Marine Products - Earnings Call - Q2 2019
July 24, 2019
Transcript
Operator (participant)
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. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a Q&A session. Instructions will be provided at that time for you to queue up for questions. I would like to advise everyone that this conference is being recorded. Jim will get us started by reading the forward-looking disclaimer.
Jim Landers (VP of Corporate Finance)
Thank you, Brian, and good morning, everybody. Before we get started today, I need 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've not received our press release and would like to see it, 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 second quarter of 2019 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 during the second quarter represented another record level. Net sales increased due to a 10% increase in average selling price per boat and an increase in parts and accessory sales. These increases were partially offset by a 7.6% decrease in the number of units sold during the quarter. 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 15.9% for the 12 months ended March 31. Robalo maintained its position as the second largest brand in its category, with a market share of 5.5%.
The combination of Robalo and Chaparral outboards now hold the highest position in the overall outboard market, with a market share of 6.8%. We announced this morning that our Board of Directors yesterday declared a regular quarterly dividend of 12 cents per share, the same as our regular quarterly dividend in the previous quarter. Also, during the first quarter, we repurchased 65,407 shares of common stock in the open market. With that overview, I will now turn it over to our CFO, Ben Palmer.
Ben Palmer (CFO)
Thank you, Rick. Next, net sales for the second quarter of 2019 were, as Rick pointed out, a record at $88.7 million, an increase of 1.9% compared to the second quarter of last year. Average selling prices increased by 10%, and parts and accessory sales increased as well, consistent with sales of larger models. Unit sales decreased as we focused on producing our newer, larger models where there was a lot of demand during the 2019 retail selling season. Gross profit in the second quarter was $20.4 million, an increase of 4.9% compared with the second quarter of 2018. Gross margin during the quarter increased to 23% compared with 22.4% in the second quarter of 2018 due to this favorable model mix.
Selling, general, and administrative expenses were $9 million in the second quarter of 2019, an increase of $724,000 compared with $8.3 million in the second quarter of last year. These expenses increased due to expenses that increased with sales and profitability, such as incentive compensation, 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 10.2% in the second quarter of 2019 compared to 9.6% in the second quarter of last year. Interest income during the second quarter of 2019 was $95,000, a slight increase compared with $85,000 during the second quarter of 2018. For the quarter ended June 30, 2019, we reported a record net income of $9.4 million, an increase of 4.3% compared to net income of $9 million in the second quarter of 2018.
Diluted earnings per share were 27 cents in the second quarter of this year compared with 26 cents in the second quarter of 2018. Our effective tax rate during the second quarter of 2019 was 18.3% compared with 20% in the second quarter of 2018. Marine Products' domestic sales increased by 7% during the second quarter of 2019 compared to the second quarter of the prior year. In contrast, international sales declined by 40.5% in the second quarter of this year and represented only 6.2% of net sales compared to 10.6% of net sales in the second quarter of last year. International sales decreased in many of our international markets. The sales decrease was more pronounced in our Canadian markets, which continued to be negatively impacted by lingering effects of tariffs.
Our cash balance at the end of the second quarter was $13 million, a decrease of $14.9 million compared to cash and marketable securities of $27.9 million at the end of the second quarter of last year. Our cash and marketable securities balance decreased because of higher working capital requirements, as well as higher dividends and cash used for share repurchases during the previous quarters. As of June 30, 2019, dealer inventories were slightly higher than at this time in 2018, but approximately 10% lower than at the end of the first quarter, indicating strong dealer sales through during this retail selling season. Unit backlog at the end of the quarter was slightly lower than at this time last year. With that, I'll turn it back over to Rick.
Rick Hubbell (President and CEO)
Jim, thank you. We look forward to introducing our 2020 models to our dealer network at our annual dealer conference next month. We are developing several new models which we believe will appeal to our dealers and retail customers, and we are eager to see their reaction. We are aware of the recent reports discussing weak retail sales in May and June. While we have not seen any indications of weaknesses in the recreational boating market, and note that the short-term data points often have some noise which makes them hard to interpret, we will be listening closely to our dealers' assessment of their markets during our dealer conference. I would like to thank you for joining us this morning. Brian, we can open up the lines for questions now.
Operator (participant)
Thank you. If you'd like to ask a question, please press star one on the telephone keypad. If you're using a speakerphone, please make sure your mute function is off to allow your signal to reach your equipment. Again, press star one to ask a question. We'll pause for a moment to allow everyone an opportunity to signal for questions. Once again, if you'd like to ask a question, please press star one. We'll now take our first question from Eric Wood from B. Riley. Please go ahead. Your line is open.
Eric Wood (Analyst)
Thank you. Good morning, guys. A couple of questions. I guess you made a comment about you're not seeing any weakness in your sales trends, and obviously, the data can be tough on a short-term basis. Anything you can point to that maybe would cause your results to outperform kind of in general? Are you seeing any regional strength or weakness around the country? This last question, I know Canada is still having some lingering effects from the tariffs that were in there up until kind of mid-quarter. What are you kind of seeing now that we're kind of into Q3? Maybe inventory kind of flows through there, and when would you expect Canada to get to kind of more normalized growth rates?
Jim Landers (VP of Corporate Finance)
Eric, this is Jim. A lot of questions there. Let's try to take them one at a time. Happy to. In terms of the whole retail sales issue and how we're doing, we have called out some new models that we've done for the 2019 model year that have been successful for us. We continue to hold the highest market share in our category in a couple of different areas, as we discussed. There is nothing outside of that that would make us immune to any changes. We do want to emphasize that we haven't seen any weakness in our markets. We just wanted to acknowledge those reports which have recently come out, which.
Ben Palmer (CFO)
I think, yeah. You asked a question about different regions and then Canada. Those are good questions. Not a whole lot of color to provide. We're not really seeing any particular changes in regional strength or weaknesses at this point. It's pretty consistent over kind of prior year and recent quarters, so no real change there. With respect to Canada and the tariffs, it's a little bit hard to tell. Of course, our international sales, again, is a small number. There was some relief a few months ago from Canada. We haven't yet seen the flow-through in terms of orders. Due to that, we're hopeful that there will be some improvement, but it's very dealer-specific as well. Unfortunately, we can't say that for us that it's a definite positive that we're seeing benefits coming through in terms of dealer orders.
Our international orders, again, being a percentage of the total, it's a little bit spotty. The visibility into that can be a little bit spotty. Unfortunately, that's really all I can provide at this point.
Eric Wood (Analyst)
No, that's very helpful. Congratulations on the strong results.
Ben Palmer (CFO)
Thank you so much.
Jim Landers (VP of Corporate Finance)
Thanks, Eric.
Operator (participant)
We will now take our next question from Louis Moser from Mafax Investors. Please go ahead. Your line is open.
Louis Moser (Analyst)
Good morning, nice earnings. I was interested in knowing that I haven't followed your company too closely up until I saw the report today, which was very, very good. If the company has a buyback program, the stock, and if not, is there any possibility of doing so?
Ben Palmer (CFO)
We do have a buyback program that is in place. We did repurchase some shares during the second quarter, a little over 65,000 shares. That is something that we do watch closely, and that is something we routinely try to do to return some cash to shareholders. That is 65,000 shares during the second quarter of this year.
Louis Moser (Analyst)
What is the total buyback potential?
Ben Palmer (CFO)
I think we have—and we could easily go back to the board—but we have well over $1 million that is authorized by the Board of Directors. The exact number, actually, $1.8 million under the current authorization.
Louis Moser (Analyst)
I guess the next question would be, you beat the two analysts that followed the stock nicely. Is this an anomaly this quarter? Is it unusual? Or do you see any consistency going forward?
Jim Landers (VP of Corporate Finance)
We had some interference here.
Ben Palmer (CFO)
Your question was about the number of analysts that are covering this. Is that correct?
Louis Moser (Analyst)
No. I said basically you've got a couple of analysts in there that their estimates were beaten considerably by your earnings report. I was wondering if the earnings for this quarter were sort of an anomaly in as much as they were so high versus the estimates, and if this trend is going to continue.
Jim Landers (VP of Corporate Finance)
Louis, this is Jim Landers. We do not give guidance, so we're not going to be able to talk about what we think the coming quarters are going to be. Since you're new to the story, we might mention that second quarter is usually seasonally our best quarter. The two analysts who follow us are great. We've seen them recently. They know our business. You would have to ask them about what their estimates are and how they're tracking.
Louis Moser (Analyst)
Okay. Thanks very much.
Jim Landers (VP of Corporate Finance)
Thanks.
Appreciate your interest.
Operator (participant)
Once again, if you'd like to ask a question, please press star one. We'll now take our next question from Ronald Buchbinder from IFS Securities. Please go ahead. Your line is open.
Ronald Buchbinder (Analyst)
Good morning. Yes, congratulations on a nice quarter, especially given what the reports from Big Data were. Looking at the Big Data compared to what you guys are seeing, is it larger boats or smaller boats, aluminum versus fiberglass? Where do you think the biggest differential is compared to what Big Data was saying?
Jim Landers (VP of Corporate Finance)
Ron, we're not sure what Big Data was saying, so I don't know if we can reasonably address that. We certainly think about other segments of the boat market that are doing better than us or worse. What I'm about to tell you is not overly helpful. The ski wakeboard market has performed pretty strongly. The aluminum pontoon boat market has been strong, maybe a little less strong right now, but I'm just repeating data that we all have or reports we all have access to. Larger boats have done well for us, and you know that from the first two quarters of this year. We feel good about that. That certainly helps our financial metrics.
Ronald Buchbinder (Analyst)
Okay. International, it's been down so much primarily because of Canada and the lingering effects, as you said, from the tariffs. Do you expect it to bounce back next year, or do you think that we might stay at this level going forward?
Ben Palmer (CFO)
This is Dan, Ronald. It's hard to say. Again, it's still a relatively small percentage for us. Several years ago, it was as much as 30% of our net sales. We've been able to grow through domestically to overcome the weakness internationally in terms of what's going to happen next year. It's uncertain. We're not necessarily seeing any signs that it's, again, picking up. I talked earlier about Canada in particular, that despite some clearance of some of the headwinds, we've not seen our dealers rush in with additional orders immediately. For us, we hope it's better, but at this point, we're not expecting that international will turn around and be a significant contributor to our results next year, any different than it has been in the most recent quarter.
Ronald Buchbinder (Analyst)
As you look to newer models to develop, is it still going to be a continued shift to larger outboards going forward?
Ben Palmer (CFO)
At this point, yeah. I mean, our folks have worked really hard and successfully to move along with the trends, which are really strong for the outboards. We have been able to pivot and take advantage of that. Yes, both outboards and the larger models we see at this point continuing to be strong. We have got new good product out there that we think will help continue to support our sales.
Ronald Buchbinder (Analyst)
Labor, have you seen any relief yet in labor, or does that continue to press higher?
Ben Palmer (CFO)
In terms of labor and the ability to retain employees, attract and retain employees, continues to be a challenge. We've thus far been able to meet the challenge. There is some—I don't know if I'd call it upward pressure, but we're looking at our compensation programs, retention, and quality, and so forth. There have been some compensation adjustments that we've obviously made, but we don't necessarily see that picking up, that there's huge wage inflation. It's something we're trying to respond to, again, more from a retention and quality perspective.
Ronald Buchbinder (Analyst)
Okay. Great. Thank you for taking my questions, and good luck for the back half of the year.
Jim Landers (VP of Corporate Finance)
Thank you.
Thank you, Ron.
Operator (participant)
Once again, to ask a question, please press star one. We'll now take our next question from Eric Wood from B. Riley. Please go ahead. Your line is open.
Eric Wood (Analyst)
Hey, thanks, guys. Quick follow-up question. This might be a tough one to answer, but the strength you're seeing in large boat demand, is any of that a function, you think, of the smaller boat buyer being hesitant and not purchasing? Or is it more just a function of that's where you're rolling out the new models and larger boats, and that's where the consumer is migrating versus the other questions?
Jim Landers (VP of Corporate Finance)
Eric, this is Jim. We think the trends that we've discussed are a result of our focus on that market and our successful designs this year, so successful products. I think it's difficult to extrapolate our results to any larger consumer trends. I would just be cautious about doing that.
Eric Wood (Analyst)
Perfect. Thanks, Jim.
Jim Landers (VP of Corporate Finance)
Thanks.
Operator (participant)
At this time, there appears to be no further questions. I'd like to turn the conference back to you, Mr. Landers, for any closing or additional remarks.
Jim Landers (VP of Corporate Finance)
Brian, thank you very much. We appreciate it. We appreciate everybody who called in this morning for your questions. Hope everyone has a good day, and we will talk to you soon.
Operator (participant)
As a reminder, the conference call will be replayed on www.marineproductscorp.com within two hours.