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Marine Products Corporation (NYSE:MPX)

Q2 2014 Results Earnings Conference Call

July 23, 2014, 08:00 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

Operator

Good morning and thank you for joining us for Marine Products Corporation's Second Quarter 2014 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). I would like to advise everyone that this conference call is being recorded. Jim will get us started by reading the forward-looking disclaimer.

James Landers

Thank you and good morning. Before we get started today I’d like 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, 2013 10-K and our 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 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 this morning and then will be available for your questions.

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

Richard Hubbell

Jim, thank you. We issued our earnings press release for the second quarter of 2014 this morning. Ben Palmer, our CFO, will discuss the financial highlights in more detail in a moment. This time I will briefly discuss our operational highlights.

Our net sales increased by more than 13% during the second quarter due to higher unit sales. We continue to sell a greater number of 307 SSX sport boats, more 21 foot Chaparral H2Os than last year as well as more Robalos. Gross margins improved because of this model mix as well as improved operational efficiencies. Our Chaparral stern drive brand continues to hold number one market share in the category. The latest available data for the 12 months ended March 31, 2014 indicate that Chaparral had a 13.8% of 18 to 35 foot stern drive market. Robalo unit sales have grown at a faster rate than the rest of its segment and has the highest market share as well.

We continue to produce and sell Chaparral’s first Vortex jet boat models during the second quarter. We are happy with our dealers’ and customers’ reception to this new model although our production has not yet reached the levels that meets dealer and consumer demand. The jet boat market is showing strong growth relative to many other pleasure boat segment this year so we are pleased to be participating in this new market segment.

We also announced this morning that our Board of Directors yesterday voted to pay a 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 June 30, 2014 we reported net income of $3 million, an increase of 55.7% or slightly more than $1 million compared to $1.9 million in the second quarter of 2013. Our diluted earnings per share for the quarter were $0.08 compared to earnings per share of $0.05 in 2013.

Unit sales increased during the second quarter of 2013 compared to the prior year among our Robalo’s sport fishing boats and bay boats, our largest Chaparral H2O model and several of our larger Chaparral models such as the 307 SSX. But due to overall higher sales volumes average selling prices were flat compared to the second quarter of ’13. We continue to sell our Vortex Jet Boats during the second quarter. We are pleased with this new model’s potential but we have not yet achieved production levels that are high enough to have a meaningful impact on our financial results.

Gross profit in the second quarter was $9.4 million, an increase of 28.9% compared to the $7.3 million in the second quarter of 2013. Gross margin during the quarter was 19.7% compared to 17.3% last year. The increase in gross margin was generated by production efficiencies resulting from the higher volumes as well as our improved model mix and lower incentives although average selling prices were flat as I just mentioned.

Selling, general and administrative expenses increased by 9.8% in the second quarter of 2014 compared to the prior year and were 11.1% of net sales, approximately the same percentage of net sales as in the second quarter of last year. These costs increased due to costs that vary with sales and profitability such as sale commissions and incentive compensation.

U.S. domestic net sales increased by 16.4% in the second quarter of 2014 compared to the second quarter of last year and international sales increased by 2.8%. International sales comprised 18.8% of consolidated net sales from the second quarter of this year, a decrease compared to 20.8% of consolidated net sales last year. Although international sales increased this quarter for the first time in a while growth in international markets is much lower than in our domestic markets.

Interest income during the second quarter was $121,000, a decrease compared to $178,000 in the second quarter of 2013. Marine Products’ income tax provision during the second quarter was $1,233,000 compared to $725,000 in the second quarter of 2013. The effective tax rate of 29% this quarter was slightly higher than an effective tax rate of 27.3% last year. We believe that our effective tax rate for the full year of 2014 will approximate the second quarter's rate.

Our balance sheet remains strong. Our cash and marketable securities balance increased to $46.9 million at the end of the second quarter compared to $40.9 million at the end of the second quarter of last year. Our cash and marketable securities balance declined by $2.4 million compared to the end of the first quarter due primarily to increased working capital requirements that occurred during the second quarter.

At June 30, 2014 our dealer inventory of Venus was higher than at this time last year but lower than at the end of the first quarter of 2014. Given what we believe to be a strong finish to the retail selling season we are comfortable with dealer inventory levels and order backlog at this time. And we are looking forward to new dealer order flow as the 2015 model year starts and we hold our Annual Dealer Meeting conference.

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

Richard Hubbell

Thanks Ben. We continue to be very proud of Robalo's growth and the success of selected Chaparral models. These factors benefited us during the second quarter and allowed us to generate year-over-year sales growth of almost 14% and net income growth of almost 56%. We also continue to be optimistic about our entrance into the jet drive recreational boat market and note that this year jet boat sales growth is among the highest of any recreational boat category. We are producing higher volumes of these boats as we enter 2015 model year while continuing to focus on the quality that is a hallmark of our products.

The retail selling season this year was compressed because of the long winter and a late spring in many of our markets. While this is mildly disappointing from the point of view of year-over-year financial results we are encouraged by preliminary reports of a good June for retail boat sales. We look forward to the 2015 model year at Chaparral and Robalo and will soon be introducing the 2015 models to our dealers at our Annual Dealer Conference.

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

Question-and-Answer session

Operator

(Operator Instructions). And we'll take our first question from Jimmy Baker, B. Riley & Company.

Jimmy Baker - B. Riley & Company

Hi, good morning. Thanks for taking my questions.

Richard Hubbell

Sure, Jimmy.

Jimmy Baker - B. Riley & Company

So the 13.6% revenue increase, if ASPs were roughly flat, it looks like your production was maybe up by about 120, 125 boats in the quarter, if I have that correctly. So can you just help us maybe frame the contribution from Vortex to those unit gains compared to some of the other models of strength that you highlighted?

James Landers

Jimmy, yes this is Jim on a percentage basis the Vortex sales growth was infinite because last year it was zero and I know you know that because you've done some research on it but just to make sure to everybody else hears that. It was -- as Ben said it did not contribute materially. We've started selling the boat and we've got some good reception but it really did not contribute materially to the second quarter.

Jimmy Baker - B. Riley & Company

Okay. So as you look at the launch curve for that Vortex maybe in real time here in July, where are you at in terms at let's say in annual unit production run rate and where do you think you need to get to in order to satisfy demand?

Richard Hubbell

Now where we need to get is higher than we are right now. Annual production raise is hard to say but I think if you try to annualize second and third quarter you'll get to -- let's say a few hundred which is a small percentage of where we need to be. We really are focusing on quality and getting that both right. We would rather disappoint people by not being able to give them one than disappointing them by giving one that was low quality.

James Landers

Jimmy a little more color on that, what we’ve produced and sold so far is the smaller jet boat and we're coming out shortly with a couple other larger models. So we're looking forward to that and expect those will be with increased margin on the lower increase volumes on the lower -- smaller once and the sales of the larger units we think it will begin to add some nice contribution and we do expect it to pick up and accelerate from here.

Jimmy Baker - B. Riley & Company

Okay, great. And then just on the strength that you're seeing specifically at Robalo, any geographies [schemed] out for you?

Richard Hubbell

Well, as you could imagine Southeast is the strongest and most recently weakest is kind of the Northeast and Midwest again due to the winter and the slow start to the retail selling season. I would say the Southeast we saw a good bit of acceleration and that felt good to us but those other two markets that I referred to it was a real struggle. And I think we really didn't miss out on a lot more opportunity there than we did again in for instance the Southeast market.

Jimmy Baker - B. Riley & Company

Understood. Thanks very much.

Richard Hubbell

Sure. Thanks Jim.

Operator

(Operator Instructions). And it appears there are no further questions at this time. Jim Landers I'd like to turn the conference back over to you for any additional or closing remarks.

James Landers

Okay. Thank you and Jimmy thanks for questions and thanks everyone else who listened in. Hope everyone has a good day and we'll talk to you soon. Goodbye.

Operator

This conference call will be replayed on www.marineproductscorp.com within two hours following the completion of the call. And that does conclude today's conference. Thank you for your participation.

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