Marine Products - Earnings Call - Q1 2018
April 25, 2018
Transcript
Operator (participant)
Please stand by. Good morning, everyone, and thank you for joining us for our Marine Products Corporation First Quarter 2018 Financial Earnings Conference Call. Today's call will be hosted by Rick Hubbell, President and CEO; Ben Palmer, Chief Financial Officer; and also present is Jim Landers, Vice President of Corporate Finance. At this time, all participants are in a listen-only mode, and following today's presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. I would also like to advise everyone that this conference is being recorded. Now, Jim will get us started by reading the forward-looking disclaimer. Jim?
Jim Landers (VP of Corporate Finance)
Thank you, Loreen. 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, our 2017 10-K, and 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 and would like one, please visit our website for a copy. We will make a few comments about the first quarter, and then we'll be available for your questions. Now, I will turn the call over to our President and CEO, Rick Hubbell.
Rick Hubbell (CEO)
Jim, thanks. We issued our earnings press release for the first quarter of 2018 this morning. Ben Palmer, our CFO, will discuss the financial results in more detail in a moment. This time, I will briefly discuss our operational highlights. Our net sales increased by 9.1% during the first quarter. Net sales increased due to a model mix of larger boats, which contributed to a 9.6% increase in the average selling price per boat. We continue to be pleased with the market share of our product categories. Our Chaparral Sterndrive products continue to hold the highest market share in their category, approximately 16.7% for the 12 months ended December 31, 2017. Robalo's market share continues to grow, and it is now ranked number three in the outboard sport fishing category.
We also announced this morning that our board of directors yesterday declared a regular quarterly dividend of $0.10 per share, consistent with the quarterly dividend issued last quarter. Also, during the first quarter, we repurchased 110,141 shares of common stock on the open market. With that overview, I will turn it over to our CFO, Ben Palmer.
Ben Palmer (CFO)
Thank you, Rick. Net sales for the first quarter of 2018 were $77.5 million, an increase of 9.1% compared to the first quarter of 2017. Higher average selling prices generated this increase as unit sales declined slightly. Gross profit in the first quarter was $17.7 million, an increase of 18.4% compared to the first quarter of 2017. Gross margin during the quarter improved slightly to 22.8% compared to 21% in the first quarter of 2017, primarily due to an improved model mix. Selling, general and administrative expenses were $8.6 million in the first quarter of this year, an increase of approximately 7.6% compared to the first quarter of 2017. SG&A expenses were 11.1% of net sales during the first quarter, a slight decline compared to the first quarter of the previous year. SG&A increased due to expenses that vary with improved operating results, such as incentive compensation.
For the quarter ended March 31, 2018, we reported net income of $7.6 million. Net income increased by $2.3 million, or 44.6%, compared to the first quarter of last year. Diluted earnings per share of $0.22 increased by $0.07, or 46.7%, compared to the prior year. Contributing to the year-over-year improvement in net income and earnings per share was lower corporate tax rates, as I will discuss in a moment. International sales represented 7.7% of total sales during the first quarter of this year, compared to 5.4% of net sales last year. Sales increased in several of our international markets, including Canada. Our cash and marketable securities balance increased to $21.4 million at the end of the first quarter of this year, an increase of $3.4 million compared to the first quarter of last year, and a slight increase of $700,000 compared to the end of 2017.
Our effective tax rate during the first quarter of 2018 was 16.1%, a significant decrease compared to 24.3% in the first quarter of last year. The effective tax rate declined in the first quarter of this year primarily because of the Tax Cuts and Jobs Act enacted in the fourth quarter of last year. Also, the effective tax rate in the first quarters of both years reflects an excess tax benefit related to the restricted shares vested during these periods. We estimate that Marine Products' effective tax rate for the next three quarters will be approximately 22%, and that the effective tax rate for the 12 months will also be in the low 20% range.
The lower effective tax rate for the first quarter of 2018, due to tax reform, increased diluted earnings per share by approximately $0.02-$0.03 compared to the effective tax rate during the first quarter of last year. As of the end of the quarter, first quarter of 2018, dealer inventories and backlog were higher than at this time last year as we prepared to support our dealers' higher demand during the remainder of the 2018 model year. I will now turn it back over to Rick for a few closing comments.
Rick Hubbell (CEO)
Yeah, thanks, Ben. The recreational boating market continues to be strong as we enter the height of the 2018 retail selling season. In spite of continued weakness in the overall Stern Drive boat market, we are developing appealing Chaparral products that drive our market share and results. We continue to be pleased with Robalo's success and market share growth. Thank you for joining us this morning, and we'd be happy to take any questions you may have.
Operator (participant)
Thank you to the audience today. If you would like to ask a question, please press star one on your touch-tone telephone. Just a reminder, if you're joining us via speakerphone today, make sure your mute function is turned off to allow the signal to reach our equipment. Once again, that is star one for questions. We'll go first to Eric Wold at B. Riley.
Eric Wold (Senior Analyst)
Couple of questions. I guess one, there was some weakness in the SSI new boat sales registration data for March that we believe was due mostly, if not entirely, by poor weather. What did you hear from your dealers out there in the channel during March in terms of deliveries, sales impact, etc.? Kind of what have you heard so far during April? Has there been any kind of recovery from that weakness?
Jim Landers (VP of Corporate Finance)
Eric, as Jim, your question alludes to the fact that we're one step away from the retail customer because we sell to the dealers. Given that, we're aware of that comment about the SSI retail data, but we really haven't seen a negative impact. I mean, our largest dealers in the Southeast, we've got a big presence in Florida. It seems to be a bit of a non-event to us, just our perspective on it.
Eric Wold (Senior Analyst)
Okay. That's helpful. Lastly, on commodity costs, just update us on your thoughts on commodity costs in general going forward and what level, if any, could the proposed tariffs have on some costs, I guess, obviously not around fiberglass, but everything else and your ability to offset those costs if there is a commodity pressure.
Ben Palmer (CFO)
This is Ben. Eric, in terms of commodity prices, there are overall in the market some indication of some upward cost pressure on commodities. We've not seen that yet at this point, but we're looking to manage that. I guess with respect to tariffs, that too is a very good question, but it's very fluid. There's been a lot of talk, not necessarily anything in particular that's come out in that regard. Our suppliers, again, I don't talk directly myself to our suppliers, but they at this point are working through it, planning through it. Obviously, our largest engine supplier, or one of them, obviously, is Japanese. I think they're hopeful that they won't be impacted, but who knows? At this point, we'll just have to respond to whatever happens.There's really nothing we can do at this point, a relevant question and obviously a potential concern for everybody. Hopefully, it's more rhetoric and posturing rather than actual impacts.
Eric Wold (Senior Analyst)
Perfect. Thank you, guys.
Ben Palmer (CFO)
Thank you.
Jim Landers (VP of Corporate Finance)
Thanks.
Operator (participant)
We will go next to Ronald Bookbinder at IFS Securities.
Ronald Bookbinder (Analyst)
Good morning, and congratulations on a nice start to fiscal 2018.
Jim Landers (VP of Corporate Finance)
Yeah. Thank you.
Ronald Bookbinder (Analyst)
Your unit sales decreased slightly. Why do you think that is, given the growth of the overall boating market? Is it just that you're moving to higher-priced boats, or could you add some color?
Jim Landers (VP of Corporate Finance)
Ron, this is Jim. I think the best answer is probably that Stern Drive sales continue to be weak overall. That's a market that has historically been a big part of our sales and still is. I think retail—let's see if I have this handy. I may not. I mean, Stern Drive sales, retail sales continue to decline. We have been fighting that weakness for a while with different products in the Stern Drive market that fit niches, and then, of course, with Robalo and some other things. I think it's just Stern Drive weakness.
Ben Palmer (CFO)
I think that, and I'll add, this has been that some of its timing on shipping also. I think that on a net-net basis, I think we would probably have more of a slight unit increase if the timing of the shipments had occurred as we had hoped. Certainly, moving up in size is obviously helping our margins. That's where we prefer to be. We're going to go to where the demand is and where we can make the best margin for ourselves and for our dealers. The bigger boats is where we want to go. That, by definition, means fewer sales overall as well, all things being equal. I think more of a flattish sort of unit is probably a better way to look at it than focusing on the decline. Obviously, we pointed that out in the release, but I think it's probably more flattish than down.
Ronald Bookbinder (Analyst)
The inventory increased 14%. Obviously, a lot of that is due to the higher-priced boats. On a unit basis, it was not nearly as much. Are you comfortable with your inventory? It was an increase on top of last year's increase. How is the aging of the inventory and the balance between newer and older boats?
Ben Palmer (CFO)
All right. I'll answer that a couple of different ways. In terms of the inventory that's on our balance sheet, we're very, very comfortable with that. Obviously, all that's brand new boats. As I alluded to, with the timing difference on shipments, what you have is some inventory sitting in there that hadn't been shipped yet. Okay? That's a big part of what's contributing to the increase on the balance sheet. Now, with respect to dealer inventories, which are not on our balance sheet, we're very comfortable with that. Those inventory levels are actually only up slightly year-over-year. That's a good thing. That means we have really good sales through to the retail customer. In terms of the aging of those boats, there are very few boats that are model year 2017 or earlier, and a majority of them are current model year boats. Also, at the dealer level, we are very, very comfortable with the inventory.
Ronald Bookbinder (Analyst)
Okay. The lower warranty expense that you experienced in Q4, did that continue into Q1?
Ben Palmer (CFO)
Yes. We're still seeing positive trends on the warranty side, which we're pleased with. Warranty is one of those things that works itself out over longer periods of time, but we are comfortable that the level at which we are reserving for warranty is stable and at a reasonable level. You always want it to be better than what it is, but we're comfortable where it is at this point.
Ronald Bookbinder (Analyst)
Okay. Lastly, are you guys going to be presenting at the Burkenroad Conference on Friday?
Jim Landers (VP of Corporate Finance)
Yes, we are, Ron. Are you coming?
Ronald Bookbinder (Analyst)
Yes. I'll see you there. Okay. Thank you very much.
Jim Landers (VP of Corporate Finance)
Great.
Ronald Bookbinder (Analyst)
Congratulations on a great start to the year.
Ben Palmer (CFO)
Thank you very much.
Jim Landers (VP of Corporate Finance)
Thank you, sir.
Operator (participant)
Once again, ladies and gentlemen, if you do have a question, please press star one at this time. We'll pause for just a moment. It looks like we have no additional questions at this time, Mr. Landers. I'll turn things back over to you, sir.
Jim Landers (VP of Corporate Finance)
Okay, Lori, thank you. Thank you to everybody who listened in and for the questions. Everybody have a good day. Talk to you soon.
Operator (participant)
Ladies and gentlemen, once again, that does conclude today's conference. I would like to thank everyone for joining us today. Just a reminder that today's conference will be replayed on www.marineproductscorp.com within two hours following the completion of today's conference. Once again, thank you for joining us today.