Marine Products Corporation
Q1 2013 Earnings Call Transcript

Published: 24 Apr 2013

[Operator:]

Good morning, and thank you for joining us for the Marine Products Corporation’s first 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, this conference call is being recorded. Jim will get us started by reading the forward-looking disclaimer.

[Jim Landers:]

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, the 2012 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 for any reason, 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’ll turn the call over to our President and CEO, Rich Hubbell.

[Richard Hubbell:]

Jim, thank you. We issued our earnings press release for the first 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 17% during the first quarter compared to the first quarter of 2012. Net sales improved because Marine Products sold 12% more boats in the first quarter of 2013 than the first quarter of last year. And the average selling price for our boats was almost 3% higher. The unit sales and average selling price increased due to higher unit sales of our larger Chaparral boats and Robalo Offshore fishing boats, including the new value-priced models. Our gross profit increase slightly during the quarter. Gross profit increased during the quarter by slightly less than 2% but our gross profit as a percentage of net sales was lower in the first quarter than last year. Operating profit declined by 28% compared to the prior year due primarily to higher to SG&A expenses. Our diluted earnings per share for both the first quarter of 2012 and 2013 were $0.04 per share. Our continued success with the value-priced Chaparral and Robalos, as well as strength in selected larger boats, is allowing us to maintain the market share gains that we achieved last year. Market share data for the 12 months ended December 31, 2012 show that Chaparral maintained it's number three position in the 18-35 foot sterndrive boat market with the market share of 11.6%. Yesterday our board of directors voted to issue to our shareholders a $0.03 per-share dividend this quarter. With that overview, I will turn it over to our CFO, Ben Palmer.

[Ben Palmer:]

Thank you, Rick. For the quarter ending March 31, 2013 we reported net income of 1.4 million and 11.2% decline compared to 1.6 million last year. Our diluted earnings per share for the quarter were $0.04 in both the first quarters of ‘12 and ‘13. Our unit sales to dealers increased by 12.3% compared to last year. Unit sales of our new value-priced Robalos for fishing boats increased significantly during the quarter compared to one year ago. In addition, unit sales improved for our new larger Chaparrals such as the 257 and 277 SSX models and the 244 Sunestas and Xtremes. Average selling prices also increased during the quarter compared to the prior year. The 2.9% increase in average selling prices is due to the changes in model mix, which I just mentioned. This quarter gross profits are 7.1 million, an increase of less than 2% compared to the first quarter of 2012. Gross margin in the first quarter of 2013 was 16.1% compared to 18.5% last year. Gross margin declined due to the lower margins generated from our valued-priced boats coupled with higher employment costs during the quarter. Selling, general, and administrative expenses increased by 14.1% in the first quarter 2013 compared to the prior year and were 12.7% of net sales. These costs increased due to expenses that vary with sales, such as warranty expense and sales commissions. The decrease is a percentage of net sales of 13.1% last year. U.S. domestic net sales increased by 17.7% in the first quarter of 13 compared to the first quarter of last year. International sales comprised 22% of consolidated net sales in the first quarter of 2013, essentially, unchanged compared to 22.5% last year. Sales to our Australian dealers continued to be strong, but sales to dealers in Western Europe remain weak. Interest income during the first quarter was 149,000 a decrease compared to 239,000 in the first quarter of '12. This decrease was due to a lower marketable securities balance during the first quarter as compared to the prior year as we liquidated a portion of our marketable securities to fund our special year-end 2012 dividend. Marine products income tax provision during the first quarter was 172,000 compared to 660,000 in the first quarter of 2012. This large favorable variance was due the retroactive extension of tax credits attributed to 2012 that were recorded in the current quarter totaling approximately $245,000. For the remaining quarters of 2013 we projected our effective tax rate will be approximately 28% to 30%. Our balance sheet remains strong. Our cash and marketable securities balance grew from 38.6 million at the end of 2012 to 43.6 million at the end of the first quarter, an increase of 5 million. Inventories increased slightly compared to the first quarter of 2012 due to higher material requirements resulting from increased production levels, but our accounts receivables were slightly lower compared to a year ago. As of March 31, 2013 our dealer inventory in units was higher than at the end of the fourth and first quarters of 2012, but remained at comfortable levels given the fact that retail sales are stronger this year compared to a year ago. Unit order backlog remains strong and it's slightly higher than at the end of first quarter of 2012. We are comfort with our production levels at the present time, but will be monitoring them closely as the retail selling season progresses. Now turn it back over to Rick for a couple of closing comments.

[Richard Hubbell:]

Thanks, Ben. We're pleased to be participating in what appears to be a steady recovery in the recreational boating industry. As our larger Chaparral models join the value priced models in garnering customer attention, we are gratified by our double-digit market share and strength in most of our product offerings. The keys to our growing market share and financial success are quality products and customer satisfaction and we are focused on these objections as our model mix varies and production levels grow. We believe the profitability should improve as we adjust our processes to these new production levels, although we know the labor costs increases have impacted our recent profitability. We have a favorable outlook for the remainder of this retail selling season. March retail sales for the industry seem to have been somewhat soft, but we believe the softness was weather related rather than an indicator of weakness in the recreational boating market, however, we will continue to monitor dealer inventories and order backlog during the second quarter. At Marine Products we are always looking for market expansion opportunities which will leverage our manufacturing expertise and strong dealer network. We will soon be announcing a new product line with an expected model introduction in 2014. We are excited about it and believe it will continue our tradition of high-quality, appealing recreational boating products. I'd like to thank you for joining us this morning and we'd be happy to take any questions at this time.

[Operator:]

(Operator instructions). We’ll take our first question from Jim Baker, B. Riley & Co.

[Jim Baker:]

Good morning. Thanks for talking my questions. I’m just interested in drilling down a little bit on the gross margin decline in the quarter. Can you maybe give a little – just a little more color as to the puts and takes there? I think you mentioned, you know, you attributed that a little bit to the increase in sales of the value-priced product, but ASP was actually positive in the quarter, so can you just help me bridge that gap?

[Jim Landers:]

Sure, Jimmy. This is Jim Landers. And you’re right, those metrics may seem a little bit confusing. The increase in sales in the value-priced boats was due to increases in our Robalo value-priced boats and those carry a higher average selling price, perhaps, than some other boats. And so although the average selling price was higher on those boats, the margin is low because they’re the value-price line. So that’s one thing. Another one regarding cost has to do with employment costs. As we talked about in the fourth quarter, we’ve, you know, we’ve hired more people and that is part of it. Another part of it is that we’ve enhanced our benefits for employees and that has been a drag on margins this quarter as well.

[Richard Hubbell:]

Let me mention, along with that this might come up is that, the large increase in the sales of the value-priced Robalos compared to a year ago is that they were a little bit, in the introduction of those, was a little bit behind the Chaparral H2Os a year ago. So we had a little bit of those sales a year ago but it was introduced a little late in the quarter. So this year we had sort of a full quarter of sales to be recognized.

[Jim Baker:]

So despite, let’s say, a little bit softer start to retail sales here in 2013, you’re not seeing any meaningful increase in promotional activity out there?

[Richard Hubbell:]

Nothing out of the ordinary. That’s an ongoing – everybody loves those and you have to respond with some but not any extra – there’s not any extraordinary promotional or discounting programs going on.

[Jim Baker:]

Okay, and just the last question for me. I’m just interested in your commentary on weather impacting March sales. Anything you can point to specifically there that kind of leads you to that view? Are you seeing stronger sales in Southern markets where weather is less of a factor or anything kind of specifically you could point to?

[Richard Hubbell:]

Jimmy, yeah, in the – well, where you live, the Upper Midwest, it’s been – it’s been rainy and cold and I guess snowing during the first quarter. March retail sales, you know, per the industry reports are down a little bit. It tends to have been in the Northeastern and Upper Midwestern markets, a comment, which frankly we’re just kind of repeating from industry sources is that weather impacted those retail sales.

[Jim Landers:]

And even in the south, we’ve seen a cooler and certainly rainier spring than we have in the past.

[Richard Hubbell:]

Yeah.

[Jim Baker:]

Okay, thanks very much.

[Operator:]

Moving on, we’ll take our next question from Aaron Syvertsen from Sidoti & Co.

[Aaron Syvertsen:]

Hi, good morning.

[Richard Hubbell:]

Hey, Aaron.

[Aaron Syvertsen:]

I had a question on the increase in the average selling price, was that more of a factor of a year-over-year increase in the value-priced models or is that all attributed to the sales of larger models in the quarter?

[Jim Landers:]

Aaron, this is Jim. The answer is actually yes to both. We talked about the Robalos a little bit earlier, unit sales of H2Os, the Chaparral value-priced boats actually declined a little bit. Our largest single unit sales increase was in one of our 26-foot Sportboats that Ben mentioned earlier and that carries a pretty high average selling price, so it was sort of three components of the model mix.

[Aaron Syvertsen:]

Sure. Do you think that’s kind of a sign for the rest of the year that you’re going to see some of those larger boat sales come back, or you know, is that more of a quarter-by-quarter one-off event?

[Jim Landers:]

It’s hard to say. I think those are new boats. They’re very popular. I think they, you know, they’re hitting a great spot, it’s an update to a line – the SSX line that’s been out there and very successful for quite some time, but this is – they are updated so that created some momentum, I think, on its own. We would like to think so but I think it’s one of those, we’ll just have to wait and see.

[Aaron Syvertsen:]

Sure. And then lastly for me, just kind of following up on the employment increase, I think last quarter you put the number out at about a 15% increase in the fourth quarter. Is that number similar that you saw year-over-year from the first quarter?

[Jim Landers:]

I believe it is, Aaron.

[Aaron Syvertsen:]

Is that mostly on the production staff?

[Jim Landers:]

Yes, yes, it’s all production, so you know, revenue-generating folks.

[Aaron Syvertsen:]

All right, great.

[Jim Landers:]

We haven’t hired – we haven’t hired incrementally any additional employees, so with the higher sales, the impact on our results were therefore be lower than they would otherwise be because production levels were similar to where it looks slightly higher in the first quarter and sales levels were higher in the first quarter than they were in the fourth quarter. So the net impact would have been somewhat less, slightly less.

[Aaron Syvertsen:]

Great, thank you.

[Jim Landers:]

Sure.

[Operator:]

(Operator Instructions). We’ll now take our next question from George Kelly, Craig Hallum Capital Group.

[George Kelly:]

Hi, guys. Two quick question for you.

[Richard Hubbell:]

Good morning, George.

[George Kelly:]

Good morning. First wondering, I think you mentioned at the end of the call that there will be a new product line coming in 2014. I was just wondering if you could provide any more detail? I’m just wondering how big of an opportunity that could be, you know, thinking about H2O, will it be a similar thing to – or similar sized opportunity H2O was when you launched that last year?

[Jim Landers:]

That was just a tease. We’re not really going to provide any more information now but it will be coming out, we expect, pretty quickly.

[George Kelly:]

Okay. Thanks, Jim. And then on one other weather-related question too. Have you seen – started to see any positive impact from Sandy, people, you know, starting to go back and – you know, with their insurance checks now starting to go back to market any time soon?

[Jim Landers:]

George, this is Jim. It’s kind of hard to say. Possibly, but nothing is material at this point. Just as a benchmark for you, in the four states affected by Hurricaine Sandy, about 12% of our unit sales came from those four states last year. So it’s a major market for us. A major market, I should say. We haven’t even antidotally I don’t think, heard of, you know, people walking in with insurance checks buying new boats. We haven’t seen that effect yet.

[George Kelly:]

Okay, that’s it. Thank you.

[Operator:]

(Operator Instructions). The call is from George Kelly from Craig Hallum Capital Group.

[George Kelly:]

Hey, guys, yeah, just one quick follow-up for you. The – launching a new line in 2014, does this change your attitude towards acquisitions at all or is that still something that you’re considering? Can you talk at all about that?

[Richard Hubbell:]

I would say, yeah, we are still interested in acquisitions, it’s just that we’re undertaking the effort that we’re talking about here doesn’t mean that we put that off or no longer pursuing it, but as you know, we have been pursuing for quite a while and there hasn’t been any that we’ve been able to successfully convert, but we’re going to keep trying. We’d definitely still like to deploy some of our capital into a favorably appropriate acquisition.

[George Kelly:]

Got you. Thanks.

[Operator:]

At this time, there are no further questions. I’d like to turn the conference back over to Jim Landers for any additional or closing remarks.

[Jim Landers:]

Okay, thank you. We appreciate everyone calling in this morning and questions. We hope everybody has a good day, we’ll see you soon. Bye, bye.

[Operator:]

Thank you. That will conclude today’s conference. We thank you for your participation. The replay of today’s webcast will be available within two hours on the company’s website. Thank you for your participation. That concludes the call. 5