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Marine Products Corporation (NYSE:MPX)

Q4 2013 Earnings Call

January 29, 2014, 8:00 AM ET

Executives

Richard Hubbell - President and Chief Executive Officer

Ben Palmer - Chief Financial Officer

James Landers - Vice President, Corporate Finance

Analysts

Jimmy Baker - B. Riley & Company

Alexander Renker - Sidoti & Company

Joe Hovorka - Raymond James

Operator

Good morning, and thank you for joining us for the Marine Products Corporation's fourth 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 you get us started by reading the forward-looking disclaimer.

James Landers

Thank you, and good morning, everybody. Before I read the forward-looking disclaimer, I'd just like to tell everyone that we're having a rare winter storm here in Atlanta, and all three of us are not in the same place this morning. So we assume technology is going to work, but we ask you to bear with us, in case this call doesn't go as smoothly as we like and as it has in the past.

Before we do get started with our prepared remarks, I need to remind everyone that some of the statements that we'll make on this call maybe 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, 2012 10-K, and our other SEC filings, which outline those risks.

All of these are available on our website at www.marineproductscorp.com. If you've not received a press release for any reason, and would like one, please also visit our website for a copy. We will make a few comments about the quarter this morning, and then will be available for your questions.

Now, I'd like to turn the call over to our President and CEO, Rick Hubbell.

Richard Hubbell

Jim, thank you. We issued our earnings press release for the fourth quarter and full year 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 16% during the fourth quarter. Net sales improved due to a higher number of units sold and an increase in average selling prices due to our model mix. We sold a lot more Robalo sport fishing boats during the fourth quarter as well as our larger Chaparral SSX and Sunesta Sportboats.

Gross margins improved primarily because of the larger Chaparrals carry higher average selling prices and the increased Robalo unit sales, including several of the larger models. Our Chaparral sterndrive brand continues to hold the number one market share in its category. The latest available data for the nine months ending September 30 indicate that Chaparral had a 13.9% market share, an increase of almost 2.2 percentage points compared to the same time in 2012.

We also announced this morning that our Board of Directors yesterday voted to pay regular quarterly dividend of $0.03 per share.

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

Ben Palmer

Thank you, Rick. For the quarter ended December 31, 2013, we reported net income of $2.4 million, an increase of more than 100% compared to $1.1 million in the fourth quarter of 2012. Our diluted earnings per share for the quarter were $0.06 compared to earnings per share of $0.03 in 2012. In the fourth quarter of '13, we benefited from both the volume and prices of boats sold.

Our unit sales to dealers during the quarter increased by 8% compared to last year, due primarily to significant increases in sales volumes of our Robalo sport fishing boats. We also benefited from unit sales growth in several of our new 2014 Chaparral models, which are larger boats that carry higher selling prices and margins. Increased sales of the larger Robalo's and Chaparrals also contributed to higher parts and accessory sales during the fourth quarter.

Gross profit in the fourth quarter was $8.2 million, an increase of 48.2% compared to the fourth quarter of 2012. Gross margin during the quarter was 20.8% compared to 16.2% last year. The increase in gross margin was generated by the sales increase and improved model mix.

On a relative basis, we sold fewer of our lower-price Chaparral H20 this quarter, and the increase volumes of the Robalo and larger Chaparrals that replaced them are higher margin boats. Also we achieved some cost efficiencies from higher production volumes.

Finally, during the quarter we benefited from a targeted volume purchase discount program on selective raw materials. At this time, we do not anticipate any continuing benefits from this program.

Selling, general and administrative expenses increased by 13.4% in the fourth quarter of 2013 compared to the prior year and were 12.5% of net sales. As a percentage of net sales, our SG&A decreased slightly during the quarter. These costs increased due to costs that vary with sales or profitability, including primarily incentive compensation and sales commissions.

U.S. domestic net sales increased by 23.5% in the fourth quarter compared to the fourth quarter of last year, while international sales declined by 20.6%. International sales comprised 12% of consolidated net sales in the fourth quarter of 2013, a decrease compared to 17.5% of consolidated net sales last year. This continues a trend of declining international sales, as many countries continue to experience struggling economies.

Interest income during the fourth quarter was $114,000, a decrease compared to $272,000 in the fourth quarter of 2012. This decrease was due to a lower average marketable securities balance during the fourth quarter as compared to the prior year. We liquidated a portion of our marketable securities balance late in the fourth quarter of 2012 to fund our special yearend dividend, as our average balance was higher in 2012 than in 2013.

Marine Products income tax provision during the fourth quarter was $966,000 compared to $383,000 in the fourth quarter of 2012. For the full year of '13, our effective tax rate was 26%. This included the impact of 2012 R&D tax credit. We anticipate that our effective tax rate during 2014 will be between 27% and 28%. However, the effective rate will be higher if the R&D tax credit provisions for 2014 are not renewed.

Our balance sheet remained strong. Our cash and marketable securities balance increased to $41.7 million at the end of the fourth quarter compared to $38.6 million at the end of the fourth quarter of 2012. At December 31, 2013, our dealer inventory and units was higher than at this time last year, consistent with higher retail sales volumes.

Order backlog is higher as well by a similar percentage and we have increased production to meet this higher level of demand. We are comfortable with our production levels at the present time, given the indications of a strong 2014 retail selling season.

I'll now turn it back over to Rick for a few closing comments.

Richard Hubbell

Thanks, Ben. The overall selling environment for recreational boats continue to improve gradually, as consumer confidence improves and the real estate market stabilizes in many of our markets. In general, we are pleased with 2013's progress and are optimistic about 2014.

And particularly, we continue to be gratified by our industry-leading market share. Preliminary industry sales data for 2013 indicate that the sterndrive fiberglass recreational boat market was weak in 2013, so we are pleased with the markets confirmation of the quality that our product offers.

We're also very proud of Robalo's success. It has become a much larger part of Marine Products and in the past, and we are proud of our product offerings layer and their appeal to the sport fishing market. We have expanded that product offering with a new bay boat. We introduced the 206 Cayman bay boat during the fourth quarter, and expect to introduce the 226 this month and the 246 Cayman this spring.

One of our demonstrated competencies is the enduring ability to be innovative and to develop products that appeal to our customers, as the recreational boat market changes. I believe that the next demonstration of this competency will be with the new Vortex jet boat that we will be introducing during the 2014 retail selling season.

We are going to initially produce three models by 20 foot or 22 foot and a 24 foot version. All of these boats will be true bowriders, which is rare in the jet boat market, and they will offer the best of Chaparrals styling and features. The Vortex by Chaparral will also offer the advantages that jet boats provide, such as more seeding because of the smaller power plant, lively acceleration and better fuel economy at lower speed.

The 2014 winter boat show season is underway. And in general, attendance has been better than last year and the level of interest among the oat show attendees is higher as well.

I'd like to thank you for joining us this morning, and we'd be happy to take any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) We'll go first to Jimmy Baker with B. Riley & Company.

Jimmy Baker - B. Riley & Company

I think you called out a benefit from volume procurement cost here in the quarter that you don't expect to continue. Can you just go over that in a little bit more detail, and if there is kind of a one-time benefit here to Q4, can you help us quantify that?

Ben Palmer

The gross margin during the quarter was over 20%, which has clearly been higher than the other quarters. Without those adjustments, we believe the gross margin is trending a bit higher than it has in the last couple of quarters. But we think there is probably 1.5 percentage point to 2 percentage point impact from those sort of one-time items.

Jimmy Baker - B. Riley & Company

And then, I think you highlighted the lackluster sterndrive market again in the release and talked about it here in your prepared remarks. Any thoughts on how you see that market playing out in 2014 based on with the boat show feedback or other anecdotes? And also with you and others bringing new jet boat product to market, do you see any incremental pressure on the category from jet boats maybe taking some share? And then lastly, on your market share, do you expect to retain your market share leadership in the sterndrive 18 foot to 35 foot category here in '14?

James Lane

Jimmy, this is Jim. Maybe I can take that and then if you want a follow-up, please do. Preliminary sales data indicates that sterndrive engine or the sterndrive boat market was down in 2013 slightly. We think that's because fiberglass sterndrive boats tend to be a little more expensive to buy and to own.

We think that as the economy continues to improve, real estate stabilizes, back to some of Rick's remarks, we think the sterndrive market will get better as people are able or feel comfortable purchasing those slightly more expensive products. You've seen more strength in smaller outboards and aluminum boats and of that nature, which are great products and are less expensive than the typical sterndrive fiberglass boat.

We don't think if, what I heard behind your question was about the jet boat market cannibalizing sterndrives. We don't see that happening. Jet boats are kind of for a different market than sterndrives. You don't take a long trip in a jet boat necessarily. And it offers some advantages that may not matter as much to a bigger sterndrive owner.

So we don't think it's going to cannibalize that. We also think that, it sounds self-serving, but our market share continues to grow. We are building and selling some good products. Part of our financial results this quarter were due to some 2014 models that are selling well and those are sterndrive boats. So we anticipate that will continue. We don't know any reason that it wouldn't at this point.

Richard Hubbell

I have nothing to add to that. That was a good answer.

Jimmy Baker - B. Riley & Company

So just to kind of be clear on the cannibalization or lack thereof of your jet boat line, I know in the release, you talked about mix moving away from the H2O line and that benefit to gross margin. So even though your jet boat offerings are largely incremental I suppose, if there were any overlap with your existing portfolio, it would be in that add to that H2O line. So just to be clear, you're not seeing dealers reduce H2O inventory positions ahead of the jet boat launch at all?

Richard Hubbell

No, I wouldn't read the lower H2O sales. I wouldn't connect lower H2O sales with the coming of the Vortex.

Ben Palmer

I think that's a good observation, but you're absolutely right. The jet boats, we don't expect to make any jet boats, any larger than 24 feet. That's one of the limitations of that power plant. So you're right. The overlap probably wouldn't be with the value priced, H2Os, if there is any. But we believe too, there are differences in a lot of cases, in the dealers between the jet boats and the sport boats.

So we think that if there is any cannibalization, surely, some eye is going to be able to find specific examples where somebody came in, and said, I want a sterndrive, and I got talked into a jet boat. That certainly will happen in some instances, but we don't think it's going to be a mark-to-market change. It's something that's really invisible.

Jimmy Baker - B. Riley & Company

And last one from me. Can you just kind of give us some color on how many dealers you have carrying the Vortex now or that are planning to carry the Vortex, I should say, in '14? And maybe just can you give us shipment cadence or any guidance as to the number of units you expect to ship and is there potential that you could become capacity constrained, if demand is significantly more robust than planned? What kind of upside potential do you have on the capacity side?

James Lane

Jimmy, this is Jim, again. I'll take a shot at that. We are going to start selling the boat, delivering it to dealers, and the height of the retail selling seasons is sort of May, June timeframe. I don't have a good data on how many we are going to produce. I mean we probably wouldn't be going to be talking about how many we're going to produce and sell and what impact it would have.

We do not see ourselves being capacity constrained. I mean just a quick thing to tell you is that in 2005, we built and sold over 7,000 boats. And the same manufacturing plan we have today. So being capacity constrained would be a nice problem, and one that we do not anticipate in the near-term. Do you agree, Rick?

Richard Hubbell

I agree. There is some of our production plans that we have temporarily closed during the down turn that we may have to reopen for this new volume, but we got to be able to do that without any problem.

Ben Palmer

And, Jimmy, as it relates to the dealers that's still developing in terms of the number of dealers, but there has been very enthusiastic perception. And we think those dealers that we want, that we think would benefit from this and would benefit us are quickly signing up and getting on board. So we're excited about that.

Operator

We will go next to Alexander Renker with Sidoti & Company.

Alexander Renker - Sidoti & Company

So I just had a quick question. I know in the gross margin line there, you were breaking up between the bargain discount program and a little bit of a manufacturing leverage. If next year would be a growth year that's analogous to this year, both in pricing and unit sales, how much manufacturing leverage would you expect there from a similar amount of growth?

Richard Hubbell

There would be some incremental improvement, but with the new introduction of the jet boats and some of the other changes that we're making, I wouldn't want to commit to any significant improvement, but there should be some lift there, there should be some lift.

Alexander Renker - Sidoti & Company

And then just one more, what did industry pricing in general look like? The motivation of my question is I'm just trying to ascertain a little bit the impact of sales mix versus general industry price increases being driven by a recovery in demand?

Ben Palmer

This is Ben. I'll touch on that briefly. We have increased some of our retail prices on our boats, typically that cover increases in raw material cost. So from a retail selling price perspective, there has really not been any growth or increase, but we are seeing some improvement or which would be a reduction in the level of incentives that are required. So that too again, it helped the fourth quarter, it's helped the last few quarters and it's at least trending in the right direction. So that in and of itself is helping us and the dealers.

Operator

So we'll go next to Joe Hovorka with Raymond James.

Joe Hovorka - Raymond James

Actually most of my questions been answered, but I just want to clarify, do you think the sterndrive market was down modestly in '13 at retail?

James Landers

Joe, this is Jim. Based on from NMMA data that came out a few weeks ago, the 14 foot to 30 foot sterndrive market, which shouldn't exactly overlap with ours, it indicated that unit sales have declined 10.4%, and that was based on something that came out, I think that was NMMA, or maybe it was just Statistical Surveys. It was Statistical Surveys, an early indication, so that was down. It's a 10.4% in units. And again, that's sterndrive 14 feet to 30 feet, so that's just a flick.

Joe Hovorka - Raymond James

That's the full year?

James Landers

Yes. That's for the full year.

Joe Hovorka - Raymond James

Do you guys know what your retail was or approximately what it was in '13? With the amount of share that you gain, were you up in retail or were you flat?

James Landers

We don't have the actual retail numbers yet. Chaparral was slightly down in terms of retail sales, I believe.

Operator

And there are no further questions at this time. I would like to turn the conference back over to Jim Landers for any additional or closing comments.

James Landers

Celia, thank you. We appreciate everybody you called in and I appreciate the questions. Everyone have a good day. Thanks.

Operator

And that does conclude today's conference. As a reminder the conference will be available for replay at the company's website within the next two hours. We thank you for your participation. You may now disconnect.

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