Marine Products Corporation
Q3 2007 Earnings Call Transcript

Published: 24 Oct 2007

[Operator:]

Good morning. And thank you for joining us for MarineProducts' Third Quarter 2007 Conference Call. Today's call will be hosted byRick Hubbell, President and CEO, Ben Palmer, CFO and Jim Landers, VicePresident of Corporate Finance. At this time, all participants are in a listen-only mode.Following the presentation, we will conduct the question-and-answer session.Instructions will be provided at that time for you to queue up to ask aquestion. I would like to advise everyone that this conference call is beingrecorded. Jim will get us started by reading the forward-looking statements. Please go ahead, Jim.

[Jim Landers:]

Thanks, operator and good morning. Before we get startedtoday, I want to remind everyone that we are going to be discussing things thatare not historical facts. Some of the statements that will be made on this callwill be forward-looking in nature and reflect a number of known and unknownrisks. I’d like to refer you to our press release issued today, our2006 10-K and other SEC filings that outline those risks. All of which areavailable on our website at www.marineProductsCorp.com.If you’ve not received our press release for any reason please call us at404-321-7910 and we will fax or e-mail one to you immediately. We’ll make a few months about the quarter and then we'll beavailable for your questions. Now I'm going to turn the call over to RickHubbell our President and CEO.

[Rick Hubbell:]

All right. Thank you, Jim. We issued our press release for thethird quarter of 2007 this morning. Ben Palmer our CFO will discuss thefinancial highlights in more detail in a moment. At this time, I will brieflydiscuss our operational highlights. Net sales for the quarter decreased due to lower overalllower unit sales volume, partially offset by an increase in the average sellingprice per boat. The decrease in unit sales continued the trend of lower retaildemand, which began in the fourth quarter of 2005. Average selling prices increased during the quarter inalmost of our different model lines due to a model mix, which included higherunit sales of our largest boats. We continue to see strength in our larger SSiSportboats and our new SSX Sportdecks. Also, our redesigned Sunesta Wide Techsare receiving great feedback from our dealers and customers. Production andsales of these new models will be increasing in the fourth quarter. Our gross profit margins declined during the quarter due toproduction inefficiencies related to lower production volumes. This waspartially offset by price increases, instituted at the model year changeover,which began in the fourth quarter. Marine Products' recent financial results reflect continuedweakness in the recreational boating market. We believe that demand has been impactedby continued high fuel prices, increased insurance costs and a weaker housingmarket. None of which show signs of improvement. At this time I’ll turn it over to our CFO, Ben Palmer.

[Ben Palmer:]

Thanks, Rick. With that, financial overview at this time,for the quarter ended September 30, we generated net sales of $52.5 million,which is an 18% decrease compared to last year. Our unit sales volume decreased24.7% compared to last year, which was partially offset by 7.2% increase inaverage gross selling price per boat. Our SSi Sportboats are our top selling boats by volume, andit performed very well with strength and the larger model. Robalo alsocontinues to benefit from selling its larger models but overall volumes arebeing impacted by these difficult market conditions. International sales remained relatively stronger because ofthe continued weakness in the U.S. dollar. Gross margin as a percentage of netsales was 21.5% for the quarter, compared to 23% last year. This margin declinedue to lower production volumes resulting lower fixed costs and laborabsorption. In addition, we're continuing our long-term strategy ofinvesting in our people and systems, primarily directed to enhance our designand quality capability. Prices for many of the commodities used in themanufacture of our products remain high but have not increased compared to lastyear. Selling, general and administrative expenses decreasedslightly in the third quarter of '07 compared to '06, due to the variablenature of many of these expenses, including warranty, incentive compensationand sales commission. As a percentage of net sales, they decreased from 12.5% lastyear to 12.3% this year. Diluted earnings per share for the quarter were $0.08,a 33% decrease compared to $0.12 diluted earnings per share in the prior year. Our effective income tax rate during the quarter was 40%,which is higher than the 38% during the third quarter of '06. The third quartertypically includes true ups to our tax returns and that increased provision byabout 7 percentage points. Our estimated tax rate is about 33%. The order backlog and field inventory levels are favorablerelative to prior periods and reasonable in light of the current demandenvironment. Order backlogs are up and dealer inventories are down compared toboth the prior quarter and the prior year. With our expectations of positive sales results of our newboat models, along with the reality of an uncertain growth in the industry forthe '08 retail-selling season, we have decided to increase slightly ourproduction levels going into the fourth quarter. We will review the ongoing indications of interest from ourdealers based on the upcoming boat shows and make production level adjust ifits necessary. Our balance sheet remains very strong as we continue to generatestrong cash flow. At the end of the third quarter, we had approximately thesame level of aggregate cash plus marketable securities compared to one yearago. The classification of these balances have changed due to a change ininvestment managers but we still maintain a portfolio of high quality, liquid,low duration marketable securities. Inventory increased slightly, due to the timing of bothshipments together with some volume purchases of certain high dollar componentsnear quarter end and also the purchase of new components to support increaseproduction of the new Sunesta Wide Techs models. As announced a few days ago, we purchased 276,800 sharesunder our open market share repurchase plan. And obviously we have plenty ofliquidity to continue these repurchases as the price and the market conditionswant. With that I'll turn it back over to Rick.

[Rick Hubbell:]

Ben, thanks. Our dealer conferences for the 2008 model yeartook place in late July and early August. Our dealers have confirmed to us thebelief that retail demand is going to continue to be weak. On a more positive note, we are encouraged by the recentinterest rate cuts and another mild hurricane season in the Southeast, whichmake boat ownership less expensive and may boost consumer sentiment. The largeboat shows last month reported slightly higher attendance than last year, whichis also encouraging. For these reasons we are looking forward to the upcomingboat show season and are excited about introducing the new boat models to theboating community. We continue to manage and invest for the long-term at MarineProducts. We are using our financial strength, design talent andmarketing expertise to develop exciting new models for the 2008 model year.Including the entirely new Sunesta Wide Techs model line, as well as the40-foot Chaparral spot yacht, which will be introduced later in the 2008 modelyear. The new Sunesta Wide Techs have been very well received bythe market. Currently, the model line features four new models, which featuresthe patent pending Sunesta Wide Tech hull design which incorporates maximumdeck space and offers other innovative features. We are also featuring two Sunesta Xtreme models, which aredesigned to offer permanent (ph) level wakeboarding experience with new colorschemes, our perfect pass cruise control system, enhanced graphics, waterballast and more. Again, we're extremely excited about all of our new modelsand improvements that we have made in the existing models and we are lookingforward to a warm reception from the boating community. I thank you for joining us this morning and at this timewe’d be happy to take any questions you may have

[Operator:]

(Operator Instructions) Your first question comes from KurtFrederick with Wedbush Morgan Securities.

[Kurt Frederick:]

Good morning, guys.

[Rick Hubbell:]

Hey, Kurt.

[Ben Palmer:]

Good morning.

[Kurt Frederick:]

I just had a quick, I missed the SG&A comments. Can yourepeat those?

[Ben Palmer:]

Yeah, what we said was that our SG&A is downyear-over-year because a lot of those costs are variable with sales. thingslike warranty. So as sales decline, warranty typically declines and we havealso had some recent improvement in quality so the warranty has gone down alittle bit more than it normally would, just a slight amount. Incentive comp is also lower and sales commissions arelower. So as a percentage of revenue, there was a slight declineyear-over-year.

[Kurt Frederick:]

Okay. All right. Thanks. Then I was wondering if you couldjust comment quickly on the health of the dealers.

[Ben Palmer:]

Well, the dealer network is still very strong. They'rehanging in well. Clearly, in this weak environment, there's certainlyheightened concern. But what we have done in this decline in sales as we havealways done in the past is try to carefully manage our field inventory. That's both in the aggregate, but also on a dealer-by-dealerbasis the best we can and we feel like we've done a pretty good job with that.As we had our dealer inventories are down from a year ago down from lastquarter. And because of that situation, and the new models we have,we're actually increasing production because dealers are comfortable with theirlevels of inventory on an overall basis and are accepting of the expectation totake additional deliveries going forward. So I think for us it's in good shape, again, relative to thecurrent industry environment.

[Kurt Frederick:]

Okay. From your comments it seems like you're starting toget slightly more positive as far as the '08 model or the '08 boating seasonbeing incrementally better than '07, is that accurate?

[Ben Palmer:]

Well, I think we are for us. We're not sure that's true forthe entire industry. I think with our new models, we believe that we should dobetter. But I'm not sure the industry in total will.

[Kurt Frederick:]

Okay.

[Ben Palmer:]

So, that will only provide us realistically only a certainamount of upside, if we're in fact able to capture that, just because as Rickindicated, the overall industry continues to be pretty weak.

[Kurt Frederick:]

Right. And I was wondering if you could maybe commentquickly just on your expectations for gross margins going forward, just kind ofhow I guess directionally, though maybe in the '08 year?

[Ben Palmer:]

Well, I mean we don't typically give guidance but our grossmargin, if we're successful with these new models, we expect they will havenice margins. They are relatively larger boats, so that continues our strategyof focusing on the larger boat segment. All things being equal, that shouldhelp us. Increasing production to some extent and going into thefourth quarter, it's really only a slight increase, but all things being equal,that should help us. Another uncertainty that we have to deal with is the priceof commodities. And as we had had indicated earlier, that year-over-year hasstabilized but they still are at very high levels. So depending upon thedynamic of our production volumes and the direction of commodity prices, wecould certainly -- we could have a nice improvement in margin but in thisenvironment, certainly not expecting a large increase.

[Kurt Frederick:]

Okay. Thanks a lot. That's all I have.

[Ben Palmer:]

Thanks, Kurt.

[Operator:]

Your next question comes from Joe Hovorka with RaymondJames.

[Joseph Hovorka:]

Thanks, a couple questions. In regards to the increasedproduction going into the fourth quarter, can you flush out a little bit morewhere you are increasing it, I mean by product line and maybe simple question,why? Sounds bad, but I mean it’s given, you talked about kind ofa pretty negative outlook here. Is there -- are you trying to reduce your backlog?Is it an increase in orders from where you were three months ago? Or what's thereason for the increase?

[Jim Landers:]

Joe, this is Jim Landers. We are increasing production inSunesta Wide Techs because it has been favorably received among the dealers andwe thing there's an opportunity for us there. We are happy with backlogs. They are high has been commentedthey’re higher than they were last quarter and last year. In this environment,we're very happy with that. But we do see an opportunity to get this newSunesta out in the market and that’s why the increase production is coming.

[Joseph Hovorka:]

Got it, okay. Now, if you look at it, I'm assuming you'retalking about increase sequentially or is it a year-over-year increase?

[Jim Landers:]

Sequential.

[Joseph Hovorka:]

Okay. So year-over-year, we're still down on a productionbasis or will be in the fourth quarter?

[Jim Landers:]

Actually, I think it's up slightly as well.

[Joseph Hovorka:]

Oh, will be up slightly, okay.

[Jim Landers:]

Last year, say again that the dynamic of us or managing ourorder backlog and field inventories I think played out, especially fourthquarter last year. Fourth quarter last year was quite weak and we had a prettysignificant reduction in production fourth quarter last year. So our increase sequentially and year-over-year again has tobe compared to that particular quarter. But I would encourage everybody to goto the Chaparral Boat's website and look at that new Wide Tech model, the WideTechs and the extremes. They really are nice looking boats and I think we'll dovery well.

[Joseph Hovorka:]

Okay. And when you're talking about production increases,it's in units, not in dollars?

[Jim Landers:]

Both.

[Joseph Hovorka:]

Both. Okay. And then your backlog I know is a function ofproduction, right, I mean, if your production goes down, your backlog all elsebeing equal would actually inch up a bit?

[Jim Landers:]

We adjust production based on backlog.

[Joseph Hovorka:]

If you look at -- I know the units declined here in thethird quarter was greater than the unit decline in the second quarter? Is theabsolute number of boats in backlog higher than it was at the end of the secondquarter or the end of the third quarter a year ago? Or is it in weeks ofproduction?

[Jim Landers:]

Joe, this is Jim. It's higher than it, just day explicitly.The number of units in our backlog at the end of September was higher than itwas at the end of June.

[Joseph Hovorka:]

Okay. That's good. Okay. That's what I had had for now.Thanks, guys.

[Jim Landers:]

Thanks, Joe.

[Operator:]

Your next question comes from Amy Noel (ph) with Fidelityand company.

[Amy Noel:]

Hi, good morning.

[Rick Hubbell:]

Hi, Amy.

[Ben Palmer:]

Good morning.

[Amy Noel:]

Two questions. I dialed in a minute or two late so Iapologize if this is repetitive. Did you comment on the acceleration in unitsales decline in the September quarter from June and if not, would you mindadding some color?

[Ben Palmer:]

We didn't comment on that.

[Amy Noel:]

Okay.

[Ben Palmer:]

Results for us, you know, good question or appropriatequestion, but it is not always relevant for us. The third quarter always for usis model changeover, dealer inventories, you know kind of wrapping up the prioryear similar years, though it's nothing in particular. It could be the timingof deliveries was a little bit out in the second quarter. I think we tried to get some things out of the way toprepare for model changeover. I think it was just a timing thing.

[Amy Noel:]

Okay.

[Ben Palmer:]

It may have been managing inventories. But, we're where wewant to be. We think we're in pretty good shape at this point.

[Amy Noel:]

And then one easy question. The tax rate seemed like it wasa little bit high?

[Ben Palmer:]

Yeah, that was I just comment on that. That is a tax returnthrough up. It's not a very big number. But when you apply it to the level ofpretax, it increased the rate about seven percentage points above what ourestimated rate is.

[Amy Noel:]

Okay. That's all I had. Thank you very much.

[Ben Palmer:]

Thanks, Amy.

[Rick Hubbell:]

Thank you.

[Operator:]

(Operator Instructions) Your next question comes fromStephanie Haggerty with Register & Akers.

[Stephanie Haggerty:]

Good morning.

[Rick Hubbell:]

Hi, Stephanie.

[Ben Palmer:]

Morning.

[Stephanie Haggerty:]

At least it's raining here.

[Ben Palmer:]

Indeed.

[Rick Hubbell:]

Yeah.

[Stephanie Haggerty:]

I just in most of my questions have been asked, but let mejust ask an overall general question. What particular things are you lookingfor that would make you get more excited about the industry, obviously dealerinventories are a factor. But what other things, macro things?

[Jim Landers:]

Stephanie, this is Jim. Rick alluded to it a little bit. Therecent interest rate cuts are helpful. We believe that approximately 80% of ourbuyers finance their boats, so that's helpful.

[Stephanie Haggerty:]

Okay.

[Jim Landers:]

People that are payment buyers. And here in the Southeast,as you know, we had another mild hurricane season. That's two in a row and thathelps. Florida is a major market for us. And then some sort of easing or atleast resolution to the residential mortgage crisis would certainly be helpful.Southern California is a big market for us, as is Florida. Those places havebeen hit pretty hard.

[Stephanie Haggerty:]

Right.

[Jim Landers:]

Those are the…

[Rick Hubbell:]

And you mentioned, talked about the rain here. Obviouslywater levels in the Southeast are problematic right now. There's a lot ofnegatives right now for the industry.

[Stephanie Haggerty:]

It's a tough industry environment and I think you guys aredoing a great job.

[Rick Hubbell:]

Thank you.

[Jim Landers:]

Thank you.

[Stephanie Haggerty:]

That’s it.

[Jim Landers:]

Okay.

[Rick Hubbell:]

Well thank you. Appreciate.

[Operator:]

Your next question comes from Chris Harrell with CapitalAsset Management (ph).

[Chris Harrell:]

Good morning. I was hoping to hear an update on the Robalo,the progress with Robalo, the potential to pick up new dealers, whether that'smaking any headway, whether your new sales were up, gain in traction.

[Ben Palmer:]

Chris, this is Ben. It continues to be a focus area for us.As I indicated in my comments, some of the larger models at Robalo are doingpretty well but they're certainly not bucking the industry trend by any means. It's a difficult environment and I think in some respectsprobably a little more difficult on those types of boats, industry-wide. So Ithink we're doing the right things. And we think it's going in the rightdirection but nothing meaningful to report at this point.

[Chris Harrell:]

Have you been able to gain any additional dealers this year?

[Rick Hubbell:]

This is Rick. We've gained a few, not anything dramatic, butwe have a couple more on the West Coast that we didn't have this time lastyear.

[Chris Harrell:]

And then I guess in particular, the issues in Florida andCalifornia would presumably particularly more difficult for Robalo?

[Rick Hubbell:]

Because the housing markets 12?

[Chris Harrell:]

Housing market, consumer demand.

[Rick Hubbell:]

That is correct.

[Ben Palmer:]

When you track and compare boat sales to home sales, theytrack just about one for one. And we had somebody do that in California andFlorida and it was a very, very, very close correlation.

[Chris Harrell:]

Okay. Thanks.

[Rick Hubbell:]

Thanks.

[Operator:]

At this time, there are no further questions. I would liketo turn the call back over to Jim Landers for closing remarks.

[Jim Landers:]

Thank you operator. Thanks to everyone for calling in andhave a good day.

[Operator:]

Ladies and gentlemen, this concludes today's Marine Productsthird quarter 2007 earnings conference call. You may now disconnect.