Marine Products Corporation
Q2 2013 Earnings Call Transcript

Published: 24 Jul 2013

[Operator:]

Good morning, and thank you for joining us for the Marine Products Corporation’s second 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. [Operator instructions.] Jim will get us started by reading the forward-looking disclaimer.

[Jim Landers:]

Thanks, operator, 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 our 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’ll turn the call over to our president and CEO, Rick Hubbell.

[Richard Hubbell:]

Jim, thanks. We issued our earnings press release for the second 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 almost 10% during the second quarter compared to the second quarter of 2012. Net sales improved because the average selling price of our boats was approximately 8% higher than the second quarter of last year. Also, our parts and accessories sales were higher in the second quarter of 2013 than the second quarter of last year. Average selling prices increased because we sold more of our larger boat models within the Chaparral H2O and SSX lines and more of the larger value price for [unintelligible] models. Gross profit was essentially flat during the quarter. As a percentage of net sales, our gross profit declined by 170 basis points during the quarter compared to the prior year. Operating profit declined by 10% compared to the prior year due to slightly higher SG&A expenses. Our diluted earnings per share for the second quarter of 2013 were $0.05 compared to $0.06 in the second quarter of last year Our continued success with the value priced Chaparral models as well as strength in the new midrange boat models has been a catalyst for additional increases in market share. The recently reported market share data for the three months ended March 31, 2013 showed that Chaparral moved to a number two position in the 18-35 foot stern drive boat market, with a market share of 13.9%. Yesterday, our board of directors declared a regular quarterly dividend of $0.03. With that overview, I will now turn it over to our CFO, Ben Palmer.

[Ben Palmer:]

Thank you, Rick. For the quarter ending June 30, 2013, we reported net income of $1.9 million, an 11% decline compared to $2.2 million last year. Our diluted earnings per share for the quarter was $0.05 compared to earnings per share of $0.06 in 2012. Our unit sales to dealers during the quarter were essentially flat compared to last year, decreasing by only 0.6%. Rick just mentioned the models which generated unit sale increases, specifically as related to the redesigned 257 and 277 SSX models. These increases were offset by unit sales declines in some of our smaller models. Also, we experienced lower unit sales in two of our Sunesta and Sunesta Xtreme models due to delays in shipments from a vendor of critical components. Cruiser unit sales were flat compared to the second quarter of last year. Average selling prices increased during the quarter compared to the prior year. The 8.1% increase in average selling prices is due to favorable changes in model mix, which we mentioned earlier. Parts and accessories sales also increased during the second quarter as compared to the prior year, consistent with sales of larger models. This quarter’s gross profit was $7.3 million, an increase of less than 1% compared to the second quarter of last year. Gross margin in the second quarter of 2013 was 17.3% compared to 19% last year. Gross margin declined due to higher employee headcount and the cost of employee benefit improvements as a result of enhancing our production workforce. We expect this will lead to improved construction quality, lower warranty costs, and higher customer satisfaction. The effect on the gross margin of these cost increases was partially offset by lower materials costs due to a more favorable model mix in the second quarter of this year compared to last year. Selling, general, and administrative expenses increased by 6.6% in the second quarter of 2013 compared to the prior year and were 11.4% of net sales. These costs increased due to expenses that vary with sales such as our warranty expense and sales commissions, but decreased slightly as the percentage of net sales, which were 11.8% last year. U.S. domestic net sales increased by 12.5% in the second quarter of 2013 compared to the second quarter of last year. International sales comprised 20.8% of consolidated net sales in the second quarter of 2013, decreasing slightly compared to 22.7% of consolidated net sales last year. Sales to our Australian dealer continued to be particularly strong, but sales to dealers in Western Europe were weaker than last year. Interest income during the second quarter was $178,000, a decrease compared to $253,000 in the second quarter of 2012. This decrease was due to a lower marketable securities balance during the second quarter versus the prior year as we liquidated a portion of our marketable securities at the end of 2012 to fund our special year-end dividend. Marine Products income tax provision during the second quarter was $725,000 compared to $840,000 in the second quarter of last year. For the remaining quarters of 2013, we project that our effective tax rate will be approximately 26% to 28%, which will represent a 2013 full year effective tax rate of approximately 24%. Our balance sheet remains strong. Our cash and marketable securities balance decreased to $40.9 million at the end of the second quarter compared to $58.7 million at the end of the second quarter of last year, again due in part to the special dividend we paid at the end of 2012 totaling approximately $25 million. Compared to the first quarter of 2013, total cash and marketable securities decreased by $2.7 million due to seasonal working capital requirements. As of the end of the second quarter, our dealer inventory in units was substantially lower than at the end of the first quarter of 2013. Dealer inventory remains at comfortable levels given the fact that our retail sales have been steadily improving compared to a year ago. Unit order backlog remains strong and substantially higher than at the end of the second quarter of last year and the first quarter of this year. We are pleased that the vast majority of our current unit order backlog represents 2014 models, which indicates that our dealers are enthusiastic about the upcoming model year. We are comfortable with our production levels at the present time, but as always we will continue to monitor retail sales and dealer inventories as we hold our annual dealer conference in a few weeks and then prepare for the new model year. And now I’ll turn it back over to Rick for our closing comments.

[Richard Hubbell:]

Thanks, Ben. We continue to believe that we are operating in a selling environment for our products that is steadily though slowly improving. Improved consumer confidence, a recovering real estate market, and a more favorable consumer lending environment are all contributing to the improvement in sales of consumer discretionary products such as ours. Having said that, the 2013 retail boat selling season was slightly disappointing. We attribute part of this disappointment to the cool, wet spring in many of our markets, and believe that the shortened 2013 boating season may have caused potential boaters to defer their purchases. We also believe that the delay in replacing the boating infrastructure in the Northeast, which was damaged by Hurricane Sandy, may have hindered sales in some of our important Northeast markets. However, we are very happy about our continued market share gains and believe that this success is a validation that we are continuing to build high-quality, stylish products that appeal to retail boat consumers. During the second quarter we announced that we will be introducing a series of recreational jet boat models for our 2014 model year. We have executed a supply agreement for a high quality, proven engine from Bombardier Recreational Products for these boats and are excited about the opportunity to introduce Chaparral’s quality and styling to the new market. We are also hopeful that this product will expand our customer base because the typical jet boat buyer is younger and more likely to be a first-time boat buyer than the buyer of a stern drive boat. As with the Chaparral H2O models that were introduced several years ago, we believe that this product line will leverage our strong dealer network and increase the number of boaters who choose our products to serve their needs throughout their boating lifetimes. Also for the 2014 model year, we are developing a bay boat version of our popular Robalo offshore sport fishing boat. This boat features the same styling and functionality of our Robalos, but will be more suitable for fishing in slow water bays and on inland waterways. We are excited about this new product extension as well, and we look forward to our dealers’ reception to this new model line at our annual dealer conference next month. I’d like to thank you for joining us this morning, and we’d be happy to take any questions you may have.

[Operator:]

[Operator instructions.] We’ll hear first from Alexander Renker with Sidoti & Company.

[Alexander Renker:]

So unit sales were flat in aggregate, a little bit of a shift to higher priced boats versus lower priced. So was there a decline in sales of lower priced models slightly?

[Ben Palmer:]

We did mention that briefly, and that is the case. I think some of that’s timing. It was so strong one year ago, because it was right after the introduction of the H2Os.

[Alexander Renker:]

And then on the higher priced models, what’s the interest rate sensitivity there in terms of the financing environment?

[Ben Palmer:]

You know, we’re one step removed from that. The cruiser market, for everyone, including us, has been flat, continues to be flat. That might perhaps be somewhat more impacted by that because of the larger models. Anecdotally, I think a lot of people have been even paying cash for their boats. And we’re very pleased with the styling of these particular boats, and perhaps that’s overcoming any other sensitivities that might be out there.

[Operator:]

[Operator instructions.] And we do have another question from Kevin Ruth with Raymond James.

[Kevin Ruth:]

I’m wondering if you could talk a little bit more about the market share gains that you’re seeing out there. Do you have a sense of where the gains are coming from, if you think it’s more the fourth and fifth largest player? Or is it more the first and second player?

[Jim Landers:]

It seems to be a little bit of both. It does seem to be from some of the bigger players, where we’re taking market share. Just looking at the data.

[Kevin Ruth:]

Did you guys say what retail was up in the quarter?

[Jim Landers:]

No, we haven’t disclosed it. There are a lot of estimates out there including yours about what retail sales were in the quarter and I think they’re all pretty good.

[Operator:]

And at this time, we have no further questions. I’d like to turn the conference back over to Mr. Jim Landers for any additional or closing remarks.

[Jim Landers:]

Okay, thank you. We appreciate everybody calling in this morning, and we appreciate the questions. Hope everybody has a good day. Thanks again.