Marine Products - Earnings Call - Q1 2019

Transcript

Operator (participant)

Ladies and gentlemen, good morning, and thank you for joining us for Marine Products Corporation's first quarter 2019 financial earnings conference call. Today's call will be hosted by Mr. Rick Hubbell, President and CEO; Mr. Ben Palmer, Chief Financial Officer; and also present is Mr. Jim Landers, Vice President of Corporate Finance. At this time, all participants are in a listen-only mode. Following the 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 call is being recorded. Mr. Landers will get us started by reading the forward-looking disclaimer. Please go ahead, sir.

Jim Landers (VP of Corporate Finance)

Thank you and 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 2018 10-K, and other SEC filings that outline those risks. All of these are available on our website at www.marineproductscorp.com. If you have not received a copy of our press release and would like one, please visit our website again at www.marineproductscorp.com for a copy. We'll make a few comments about the 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 (President and CEO)

Jim, thank you. We issued our earnings press release for the first quarter of 2019 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 7.1% during the first quarter. Net sales increased due to a model mix that was highlighted by more sales of larger boats, leading to a 14.8% increase in average selling prices. These increases were partially offset by a 6.8% decrease in the number of boats sold. In general, sales of smaller boats accounted for the decrease in unit sales during the quarter. Marine Products Corporation is maintaining its strong market share. For 2018, Chaparral's Stern Drive products held a 16.2% market share, the highest in that category.

Revolo maintained its position as the second largest brand in its category with a market share of 5.6%, and the combination of Revolo and Chaparral outboards held the third highest position in the overall outboard market with a market share of 6.8%. We also announced this morning that our Board of Directors yesterday declared a regular quarterly dividend of $0.12 per share, the same as our regular quarterly dividend of $0.12 per share in the previous quarter. Also, during the first quarter, we repurchased 263,805 shares of common stock in the open market. With that overview, I'll turn it over to our CFO, Ben Palmer.

Ben Palmer (CFO)

Thank you, Rick. Net sales for the first quarter of 2019 were $83.1 million, an increase of 7.1% compared to the first quarter of last year. Unit sales decreased by 6.8%, with the smaller boats accounting for this unit sales decline. Our average selling prices increased by 14.8%, however, as the number of our larger models sold very well. In addition, parts and accessories sales increased by almost 10%. Gross profit in the first quarter was $18.7 million, an increase of 5.9% compared with the first quarter of 2018. Gross margin during the quarter declined slightly to 22.5% compared with 22.8% in the first quarter of 2018 due to higher labor rates to assist with retention and higher headcount targeting improved quality.

Selling, general and administrative expenses were $9.8 million in the first quarter of 2019, an increase of $1.2 million compared to $8.6 million in the first quarter of last year. These expenses increased due to expenses that increased with sales and profitability, such as incentive compensation and sales commissions, as well as higher research and development costs to support our new model development. As a percentage of net sales, SG&A expenses increased to 11.8% in the first quarter of 2019 compared to 11.1% in the first quarter of last year. Interest income during the first quarter of this year was $57,000, an increase of $24,000 compared with $33,000 during the first quarter of 2018. During the first quarter, we liquidated the portfolio of short-term tax-exempt marketable securities in which we had invested for more than 10 years, and we reinvested the proceeds in bank deposits which pay taxable interest.

We made this change due to our lower effective tax rate and our status as a tax-paying entity. The taxable equivalent return on our bank deposits is, at the present time, higher than that of the tax-exempt securities in which we had previously invested. The quarter ended March 31, 2019. We reported net income of $7.5 million, a decrease of 1.8% compared to net income of $7.6 million in the first quarter of 2018. Diluted earnings per share were $0.22 in the first quarters of both 2019 and 2018. Our effective tax rate during the first quarter of 2019 was 16.3% compared with 16.1% in the first quarter of 2018. International sales grew by 2.1% in the first quarter compared to the prior year and represented 7.4% of net sales compared to 7.7% of net sales in the first quarter of last year.

International sales increased in many of our international markets, although sales decreased in Canada. Our cash balance at the end of the first quarter was $18.3 million, a decrease of $3.1 million compared to cash and marketable securities at the end of the first quarter of 2018. Our cash and marketable securities balance decreased because of higher working capital requirements, as well as higher dividends and increased cost of share repurchases during the previous four quarters. As of March 31, 2019, dealer inventories were essentially unchanged compared to the prior year. Unit backlog at the end of the quarter was slightly lower than at the same time last year, though dollar backlog was slightly higher due to the higher average selling prices that we reported this quarter and believe that we will report in the immediate future.

We have reduced our unit production slightly in order to keep dealer inventories healthy in preparation for the upcoming 2020 model year.

Rick Hubbell (President and CEO)

Thank you, Ben. A prominent operational and financial feature of Marine Products is our large boats. We believe that we have found several appealing opportunities that attracted potential customers during the 2019 winter boat shows. We believe that the 2019 retail selling season will continue to be strong, but we are monitoring retail demand to ensure that our dealer inventories remain healthy in preparation for the new models that we continue to develop for upcoming years. I'd like to thank you for joining us this morning, and we'd be happy to take any questions you may have.

Operator (participant)

Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your telephone keypad now. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press Star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. Our first question comes from Eric Wold with B. Riley.

Eric Wold (Senior Equity Research Analyst)

Thank you. Good morning.

Jim Landers (VP of Corporate Finance)

Hey, Eric.

Eric Wold (Senior Equity Research Analyst)

Two quick questions. One, on Canada, I can understand that it continued to be down in the quarter. Are you seeing any change or any improvement in demand trends as that tariff lingers and maybe becomes more of the expected norm in the region, or is really that going to expect to stay weak until we get some relief there? I have a follow-up.

Ben Palmer (CFO)

Yeah. Eric, this is Ben. I would say that there's no definitive trends or improvements. I agree with you that it'll probably continue to be a little uncertain or a little weak until some of that uncertainty gets cleared up.

Eric Wold (Senior Equity Research Analyst)

Okay. Can you maybe talk a little bit more about what drove the weakness in the smaller boats in the quarter and kind of what was specific to those boats? Can you maybe dive into if there were certain types or models that were impacted more than others? Aside from that, coming out of the boat show season, I know you're still remaining optimistic and kind of modeling things. Any underlying trends that are possibly giving more pause than not, shifts in buying preferences around ASP features, financing needs, or is everything remaining as it was heading into the boat show and maybe as it was last year? Thank you.

Jim Landers (VP of Corporate Finance)

Eric, this is Jim. Good questions. I don't think we see any really discernible trends at this point that would point to larger boats being or smaller boats being weaker. We do know that it was a difficult February and March from a weather point of view, and it is possible that smaller boats are more susceptible or purchases of smaller boats are more susceptible to short-term trends. If you're thinking about buying a small boat, it's a little more of an impulse purchase, and if it's a cold, rainy March, you might not do that. Whereas with bigger boats, you've planned for it, and you might have a different mindset. That is a possibility. Also, for us, we're just trying to find different market niches and designs that appeal to things. I'm not sure that our results point to big macro trends one way or the other.

Ben Palmer (CFO)

I would say, this is Ben, to add to that, I think as much as weaker small boat sales, I just think we're seeing more strength in the larger boats, and we're trying to—that's more appealing for us, more appealing for our dealers. The demand is stronger there, so that's where we're spending some of our R&D dollars to continue to develop that market on the larger boats. It's a trend that we've seen over the last couple of years and picked up recently. Overall, I think that's a positive trend for us. Some of that is just us focusing on the larger boats, again, more than excess weakness in the smaller boats.

Eric Wold (Senior Equity Research Analyst)

Perfect. Thank you, guys.

Jim Landers (VP of Corporate Finance)

Thanks, Eric.

Operator (participant)

Thank you. Our next question comes from Ronald Bookbinder with IFS Securities.

Ronald Bookbinder (Analyst)

Good morning, and thank you for taking my questions. Continuing on with the smaller boat slowdown, is the Canadian market or international markets, are they a higher percentage of smaller boats?

Jim Landers (VP of Corporate Finance)

I'm not sure that the mix is discernibly different, Ron. It's a good question trying to delve into that, but I do not believe so.

Ronald Bookbinder (Analyst)

You talked about your focus on larger boats. Had you cut production of smaller boats just such that you just had less of an appealing selection?

Jim Landers (VP of Corporate Finance)

No, we still produced all of our models. You would have been able—and certainly, you can't always get every model that you want. There's a waiting line sometimes, certainly, during the retail selling season. We produced all of our models. We just found that there was more demand for the larger boats, and frankly, that's better for us financially. That's where we operated in the quarter.

Ronald Bookbinder (Analyst)

To be clear, you don't see some sort of macro slowdown in smaller entry-level boats such that people aren't getting into boating as in the past, or that there's not some other impediment for a younger purchaser who's looking for that entry-level boat?

Jim Landers (VP of Corporate Finance)

No, no. I would discourage you from making global large economic assumptions from three months of our sales. I would really discourage that.

think relative to,

Ben Palmer (CFO)

excuse me, the production on the smaller boats, I guess we did sell fewer smaller boats in the quarter, so we are producing fewer smaller boats. Again, it is more where the production has been shifted to focus on the larger ones.

Ronald Bookbinder (Analyst)

Okay. On the SG&A, it delevered 70 basis points. Was there anything in specific that caused the deleverage despite the higher sales on fixed costs?

Ben Palmer (CFO)

I think this is Ben. It was just a variety of things that flowed through. We talked about higher rates, our labor rates affecting our gross margin. There are higher labor rates also in SG&A. All of this to focus on trying to retain our employees and also focus on improving our quality. It is an investment in our employees, and we believe the future of profitability that will help us on the warranty side. Also, R&D. R&D spending was up a little bit in the quarter again to focus on the larger boats. It was a variety of things. Also flowing in there is our supplemental retirement plan, and I will not get into an accounting dissertation, but the fact that the market, the equity markets, were down in the fourth quarter last year, there was a small net benefit.

The fact that the markets were up in the first quarter this year, there was a small detrimental impact. There was also the timing of audit procedures from our external auditors also flowed through. It was just a variety of things that kind of hit during this first quarter.

Ronald Bookbinder (Analyst)

You mentioned the higher labor costs. Is that just in Nashville, Georgia, or at your production, or is it just finding truckers to move the product to your retail network, your distribution?

Jim Landers (VP of Corporate Finance)

Ron, where it impacted our financials was the manufacturing plant in rural Georgia. I think every industrial or manufacturing company in the United States right now is having problems with skilled labor, the hiring and retention of skilled labor. That is where the financial impact was for us.

Ronald Bookbinder (Analyst)

Okay. And lastly, will you be presenting on Friday at the Birken Road Conference in New Orleans?

Jim Landers (VP of Corporate Finance)

Yes, sir. We will. Look forward to seeing you.

Ronald Bookbinder (Analyst)

Okay. I look forward to seeing you all. Okay. Thank you very much. It was a nice execution in the quarter, and good luck with the rest of the year.

Jim Landers (VP of Corporate Finance)

Thank you, Ron. See you soon.

Operator (participant)

Thank you. Again, if you would like to ask a question, please press star one now. At this time, I'm showing no further questions, so I'll turn it back to Mr. Landers for closing comments.

Jim Landers (VP of Corporate Finance)

Thank you. We appreciate everyone who called in, and especially the questions and the dialogue. We look forward to talking to everyone soon. Have a good day. Thank you.

Operator (participant)

Ladies and gentlemen, as a reminder, this conference will be replayed on www.marineproductscorp.com within two hours following the completion of today's call. That concludes today's call. You may.