Marine Products - Earnings Call - Q2 2018
July 25, 2018
Transcript
Operator (participant)
Good morning and good day. Thank you for joining us for Marine Products Corporation's second quarter 2018 financial earnings conference call. This call will be hosted by Rick Hubbell, President and CEO, and Ben Palmer, Chief Financial Officer, and Jim Landers, Vice President of Corporate Finance. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at this time for you to queue for questions. I would like to advise you, everyone, that this conference is being recorded today. Jim will get us started by reading the forward-looking disclaimer.
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 2017 10-K, and 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, please visit our website 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 second quarter of 2018 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 21.7% during the second quarter, breaking our previous record set in the second quarter of 2005. Net sales increased primarily due to a 13.3% increase in units of boats sold and a 6.9% increase in the average selling price per boat. We continue to be pleased with the market share of all of our product categories. Our Chaparral stern drive products continue to hold the highest market share in their category, approximately 16.7% for the 12 months ended March 31, 2018. Robalo's market share continues to grow as it is now ranked number three in the outboard sport fishing category.
As a testament to the success of our Chaparral SunCoast Outboards, the combination of Robalo and Chaparral outboard models now holds the number two market share in the 16-foot to 30-foot fiberglass outboard boat 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 second quarter, we repurchased 13,434 shares of common stock in the open market. I will now turn over the call to our CFO, Ben Palmer.
Ben Palmer (CFO)
Thank you, Rick. Net sales for the second quarter of 2018 were $87 million, an increase of 21.7% compared to the second quarter of 2017. Higher average selling prices contributed to this increase, as well as higher unit sales. Gross profit in the second quarter was $19.5 million, an increase of 19.6% compared to the second quarter of 2017. Gross margin during the quarter declined slightly to 22.4% compared to 22.8% in the second quarter of last year. Selling, general and administrative expenses were $8.3 million in the second quarter, an increase of approximately 10% compared to the second quarter of 2017 due to expenses that vary with higher net sales and profitability, including incentive compensation, commissions, and warranty expense. SG&A expenses were 9.6% of net sales during the second quarter of 2018, compared to 10.6% in the second quarter of the prior year.
SG&A as a percentage of net sales decreased due to the leverage of higher net sales over several costs that are relatively fixed during the short term. For the quarter ended June 30, 2018, we reported net income of $9 million. Net income increased by $2.9 million, or 46.9%, compared to the second quarter of last year. Diluted earnings per share of $0.26 increased by $0.08, or 44.4%, compared to the second quarter of last year. Our net income and earnings per share this quarter were also records, with the previous highest net income and EPS having been recorded in the second quarter of 2005. Contributing to the year-over-year improvement in net income and earnings per share were lower corporate tax rates. International sales represented 10.6% of total sales during the second quarter, compared to 7.1% of net sales in the second quarter of last year.
Sales increased in several of our international markets, including Canada. Along with everyone else in the recreational boat industry, we are closely monitoring developments in international trade. As you probably know, the U.S. imposed a 10% worldwide tariff on aluminum and a 25% worldwide tariff on steel in March. In retaliation, several of our trading partners, including Canada, Mexico, and the European Union, have recently implemented retaliatory tariffs on many U.S. products, including recreational boats. We believe that there are several potential impacts to our sales and profitability if these tariffs remain at current levels. First, worldwide aluminum prices have increased during the past several months, and we use aluminum in the manufacturing of our products. In addition, we believe that our products exported to Canada, Mexico, and the European Union will be less competitive in those markets than in previous periods.
The offset to this issue is the fact that we have high U.S. domestic demand and a strong order backlog. For the six months ended June 30, 2018, approximately 7.3% of Marine Products' total net sales were generated from these three trading partners. Our cash and marketable securities balance increased to $27.9 million at the end of the second quarter of 2018, an increase of $6.2 million compared to the second quarter of last year, and an increase of $6.4 million compared to the end of the prior quarter. Our effective tax rate during the second quarter was 20%, a significant decrease compared to 30.3% in the second quarter of last year. The effective tax rate declined in the second quarter of 2018 primarily because of the Tax Cuts and Jobs Act enacted in the fourth quarter of last year.
The lower effective tax rate for the second quarter of 2018, due to tax reform, increased diluted earnings per share by approximately $0.03. As of June 30, 2018, dealer inventories were only slightly higher compared to this time last year, as retail demand remained strong. With that, I'll turn it back over to Rick for a few closing comments.
Rick Hubbell (President and CEO)
Thanks, Ben. We are pleased to report record sales and net income and earnings per share during the second quarter, beating a previous record set 13 years ago. Strong consumer confidence, stable real estate values, and the strongest employment market in many years are catalysts for a good selling environment for our products. We will be holding our annual dealer conference in a few weeks, and we look forward to introducing our new 2019 models to our dealer network, as well as hearing their assessment of consumer sentiment in their individual markets. Thank you for joining us this morning, and we'd be happy to take any questions you may have.
Operator (participant)
Thank you. If you would like to ask a question, please press star one on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach your equipment. If you find your question has been answered, you may remove yourself from the queue by pressing star two. Again, please press star one to ask a question. We'll now take our first question from Eric Wold from B. Riley. Please go ahead.
Eric Wold (Senior Analyst)
Thank you. Good morning and congrats on a very strong quarter. I just.
Rick Hubbell (President and CEO)
[crosstalk] Thank you.
Eric Wold (Senior Analyst)
Dan, I just want to dive in a little bit on the tariff issue. Obviously, a little bit of a fluid issue. Not everything completely known at this point. Anything you would do kind of proactively ahead of full knowledge of the tariffs and kind of the issues, or is it more kind of wait and see what the final impact is? If it does come in as expected, or kind of what the current kind of expectation is, or kind of rhetoric for the tariffs and the retribution from our tariffs, what could be something you could do to help offset that risk? Would you kind of take more price here in the U.S., out to international, or would you kind of treat those markets as they are?
Jim Landers (VP of Corporate Finance)
Eric, this is Jim. Kind of difficult to say. We've looked at every angle of it. As you mentioned, it's very fluid at this point. Canada is one of our largest export markets, as Ben mentioned, and they just put this tariff in place on July 1st. We do not know. We use aluminum in our products, in the manufacture of our products. It's not a huge amount, though, so that's less of an issue than not being able to export or exporting fewer boats. Thank goodness for strong demand here in the U.S. That's one quick answer. I'm sorry we don't have a more complete answer for you.
Eric Wold (Senior Analyst)
You might remind us of what the percentage of aluminum is, of the cost of sales?
Jim Landers (VP of Corporate Finance)
We don't know. We've actually worked on that. It's hard to know the aluminum content of every component of our boats. We can tell you that our fuel tanks are made of aluminum, and our trailers that we buy from a third party are made of aluminum. We haven't seen an increase in those prices yet, but that doesn't mean it won't happen. Aluminum content of other things, instrument panels, engines, etc., we just don't know. We just haven't done that work.
Ben Palmer (CFO)
It is a reasonable—Eric, this is Ben—it is a reasonable question. We use very little aluminum that we buy directly. I mean, it is really in the components that we buy from our suppliers. For us, it is really more of a wait and see, see what the impact is on them, and then we will have those discussions when the time comes. Reasonable question, but we do not yet know what the impact is going to be. I expect there will be discussions with a number of suppliers in that regard, and we will work through it like we do each year.
Eric Wold (Senior Analyst)
Fair enough. Thank you, guys.
Ben Palmer (CFO)
Sure.
Jim Landers (VP of Corporate Finance)
Thanks, Eric.
Operator (participant)
We will now take the next question from Ronald Bookbinder from IFSS.
Ronald Bookbinder (Analyst)
Yes. Continuing on the taxes, what percent of the overall cost of the boat do you think that this would increase, given that it's only a percentage of the aluminum?
Jim Landers (VP of Corporate Finance)
Ron, this is Jim. It's very small. We don't know the number, but it's very small. The largest single.
Ronald Bookbinder (Analyst)
Okay. So.
Jim Landers (VP of Corporate Finance)
Cost component, let me just make a point, the largest single cost component in our boats is the engine. There's some aluminum in that, I'm sure, but very little. It is a small cost for us. Ben just mentioned that in the interest of just full disclosure about what we were dealing with.
Ronald Bookbinder (Analyst)
Like you said, it's a small percentage of the total cost, and then it's only going into 7% of your sales, correct?
Ben Palmer (CFO)
That's correct. Based on the last six months' sales, it represents only 7% of our consolidated net sales. International sales represent a little over 7%, 7%-7.5% of our total net sales for the last six months. We believe, and kind of on the export side, that I think there'll be—I think Eric mentioned this—but I think it's probably going to be the case that there are going to be a lot of sort of wait and see as it relates to international markets, particularly like Canada. I think they've taken delivery of many of the boats that they've already ordered with their boating season, so I think there's some time to let this shake out. I think there will be a lot of sort of wait and see.
We are not, at this point, moving aggressively forward to try to figure out ways to ourselves to deal with tariff. We think we have a little bit of time, and hopefully it'll be resolved in some manner, and it'll have minimal impact, but we don't know at this time. I think it's just more of wait and see and work with our dealers and partners. Hopefully, as Jim indicated, and I indicated in my comments, hopefully U.S. demand will be strong enough to absorb some, if not much, of what would otherwise be impacted from these other export sales. We maybe absorb that here in the U.S.
Ronald Bookbinder (Analyst)
Okay. The operating profit continues to expand. What do you think is, as you continue to get manufacturing leverage, what do you think the potential for the operating margin is over the longer period of time? Excluding the tariffs and outside forces.
Ben Palmer (CFO)
We talked about our record sales back in 2005. Our gross margins in the last several years have been lower than they were back in 2005. I expect we'll continue to strive for better margins, I think, with larger boats. We're tending to sell larger boats with higher average selling prices. I expect there's some upside to our gross margin. We'll continue to manage our costs closely and with our workforce and always working on quality. I think there is some opportunity to increase the margin, but considerably at this point, it depends obviously on product mix, but we are moving up to the larger boats, and that's helpful.
Ronald Bookbinder (Analyst)
There's nothing that would impede you from getting back to the O5 levels that's not in mix or different than the value that you're providing compared to O5?
Ben Palmer (CFO)
Right.
Ronald Bookbinder (Analyst)
All right. All right. Terrific. And lastly, as the outboards become more popular than the stern drives, are you looking at moving the mix of the Chaparrals more towards outboards, or are you pretty much holding the brand to what it is?
Ben Palmer (CFO)
I think we'll continue to make more Chaparrals with outboards. The stern drive continues to be okay with us, obviously a struggle overall, but we'll find that right balance. We think there is additional opportunity in putting outboards in some Chaparral models, and we have some exciting things we hope to share with our dealers here soon. Yeah, I see that trend continuing, that there will be more models with outboard engines at Chaparral.
Ronald Bookbinder (Analyst)
Okay. Great. Congratulations on the quarter, and good luck in the new quarter. Thank you very much.
Ben Palmer (CFO)
Thank you very much.
Jim Landers (VP of Corporate Finance)
Thank you, Ron.
Ben Palmer (CFO)
Thank you.
Operator (participant)
We will now take the next question from [Louis Moser from Mayfax Investors].
Yeah. Hi, good morning. Just the.
Jim Landers (VP of Corporate Finance)
Morning, Louis.
You said the overall foreign sales versus U.S. sales are 7% versus 93% in the U.S., or is that incorrect?
Ben Palmer (CFO)
No, that's right. In the current quarter, international sales were, I think it was 10.6. For the last six months, it was 7.3.
The next quarter is generally a seasonally lower quarter, traditionally. Is that correct?
Third quarter? Is that your question?
Yeah. Third quarter lower.
Third quarter is a natural. Yeah. Yes. That's a slower sales quarter. That's correct.
Okay. Based on whatever happens with the export situation, to maintain your market, can you raise your prices on retail to recoup whatever is lost on the trade situation?
The tariffs? No, the three partners that we talked about at 10%, 15%, and 25%, I think that would be difficult. Certainly, it would have some impact. That's certainly an option that we or our dealers could pass that along to the consumer, but I think it would definitely have an impact on demand in those particular markets. Clearly, we're concerned about that. I guess we're blessed that international sales at this point in time, that international sales are not that significant of a component of our total sales, much less than it was a number of years ago. Again, we're just hoping it gets resolved, and maybe there can be some equalization of tariffs between the trading partners, and maybe it'll get resolved sooner rather than later.
Okay. I appreciate your answers. Very good. Thanks very much.
Thank you.
Jim Landers (VP of Corporate Finance)
Thank you.
Operator (participant)
Again, as a reminder to ask a question, please press star one. If there are no further questions, I'd like to hand the call back over to your host for closing remarks.
Jim Landers (VP of Corporate Finance)
Thank you, Marion. Thank you, everybody who called in and for the questions. We hope everyone has a good day. Talk to you soon. Thanks.
Operator (participant)
The conference call will be replayed on www.marineproductscorp.com within two hours following the completion of the call. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.