers increased 50%.

Okay, that's helpful. And just overall, at least from the data that we see, it looked like Q3 retail demand really accelerated on an industry-wide basis. Can you just talk about maybe in that critical 18-to 35-foot sterndrive category, what you are seeing on an industry-wide basis in the third quarter? Any regions stand out to you as particularly strong or weak?

Jimmy, this is Jim again. Yes, September was a better month than one would expect, just given the time of the year it is. So we think the market is recovering. But we did better this quarter in the Southeast, the Northeast, and the mid-Atlantic than we would have done last year. So those are the areas of strength for us. And we do feel, again, the third quarter was good.

The second article in the front section of the Wall Street Journal this morning is about this exact subject and how things like motorcycles -- they mentioned boats, particularly, and ATVs have seen a nice surge in sales recently. And -- you know, with consumers who can afford them. So -- but, again, for us it was more the Eastern half of the United States.

And I think, Jimmy, I think a reason for that might be -- and what we can speak more directly to, again, is the shipments to dealers rather than retail sales. But, you know, they tend obviously over time to mirror each other eventually. The Robalos were so strong -- as we indicated, those sales are strongest in the Southeast and the Northeast, so I think that contributed to the strength there. The H2Os are still doing very, very well, but those were really, really strong last year.

So there's kind of a mix in the type of product -- the new product that came out. And, again, the Robalos themselves were very, very strong, which results in strong distribution into the markets that we indicated.

That's really helpful. Thanks. So lastly, I just wanted to dive a bit into margins and I'll pass it off. Do you see any opportunity to take some price increases here to help offset the higher employment costs? And I guess just any general comments on gross margin trajectory going forward. And then, just separately, you called out, I think, higher advertising costs and SG&A. Can you just talk about what you're doing differently or more out there and how we should think about that spend going forward?

Well, Jimmy, on margin progression, I mean, it's lower than it has been. Volume will help us because of direct cost absorption, so the more volume we do -- we feel really good about the jet boats, for example. More volume we do, that will help.

We've got some bigger boat sales -- I mean, slightly bigger, in the third quarter, so that has helped our materials costs as a percentage of net sales.

We did have -- we have had some model year price increases that have gone through and done pretty well. So there might be a little bit of opportunity there. But any margin progression we see is going to be based on those factors, and its upward trend in margins is going to be slow. It's going to be slow.

Advertising -- you know, we've got some new products out there, and I think that's part of the -- we're helping our dealers as much as we can, so I think that's part of the advertising.

Yes, the margins -- obviously, we're working on those very diligently. We think with the new jet boat, the Vortex, we hope to achieve some pretty good volume there. We think we'll be able to leverage some of our manufacturing space and overhead with that additional volume. So we think that -- you know, we talked about that being delivered, we expect, late in the first quarter of next year.

So mid to late next year, hopefully, we'll see, all things being equal, some margin improvement there. And that's really -- again, that's one of the main reasons for the increase in headcount now is to prepare for that particular ramp-up in production for those boats.

Okay great. Thanks.

And the promotion -- I'm sorry. Yes, about promotions, it did change SG&A a bit. There's nothing in particular different than we're doing. We are trying to help ourselves and help our dealers by investing more in promotional activities in magazines and other things. And we have Internet advertising and things like that, but nothing in particular. Reasonable question, but nothing in particular that's driving it.

Okay. Thanks a lot for the time. It's very helpful.

Thanks, Jimmy.

(Operator Instructions) With no other questions in queue at this time, I'll turn it back to Jim Landers for closing remarks.

Okay Debbie, thank you. Thanks to the people who called in this morning. We enjoyed the discussion. Hope everybody has a good day.

Ladies and gentlemen, thank you for your participation. This does conclude today's conference. I would like to remind callers that the conference will be replayed on the website within two hours following the completion of today's call. Thank you for your participation. Have a great rest of your day.