Marine Products Corp (MPX) 2018 Q2 法說會逐字稿

Good morning, and good day. Thank you for joining us for Marine Products Corporation's Second Quarter 2018 Financial Earnings Conference Call. This call will be hosted by Rick Hubbell, President and CEO; and Mike Palmer -- Ben Palmer, Chief Financial Officer; and present, Jim Landers, Vice President of Corporate Finance. (Operator Instructions) I would like to advise everyone that this conference is being recorded today.

Jim will get us started by reading the forward-looking disclaimer.

Thank you, and good morning. Before we get started today, I'd 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'd like to refer you to our press release issued today, our 2017 10-K and other SEC filings that outline those risks, all of which are available on our website at www.marineproductscorp.com. If you've not received our press release, please visit our website at www.marineproductscorp.com for a copy.

We'll make a few comments about the quarter, and then 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 second quarter of 2018 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 21.7% during the second quarter, breaking our previous record set in the second quarter of 2005. Net sales increased primarily due to a 13.3% increase in units of boats sold and a 6.9% increase in the average selling price per boat. We continue to be pleased with the market share of all of our product categories. Our Chaparral sterndrive products continue to hold the highest market share in their category, approximately 16.7% for the 12 months ended March 31, 2018. Robalo's market share continues to grow as it is now ranked #3 in the outboard sport fishing category. As a testament to the success of our Chaparral SunCoast outboards, the combination of Robalo and Chaparral outboard models now holds the #2 market share in the 16- to 30-foot fiberglass outboard boat category. We also announced this morning that our Board of Directors, yesterday, declared a regular quarterly dividend of $0.10 per share, consistent with the quarterly dividend issued last quarter. Also during the second quarter, we repurchased 13,434 shares of common stock in the open market.

I will now turn over the call to our CFO, Ben Palmer.

Thank you, Rick. Net sales for the second quarter of 2018 were $87 million, an increase of 21.7% compared to the second quarter of 2017. Higher average selling prices contributed to this increase as well as higher unit sales. Gross profit in the second quarter was $19.5 million, an increase of 19.6% compared to the second quarter of '17. Gross margin during the quarter declined slightly to 22.4% compared to 22.8% in the second quarter of last year.

Selling, general and administrative expenses were $8.3 million in the second quarter, an increase of approximately 10% compared to the second quarter of 2017, due to expenses that vary with higher net sales and profitability, including incentive compensation, commissions and warranty expense. SG&A expenses were 9.6% of net sales during the second quarter of '18 compared to 10.6% in the second quarter prior year. SG&A as a percentage of net sales decreased due to the leverage of higher net sales over several costs that are relatively fixed during the short term.

For the quarter ended June 30, 2018, we reported net income of $9 million. Net income increased by $2.9 million or 46.9% compared to the second quarter of last year. Diluted earnings per share of $0.26 increased by $0.08 or 44.4% compared to the second quarter of last year.

Our net income and earnings per share this quarter were also records, with the previous highest net income and EPS having been recorded in the second quarter of 2005. Contributing to the year-over-year improvement in net income and earnings per share were lower corporate tax rates.

International sales represented 10.6% of total sales during the second quarter compared to 7.1% of net sales in the second quarter of last year. Sales increased in several of our international markets, including Canada.

Along with everyone else in the recreational boat industry, we are closely monitoring developments in international trade. As you probably know, the U.S. imposed a 10% worldwide tariff on aluminum and a 25% worldwide tariff on steel in March. In retaliation, several of our trading partners, including Canada, Mexico and the European Union have recently implemented retaliatory tariffs on many U.S. products, including recreational boats. We believe that there are several potential impacts to our sales and profitability if these tariffs remain at current levels. First, worldwide aluminum prices have increased during the past several months, and we use aluminum in the manufacturing of our products. In addition, we believe that our products exported to Canada, Mexico and the European Union will be less competitive in those markets than in previous periods. To offset this issue is the fact that we have high U.S. domestic demand and a strong order backlog. For the 6 months ended June 30, 2018, approximately 7.3% of Marine Products total net sales were generated from these 3 trading partners.

Our cash and marketable securities balance increased to $27.9 million at the end of the second quarter of 2018, an increase of $6.2 million compared to the second quarter of last year, and an increase of $6.4 million compared to the end of the prior quarter.

Our effective tax rate during the second quarter was 20%, a significant decrease compared to 30.3% in the second quarter of last year. The effective tax rate declined in the second quarter 2018 primarily because of the Tax Cuts and Jobs Act enacted in the fourth quarter of last year. The lower effective tax rate for the second quarter 2018 due to tax reform increased diluted earnings per share by approximately $0.03. As of June 30, 2018, dealer inventories were only slightly higher compared to this time last year, as retail demand remained strong.

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

Thanks, Ben. We're pleased to report record sales, net income and earnings per share during the second quarter, beating our previous record set 13 years ago. Strong consumer confidence, stable real estate values and the strongest employment market in many years are catalysts for a good selling environment for our products. We will be holding our annual dealer conference in a few weeks, and we look forward to introducing our new 2019 models to our dealer network as well as hearing their assessment of consumer sentiment in their individual markets.

Thank you for joining us this morning, and we'd be happy to take any calls you may -- any questions you may have.

(Operator Instructions) We'll now take our first question from Eric Wold from B. Riley.

Yes, I just want to dive a little bit on the tariff issue. Obviously, a little bit of fluid issue, not everything completely known at this point. Anything you would do kind of proactively ahead of full knowledge of the tariffs and kind of the issues, was it more kind of wait and see what the final impact is? And then if it does come in as expected kind of what the current kind of expectation is or kind of rhetoric for the tariffs and kind of the retribution from our tariffs. What could be something you could do to help offset that risk? Would you kind of take more price here in the U.S. [to offset] international? Or are you going to keep those markets as they are?

Eric, this is Jim. It's kind of difficult to say, we've looked at every angle of it, as you mentioned it's very fluid at this point. Canada is one of our largest export markets, as Ben mentioned. And they just put this tariff in place on July 1. So we do not know. We use aluminum in our products -- in the manufacturing of our products. It's not a huge amount though, so that's less of an issue than not being able to export or -- exporting fewer boats, but thank goodness, for strong demand here in the U.S. So that's one quick answer. I'm sorry, we don't have a more complete answer for you.

So can you remind us what the percentage of aluminum is or the cost of...

We don't know. We've actually worked on that. It's hard to know the aluminum content of every component of our boats. We can tell you that our fuel tanks are made of aluminum, and our trailers, that we bought from a third-party, are made of aluminum. We haven't seen an increase in those prices yet, but that doesn't mean it won't happen. Aluminum content and other things, instrument panels, engines, et cetera, we just don't know, we just haven't done that work.

And it's a reasonable -- Eric, this is Ben. That's a reasonable question. We use very little aluminum that we buy directly. I mean, it's really in the components that we buy from our suppliers. And so for us, it's really more of a wait and see, see what the impact is on them and then we'll have those discussions when the time comes. So reasonable question, but we don't yet know what the impact is going to be, and I expect there'll be discussions with a number of suppliers in that regard, and we'll work through it like we do each year.

We will now take the next question from Ronald Bookbinder from IFSS.

Yes, so continuing on the taxes, what percent of the overall cost of the boat do you think that this would increase given that it's only a percentage of the aluminum?

Ron, this is Jim. It's very small. We don't know the number, but it's very small. The largest single component -- the largest single cost component -- let me just give you a point, the largest single cost component in our boats is the engine, and there is some aluminum in that, I'm sure, but very little. So it is a small cost for us. Ben, just mentioned that in the interest of just full disclosure about what we were dealing with.

And like you said, the small percentage of the total cost, (inaudible) I think, it's only going into 7% of your sales, correct?

That's correct. Based on the 6 months -- the last 6 months sales, it represents only 7% of our consolidated net sales. International sales represent a little over 7% -- 7% to 7.5% of our total net sales for the last 6 months. We believe and kind of on the export side that I think there'll be -- I think Eric mentioned this, but I think it's probably going to be the case. There is going to be a lot of sort of wait and see as it relates to international markets, particularly like Canada, I think, they've taken delivery of many of the boats that they've already ordered with their boating season. So I think there is some time to let this shake out. So I think there will be a lot of sort of wait and see. We are not at this point moving aggressively forward to try to figure out ways to -- ourselves to deal with the tariff. We think we have a little bit of time, and hopefully, it'll be resolved in some manner and it'll have minimal impact, but we don't know at this time. And so I think it's just more wait and see and work with our dealers and partners, and hopefully, as Jim indicated and I indicated in my comments, hopefully, U.S. demand will be strong enough to absorb some, if not much of what would otherwise be impacted from our -- these other export sales. We maybe absorb that here in the U.S.

Okay. And the operating cost that continues to expand, what do you think is -- as you continue to get manufacturing leverage, what do you think the potential for the operating margin is over the longer period of time and excluding the tariffs and outside forces?

Well, we talked about record sales back in 2005. Our gross margins in the last several years have been lower than they were back in 2005. I expect we'll continue to strive for better margins and I think with larger boats, we're tending to sell larger boats with higher average selling prices. And -- so I expect there's some upside to our gross margin. We'll continue to manage our cost closely and with our workforce and always working on quality. So I think there is some opportunity to increase the margin and -- but considerably, at this point, it's been vastly on product mix, but we are moving up to the larger boats and that's helpful.

You said there is nothing that can impede you from getting back to the '05 levels that (inaudible) in mix or different that -- the value that you're providing compared to '05?

Right.

And -- all right. Well, terrific. And lastly, as the outboards become more popular than the sterndrives, are you looking at moving the mix of the Chaparrals more toward outboards? Or are you pretty much holding the brand to what it is?

I think, we'll continue to make more Chaparrals with outboards. The sterndrive is -- continues to be okay with us, obviously, a struggle overall. But we'll find that right balance. We think there is additional opportunity in putting outboards and some Chaparral models, and we have some exciting things. We have to share with our dealers here soon. But yes, I see that trend continuing that there will be more models with outboard engines at Chaparral.

We will now take the next question [Louis Moser] from [Mayfax Investors].

Just a -- (inaudible) answered. The overall foreign sales versus U.S. sales are 7% versus 93% in the U.S. or is that incorrect?

No, that's right. We -- in the current quarter, international sales were, I think, it was 10.6%; for the last 6 months, it was 7.3%.

Next quarter is generally a seasonally lower quarter traditionally, is that correct?

Third quarter? Is that your question?

Yes. Third quarter...

Yes, third quarter is the natural -- yes, that's a slower sales quarter. That's correct.

Okay. Based on whatever happens with the export situation to maintain your market, can you raise your prices on retail to recoup whatever is lost on the trade situation?

Tariffs. No, the 3 partners that we talked about at 10%, 15% and 25%, I think, that would be difficult. I'm not -- certainly, it would have some impact that, that's certainly an option that we or our dealers could pass that long to the consumer. But I think it would definitely have an impact on demand in those particular markets. So clearly, we're concerned about that. I guess, we're blessed that international sales -- at this point in time, the international sales are not at that significant of a component of our total sales, much less than it was a number of years ago. So again, we're just hoping it get resolved and maybe there can be some equalization of tariffs between the trading partners and maybe it'll get resolved sooner or rather than later.

(Operator Instructions) As there are no further questions, I'd like to hand the call back over to your host for closing remarks.

Thank you, Marion. Thank you, everybody, who called in and for the questions. We hope everyone has a good day. Talk to you soon. Thanks.

The conference call will be replayed on www.marineproductscorp.com within 2 hours following the completion of the call. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.