Marine Products Corporation Q2 2008 Earnings Call Transcript

| About: Marine Products (MPX)

Marine Products Corporation (NYSE:MPX)

Q2 2008 Earnings Call

July 23, 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

Kurt Frederick - Wedbush Morgan Securities, Inc.

Brandon Taylor – Raymond James

[Paul Flenet] - Stevens Incorporated

Operator

Welcome to the Marine Products Corporation second quarter 2008 conference call. Today’s call is hosted by Rick Hubbell, President and CEO and Ben Palmer CFO. Also present with us, we have Jim Landers, VP of Corporate Finance.(Operator Instructions)

Jim will get us started by reading the forward-looking disclaimer.

Jim Landers

Before we get started today, I would like to remind everyone that we are going to be discussing things that are not historical facts. Some of the statements that we 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 are available 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 will fax or e-mail one to you immediately.

We will make a few comments about the quarter this morning and then we will be available for your questions.

At this point I will turn the call over to our President and CEO, Rick Hubbell.

Rick Hubbell

We issued our earnings press release for the second 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 18% compared to the first quarter last year. This was due to a 25% decrease on the number of boat sold during the quarter, firstly offset by 7% increase in the average selling price per boat.

Unit sales of our new Chaparral, Sunesta Wide Tech. and Xtremes were much higher than the unit sales of the old Sunesta model. But unit sales of our other models declined significantly compared to last year. Average selling price per boat also increased dramatically in the new Sunesta model. Our gross profit margin of 20% was lower than the 22% gross margin that we realized in the second quarter 2007. Ben will discuss the reasons for that in a few minutes.

Operating income decreased by 37.2% and pre - tax income decreased as well. Net income decreased by little over 26% and our diluted earnings per share decreased by $0.03 or 21%. The retail selling season was very weak. Fuel price has escalated during this year’s retail selling season and made daily news headlines which, of course, kept this issue dominant in boat consumers’ mind. The declines in residential real estate increased in our especially acute and important boating markets. This is the worst environment for our business in our time as a public company and the worst time in the recreational boating business that most industry veterans can remember.

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

Ben Palmer

For the quarter end June 30, 2008 we generated net sales worth $55.7 million that is 17.9% decrease compared to a year ago. Our net sales declined by 24.8% compared to last year as we reduced our production during the quarter in reaction to the weak retail selling season and the result in increase in the year-end inventories. Unit sales increased in Sunesta products, as Rick mentioned but declined in all of our other model line. Average selling price increased due to the success of our redesigned Sunestas as well as slightly higher average selling prices in our Chaparral signature cruise ships.

Because of weakness in US dollar international sales comprised 37.9% of consolidated net sales this year compared to 29.7% in the second quarter of 2007. Our international business is strong relative to our domestic business but we believe that this too is showing signs of flawing. Gross margin as a percentage of net sales was 19.8% for the quarter compared to 23% last year.

Gross margin declined because of the inefficiencies we experienced that lowered production volumes and the extension of the retail incentive program that we announced last quarter for a few more months. And as we have discussed last quarter this incentive is designed to try to reduce both in the year-end inventory which will eventually help generate additional orders of our nine models.

Selling, general and administrative expenses decreased by 16.4% in the second quarter of 2008 compared to the prior year due to the variable nature of many of these expenses, including the incentive compensation which varies with sales and profitability as well. Our interest income in the second quarter was roughly equivalent to the second quarter of last year. Our cash and marketable securities balance was similar to last year as well and we still have the same type of short-term tax exempt securities that we had a year ago.

Our effective income tax rate during the quarter was 22.6% which is lower than the 31.1% during the second quarter last year. The effective rate was lower primarily because taxes on interest on marketable securities in the second quarter of 2008 was higher in relation to our pre-tax income.

Diluted earnings per share for the quarter were $0.11, a 21.4% decrease compared to $0.14 diluted earnings per share in the prior year. Our average share count was lower resulting from the open market repurchases we have made over the past 12 months but this did not impact the calculated the diluted EPS during the current quarter.

Turning to the balance sheet, we still maintained a healthy and liquid balance sheet. Inventories decreased by $7.7 million compared to a year ago due to lower production volumes and because of our efforts to try to reduce our working capital requirement. 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 second quarter increased to $60.7 million compared to $57.8 million at this time last year.

We continue to closely monitor our key indicators; our daily inventories are higher than last year and our order backlog is lower and at this time last year. This symmetric are among the main drivers behind our decision to extend our retails incentive programs and continue lowering our production levels until we see tangible evidence and improvements in retail demand.

With that I will turn it back over to Rick for a summary.

Rick Hubbell

The retail selling season is approaching its end in many parts of the country and as we have stated, it was very weak. Our dealer meeting will be taking place in the next few weeks and as always it is an important opportunity for us to assist upcoming dealer demand. However, we are not very hopeful about dealer and consumer demand until at least the winter boat sale season begins in the fourth quarter. I feel prices and economic weakness continue to make daily headlines.

Uncertainty about the upcoming Presidential Elections and continued falling home prices in most parts of the country compound the negative headline and forced consumers be very cautious about large discretionary purchases such as pleasure boats. Against this negative backdrop we continue to be pleased with our position in the industry and our ability to generate positive net income and generate cash in times such as these.

We have recently announced that the largest of our popular new Sunestas won the Power Boat Magazine Boat of the Year Award. We also learned recently that Chaparral and Robalo received the National Marine Manufacture’s Association Customer Service Index Award which are given based on customer feedback to product and service quality. This recent recognition is confirmation of our ability to build quality products with appeal to boaters.

I would like to comment briefly on some preliminary boat unit sales data that we have mentioned in our press release. While the data are preliminary, they indicated tremendous decline in sales this year. Some of the large boating States such as California and Florida are much lower than the national average which is negative for our company because of our presence in these markets. One bright spot on the check is that our Chaparral brands seems to be holding its own and in fact has gained some market share but in general the available retail fees fails data point to a continued weak market.

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

Question-And-Answer-Session

Operator

(Operator Instruction) Our first question comes from the line of Kurt Fredrick

Kurt Fredrick – Wedbush Morgan Securities, Inc.

Hey. Good morning guys.

Rick Hubbell

Hey Kurt

Ben Palmer

Good morning.

Kurt Fredrick – Wedbush Morgan Securities, Inc.

I wonder if you could expand a little bit on what you are seeing in the international market. It is like you see a little bit of slowing of sales in the regional, it is like Europe or Asia. What do you see in there?

Ben Palmer

This is Ben. It is a reasonable question. Our international sales possibly being getting up in the 30% is pretty significant but in terms of our regional we really do not have great coverage throughout the international market everywhere so I do not know if there is any particular areas that we would comment on at this time that this has shown particular weakness so the we would have enough data point to really be able to provide you any good answer there.

Kurt Fredrick – Wedbush Morgan Securities, Inc.

Okay. I am turning a little bit to the rebate program. How effective that is in clearing out the prior model year boats? Are you going to have those pretty lowered down do you think by the end of this summer or is it going to carry over in the next year?

Ben Palmer

That is really hard to say. As we have tried to indicate and I think there are a lot of evidence since it is a very, very difficult environment. We have never in our certain public company history ever had to have a retail incentive program in the first or in the second and third calendar quarter like this. So, it is sort of unprecedented. It is hard to say. We have designed to try to achieve that and I think this is going to take some time whether how long that will take you and again, it is pretty uncertain right now.

Kurt Fredrick – Wedbush Morgan Securities, Inc.

Talk a little bit on the magnitude of how much year end inventories are up over the prior year?

Ben Palmer

I would say single digits. That was not up tremendously but clearly it was sales being down we will prefer that inventories to be certainly flat or down at this point but they are in up in high single digit.

Jim Landers

Hey, Kurt. It’s Jim remember and as you know, that is one of out main metrics so we watch that very closely and are pleased with it is not up more but it certainly something that we have to manage too.

Ben Palmer

I think also in terms of our work and our inventory down a big determination of how successful we are going to be is how much inventory other manufacturers have in the field as well and how aggressively they might be discounting to move all those boats so that is another variable that will, it is hard to predict exactly how long it will take to work things down but we will face it that the incentive program that we did is we increased it a little bit in terms of the specifics of the incentive but basically this is extended what we had in place for a few more months.

Kurt Fredrick – Wedbush Morgan Securities, Inc.

Did you repurchase any share during the quarter?

Ben Palmer

We did not.

Kurt Fredrick – Wedbush Morgan Securities, Inc.

Okay. All right. Thank you.

Ben Palmer

Thanks, Kurt

Operator

Our next question come from the line of Brandon Taylor with Raymond James.

Brandon Taylor – Raymond James

Hi. Good morning guys.

(Crosstalk)

Brandon Taylor – Raymond James

Just a quick clarifying question. In terms of the back log and the year-end inventories. Is that in unit $10 or just in units or just in dollars or could you just clarify a little bit?

Jim Landers

Brandon, this is Jim. The inventory that we talked about is in the changes are in unit $10.

Ben Palmer

And they have similar order of magnitude changes this summer.

Brandon Taylor – Raymond James

And what about the backlog?

Ben Palmer

Backlog is down and that is both in units, dollars that sort of thing.

Brandon Taylor – Raymond James

Okay. Great. Great. Thanks a lot.

Rick Rubbell

Bye. Thank you.

Operator

Your next question comes from the line of [Paul Flenet] with Stevens Incorporated.

[Paul Flenet] - Stevens Incorporated

Good morning.

Rick Rubbell

Hey Paul

Ben Palmer

Good morning.

[Paul Flenet] - Stevens Incorporated

This thing will turn sometimes we just do not know when. Right?

(Crosstalk)

Ben Palmer

That is correct.

[Paul Flenet] - Stevens Incorporated

First, can you point to any great spots like maybe pure economical models? I know like an auto business. Some small cars are actually selling over invoice. Is there anything like that going on?

Jim Landers

Not in terms of fuel efficiency – Paul, this is Jim. Boating is not a fuel efficient endeavor.

[Paul Flenet] - Stevens Incorporated

Is there any attempt by any of the manufacturers to make something more fuel efficient or just forget about it?

Jim Landers

Not really. I think we try to have as efficient design as possible but it is, at least up to now, has never been a concern in the marine business and there is talk of diesels but as far as designing boats for better fuel efficiency, no, we have not taken that into consideration. Some people maybe doing some of that on engine side but that will take a quite a while for any of that to have any real benefit.

Rick Rubbell

The designs that they have started six months ago is going to take three years to get into that water.

Ben Palmer

I do not know how long but I think it will take a quite a while.

Rick Rubbell

We don’t even have catalytic converters yet in all the boats and that should be a requirement and will be requirement the next year or so.

[Paul Flenet] - Stevens Incorporated

Okay. With the increase in fuel prices and I know marine fuel – if you fuel up at your marina it is significantly above what you see at your gas pump. Has that ratio changed or in other words if you go from $2 to $4 and marine fuel is usually 50% more, is it still 50% more or is the ratio is actually higher or lower?

Ben Palmer

I believe that margin is down.

Jim Lander

Yes. In other words Paul the differential between the automobile gas pump and the marina is a constant and right now at least in our part of the country around 20% or 25%.

[Paul Flenet] - Stevens Incorporated

Okay. So the percentage is [Inaudible] not like a fix dollar amount …

(Crosstalk)

Jim Lander

I am sorry. It is more of a fix dollar amount. In other words the higher fuel goes the lower that differential is …

(Crosstalk)

[Paul Flenet] - Stevens Incorporated

So, relative to automobile tax it should get a little better.

Rick Rubbell

Relatively speaking, yes.

[Paul Flenet] - Stevens Incorporated

Is there any indication – and I know there is a support but any indication of deterioration of marine paper that extended to consumers or local banks slowing it to extend credits to either the dealer or to the end-consumer?

Jim Lander

Paul, as you know we are not on that endeavor but we know and totally from our contacts in the industry. What we have been told is that consumer lending standards have tightened in the form of higher down payments and higher credit scores with what the lenders are looking for from a consumer side. I don’t know anything really on a poor plan side but that has been tightened. Uncertainly, everybody is watching inventories very closely, in terms of lending standards. I do not know of anything that is cut and tied.

Ben Palmer

I would say it well. I think if it has gone either way. It is certainly tighter.

[Paul Flenet] - Stevens Incorporated

Yes.

Ben Palmer

If it is just the same, I think we would be lucky .I think everybody is cautious.

Jim Lander

Yes. It is affecting sales to some extent.

Ben Palmer

Probably

Rick Hubbell

Right.

[Paul Flenet] - Stevens Incorporated

Okay. And I often ask a question about this but I hope something is going to move but on the manufacturing side do you think that the feel that is standing in our pier we saw Brunswick’s announcements. do you think that supply is coming down? I mean, you guys are managing it correctly but are the other manufacturers finally saying, “Uncle, I am going to take supply down.” And does that give you an – at some point you get more opportunities on the acquisition side.

Rick Rubbell

I think other manufacturers are certainly are working to try to bring inventories down. I think everybody is experiencing what we are experiencing and it is very, very, very difficult environment so I think – I don’t think there is anybody out there who haven’t got the message yet. Could it result in acquisition opportunities? Sure, it could.

[Paul Flenet] - Stevens Incorporated

Okay. Thank you.

Operator

(Operator Instruction) There are no further question at this time.

Jim Landers

Okay. Thank you. This is Jim Landers. We would like to thank everyone for listening in and for your questions. We appreciate it. Have a good day.

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