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Marine Products Corporation (NYSE:MPX)

Q3 2008 Earnings Call

October 29, 2008; 8:00 am ET

Executive

Rick Hubbell - President and Chief Executive Officer

Ben Palmer - Chief Financial Officer

Jim Landers - Vice President of Corporate Finance

Analyst

Joe Hovorka - Raymond James

Kurt Frederick - Wedbush Morgan

Rob Henderson - Rutabaga Capital Management

Operator

Good morning and thank you for joining us for the Marine Products Corporation, third quarter 2008 conference call. Today’s call will be hosted by Rick Hubbell, President and CEO and Ben Palmer CFO. Also present, we have Jim Landers, VP of Corporate Finance.

At this time all participants are in listen-only mode. Following the presentation we will conduct a question-and-answer session. (Operator Instructions) I would like to advise everyone that this conference call is being recorded. Jim will get us started by reading the forward-looking disclaimer.

Jim Landers

Thank you, Jean and good morning. Before we get started today, I need to remind everyone that we are going to be discussing things that are not historical facts. Some of the statements that will be made on this call will 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, our 2007 10-K and our other SEC filings that outline those risks; all of which can be found on our website at www.marineproductscorp.com.

If you have not received our press release for any reason, please call us at 404-321-7910 and we’ll forward one to you immediately. This morning we are going to make a few comments about the quarter and then we will be available for your questions.

Now, I will turn the call over to our President and CEO, Rick Hubbell.

Rick Hubbell

Jim, Thank you. We issued our earnings press release for the third quarter of 2008 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.

First, net sales for the quarter decreased almost 40% compared to the third quarter of last year. Unit sales of our new Chaparral, Sunesta Wide Tech. and Xtremes were constant with last year, but sales of our other models declined significantly. Average selling prices per boat also increased in the new Sunesta models, which sort of increased the overall average selling price per boat for the company.

Our gross profit margin of 16.2% was lower than the 21.5% gross margin that we realized in the third quarter of ‘07. Ben will discuss these reasons for that in a few minutes.

Operating income decreased by 79% and our diluted earnings per share decreased by $0.06 or 75%. The retail selling season was very weak and we have serious concerns about the upcoming winter boat show season. The same macro economic and the industry specific factors that have been problems for us over the past three years continue to be in place and have recently deteriorated even further.

During the third quarter and now into the fourth quarter, the credit crisis and turmoil in the financial markets have negatively impacted us as well. The lack of reliable credit availability to both consumers and our dealers has surfaced yet another issue for our industry to overcome. This is the worst environment for pleasure boating during our time as a public company.

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

Ben Palmer

Thanks Rick. A few more details on the financials; for the most recent quarter we generated net sales of $31.6 million, a 39.8% decrease compared to last year. Unit sales declined almost 48% compared to last year as we reduced our production during the quarter in reaction to the weak retail selling season and the level dealer inventories.

Unit sales in our new Sunestas product were maintained compared to last year as Rick mentioned, but declined in all of our other model line. Average selling prices increased due to the success of our new Sunestas and a favorable model mix of revolver.

Although, international sales in the third quarter increased from 18.3% to 27% compared to prior year, international sales decreased 10.9 percentage points sequentially from the second quarter of ’08. Global economic issues and the increase in the dollar compared to the euro over the last three months had negatively impacted international sales and although international business is strong relative to the domestic business it too is showing signs of slowing.

Gross margin had substantial net sales of 16.2% for the quarter, compared to 21.5% last year. Gross margin decline because of inefficiencies we experienced with the lower production volumes and extension of the retail incentive program that we announced last quarter or a few more months. This incentive is designed to reduce boats in dealer inventory. One small bright spot is that the recent decline in prices for oil and steel and copper should have favorable implications in the future for the cost of raw materials used in the production of our products.

Selling, general and administrative expenses decreased by 36.9% in the third quarter of ’08 compared to the prior year, because many of these costs are variable in nature including incentive compensation which varies with sales and profitability.

Our interest income in the third quarter was slightly higher compared to the third quarter of last year. Our cash and marketable securities balance increased slightly compared to last years and we have the same type of poly liquid investment rate, tax exempt, municipal securities that we had in the third quarter of ’07.

Although, the estimated effective tax rate for the full-year of ’08 is about 30%, the effective income tax rate during the quarter was 58%. This increased because of items that we recognized for financial statement purposes, but not for tax purposes; the most significant of which were non-deductible losses of assets held in a non-qualified benefit plan. Diluted earnings per share for the quarter were $0.03 or 75% decrease compared to $0.08 diluted earnings per share in the prior year.

Now, turning to the balance sheet, we still maintain a healthy and liquid balance sheet. I mentioned that our cash and marketable securities balances were higher than last year. Also inventories decreased by $8.3 million compared to the third quarter of ’07, in line with our lower production volumes and our efforts to reduce our working capital requirements.

Despite the very challenging business conditions over the last 12 months, our total of cash, short-term and long-term marketable securities at the end of the third quarter increased slightly to $57.6 million compared to $56.7 million last year.

We continue to closely monitor our key indicators that we talked about in the past. Dealer inventories are approximately the same as they were at this time last year, which is a direct result for all the hard work and disciplined management of our production levels and our incentive programs. However, we’re watching the statistics as well as order backlog and are prepared to adjust production further if necessary.

With that I’ll turn it back over to Rick.

Rick Hubbell

Ben, thank you. Over the past three years we have worked diligently to support our dealer network, while protecting long-term shareholder value. We will continue to do so in the deteriorating environment in which we find ourselves at the end of the third quarter may require us to consider additional incentive programs to move inventory, additional workforce reductions and temporary plant consolidations. Given that our production levels at the end of the third quarter were lower than the beginning, some of these actions are very positive.

While we are doing things to manage the short-term, we have not lost sight of the goal of supporting our position as a strong company, with a good brand name and solid fundamentals. We have the resources and skill to invest in the development of new products and we have continued to do so most recently with the introduction of Chaparral’s 400 Premiere Sport Yacht in August, as well as redesigned models for the ’09 model year.

As we have reported over the past few quarters and as industry observers have recognized, our new models have been well received in the marketplace. A minute ago Ben mentioned a decline in commodity prices and the favorable impact that it may have in our manufacturing costs.

High fuel prices have been one of the industries major issues over the past three years. If the current decline in fuel prices last into the winter boat show and spring retail selling seasons will no longer have that issue of high fuel prices to dealer.

In summary although we are in the most protracted downturn in anyone’s memory, we are continuing to do the right things and leverage our position as an experienced high quality manufacture with two strong brand names in the pleasure boat business and with the financial prices making daily headlines, there is no better time than today to have a debt free balance sheets and a lot of cash. In summary we are in a good position take advantage of the opportunities when things do improve in this business.

I’d like to thank you for joining us this morning and we’ll be happy to take any question you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Joe Hovorka - Raymond James.

Joe Hovorka - Raymond James

Just one question; you talked about your inventory at the dealer being flat with this time last year. How do you feel about that given that retail sales are down either 40 plus percent? You still want that to be lower still, so production will actually be below retail sales for the next couple of quarters or are how you thinking about that?

Ben Palmer

No, absolutely; we’re always focused on that. Clearly with retail sales much lower than they were at this time last year, we preferred that the field inventory would be lower. So, yes we are again constantly looking at production levels and all things being equal yes.

Joe Hovorka - Raymond James

And then you made a comment in the release about floor plan credit to dealers being less available that have had been; can you comment on that and any changes that have occurred there in the last three months?

Jim Landers

Joe this is Jim. I think probably it’s no surprise to anybody in the past month and a half with all the credit tightening and obviously the floor plan lenders are, yes they have been much more restrictive with floor plan lending that they had in the past and it’s probably a kind of developing situation, that’s probably all we got to say at this point.

We renew those floor plan agreements each year and we are looking at those renewals at this point, nothings finalized to yet, but we certainly have recent to anticipate that the floor plan agreements are going to be more restrictive than they were in the past, but hard to say too much else at this point.

Joe Hovorka - Raymond James

When you say more restrictive, is it higher cost, is it lower availability or lower limits or how are they restricting it?

Ben Palmer

It could be all of those things. Again like Jim indicated, we are currently negotiating and go through that process. As you can imagine, any and all lender with their problems with funding and the increased cost even short-term funding that’s putting pressure on them and so we are having to negotiate hard.

Joe Hovorka - Raymond James

And you negotiate for all of your dealers or most of them?

Ben Palmer

Well, we negotiate the overall floor plan program that our dealers have the choice and elect to participate in, so in essence we do in some respect, but the relationship is between the dealer and the floor plan provider.

Joe Hovorka - Raymond James

How many of your dealers use your floor plan, roughly?

Ben Palmer

I think its probably pretty hard; mid 80% to 90%.

Joe Hovorka - Raymond James

And when does that agreement end and when do you expect it to?

Rick Hubbell

Joe, this is Rick. We have a couple of floor plan providers and those are different contracts and so they have varying expiration.

Ben Palmer

We are looking to try to extend that out, typically the annual we’ve made and go out of this, so yes all that’s being negotiated right now.

Operator

Your next question comes from Rob Henderson - Rutabaga Capital Management.

Rob Henderson - Rutabaga Capital Management

In the fourth quarter, I think you normally have a seasonal downtick in the sales, which you didn’t have last year because it was such a good model year for the new boats, would you expect to have a normal seasonal downtick from the third quarter or even that a greater than normal in the fourth quarter ’08?

Ben Palmer

The latter.

Rick Hubbell

Rob, this is Rick. I don’t think there is anything normal right now going on. So, nothing in the past will dictate what’s going to happen in the future.

Ben Palmer

One thing it is true, yes. It’s always a seasonally slow period, but right now with all of the tremendous uncertainty that’s further down pressure.

Rob Henderson - Rutabaga Capital Management

Okay and is there any sort of rule of thumb you might have for revenues? Like how bad would revenues have to get for say operating margins to get down to the breakeven level; is that something you can tell us?

Ben Palmer

That’s no, its not. We don’t disclose that type of details to the question, but that’s something we are making adjustments very frequently, it’s not they were looking at it. It’s the level that we want to be at, relative to production levels and what we need in this environment going forward. I mean we are trying to look a little bit longer-term and see what we need, but again this is a highly, highly uncertain range.

Rick Hubbell

A lot of it depends on the model mix, because we have so many different models and they have varying gross profit margins. So, a lot of it is not just total revenue, it’s the model mix within the direct total revenue.

Operator

(Operator instructions) Your next question comes from Kurt Frederick - Wedbush Morgan.

Kurt Frederick - Wedbush Morgan

I had a question just on the dividend that your earnings have comedown, the sales kind of gone up. I was wondering if you guys had anything plan to like cut the dividend or your just going to use your cash that’s on the balance sheet and then continue to pay?

Ben Palmer

We’ve had the decision that Board looks at each quarter and now look at again next quarter and so obviously you see that we declared the same dividend this quarter and we will just have to wait and see what the Board decide.

Kurt Frederick - Wedbush Morgan

And then another question on the, like your tax rate that changed for that non qualified plan assets. Is that run through to SG&A like the write-down; is that how that works?

Ben Palmer

It’s a funded non-qualified plan where employees can differ their compensations, so basically the P&L impact is pretax, it’s relatively smaller because both the increase and the decrease is within SG&A, but the asset value change is not a tax event, its excluded from tax.

As of the large decline in the financial markets we had a rather steeping quick decline in the value of the assets and so projecting that out over the total year it’s sort of all, whatever that impact is sort of called out in the third quarter and with the low pretax income it made it look like a big percentage number.

Operator

Your next question comes from Joe Hovorka - Raymond James.

Joe Hovorka - Raymond James

Thanks, just a follow-up on one of the other question. How much of your cost of goods is fixed versus variable?

Rick Hubbell

Cost of goods, direct cost Joe,

Joe Hovorka - Raymond James

Yes right.

Rick Hubbell

Well, I mean I don’t want to sound fluke on it and in the long run, none of it is fixed. In the short run we know the components are kind of hard to get at because there are some “fixed costs” in there; certainly our plant supervisors, there is an overhead allocation things of that nature.

Joe Hovorka - Raymond James

I mean even a rough number, is it 30% variable, is it 60% variable?

Ben Palmer

Its probably 20%.

Joe Hovorka - Raymond James

20% variable?

Ben Palmer

Yes.

Joe Hovorka - Raymond James

And then on the SG&A line, I know there is a lot of a variable numbers in there, but there is also a fixed component on a quarterly basis, what does that run roughly? Like if you have paid none of your profit share or your incentives and the bonuses paid on the profits, is there a core number that we need to look at?

Rick Hubbell

Joe, there’s sort of a few layers of cost there, because some of the things like warranty accruals and things of that nature do vary with sales and I know you know that and I’m just kind of reminding you and the others about it. I mean we have certain public company costs that aren’t compliance costs, that aren’t variable.

Joe Hovorka - Raymond James

You know at some point we’re going to stop expecting…

Rick Hubbell

I think half of the SG&A is fixed, I would say.

Joe Hovorka - Raymond James

How much?

Rick Hubbell

A third to a half, some of the details of this quarter.

Operator

(Operator Instruction) I show no more questions in the queue at this time, sir.

Rick Hubbell

Okay, well we appreciate everybody calling in this morning and thank you for your questions also and have a good day. Thanks.

Operator

This does conclude today’s conference call. You may now disconnect. Thank you.

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Source: Marine Products Corporation Q3 2008 Earnings Call Transcript

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