Marine Products - Earnings Call - Q3 2018
October 24, 2018
Transcript
Operator (participant)
Good morning, and thank you for joining us for Marine Products Corporation's third quarter 2018 financial 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 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 like to advise everyone that this conference call is being recorded. Jim will get us started by reading the forward-looking disclaimer.
Jim Landers (VP of Corporate Finance)
Thank you, Anna, 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 these are available on our website at www.marineproductscorp.com. If you've not received our press release, please visit our website again at www.marineproductscorp.com for a copy. We will 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 third 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 21.6% during the third quarter. Net sales increased due to a 7.9% increase in units of boats sold and a 12.6% increase in the average selling price per boat. We are especially pleased with sales increases in our Stern Drive product line, which runs counter to the cyclical weakness in this recreational boat segment and sales of our new, larger SSX models, which drove the increase in our average selling prices. 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 the category, approximately 16.8% for the 12 months ended June 30. Robalo's market share continues to rank number three in the outboard sport fishing category. As a testament to the success of our Chaparral Sun Coast outboards, the combination of Robalo and Chaparral outboard models together now hold number one market share in the 16-30 ft 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, as well as a $0.10 per share special year-end dividend, which is a 100% increase compared to last year. Also, during the third quarter, we repurchased 49,194 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. Net sales for the third quarter of 2018 were $72 million, an increase of 21.6% compared to the third quarter of 2017. Both average selling prices and unit sales increased. Unit sales in almost every product category increased, and a model mix that included larger boats drove average selling prices higher. Gross profit in the third quarter was $16.2 million, an increase of 20.2% compared to the third quarter of 2017. Gross margin during the quarter declined slightly to 22.5% compared to 22.7% in the third quarter of last year. Selling, general and administrative expenses were $7 million in the third quarter, an increase of approximately 3% compared to the third quarter of 2017 due primarily to higher incentive compensation, consistent with improved operating results. SG&A expenses were 9.7% of net sales this quarter compared to 11.5% in the third quarter of last 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 September 30, 2018, we reported net income of $7.2 million. Net income increased by $2.6 million, or 56.9%, compared to the third quarter of last year. Diluted earnings per share of $0.21 increased by $0.08, or 61.5%, compared to the third quarter of last year. Contributing to the year-over-year improvement in net income and earnings per share were lower corporate tax rates. International sales represented only 3.1% of net sales during the third quarter, compared to 6.1% of net sales in the third quarter of last year. International sales decreased primarily due to the retaliatory tariffs enacted earlier this year.
Our cash and marketable securities balance at the end of the third quarter was $22.3 million, an increase of $4.8 million compared to the prior year, but a decrease of $5.5 million compared to the end of the second quarter. Our cash and marketable securities balance decreased sequentially because of higher inventories, consistent with high production levels. Our effective tax rate during the third quarter of 2018 was 22.9%, a significant decrease compared to 32.4% in the third quarter of last year. The effective tax rate declined in the third quarter of this year primarily because of the Tax Cuts and Jobs Act enacted in the fourth quarter of last year. The lower effective tax rate for the third quarter of 2018, due to tax reform, increased diluted earnings per share by approximately 3 cents compared to the third quarter of 2017.
As of the end of the third quarter, our order backlog was higher than at the same time last year, and our dealer inventories were relatively unchanged, reflecting the strong 2018 retail selling season and prospects for 2019. With that, I'll now turn it back over to Rick for a few closing remarks.
Rick Hubbell (President and CEO)
Ben, thank you. We held our annual dealer conference in August and were pleased with both our dealers' reception to our 2019 models and their enthusiasm regarding near-term prospects for the recreational boating market. Our dealers were very enthusiastic about our new Robalo R272 center console. At Chaparral, we have introduced a 297 Surf Series for 2019, which is the largest Surf Series yet, as well as smaller Surf and H2O models. As we previously mentioned, our third quarter results were highlighted by sales of larger boats. I'm proud of the appeal of some of our larger models, including the larger Chaparral SSX models. One example of our successes this quarter is the largest Chaparral SSX, the 347. The 347 is a large Stern Drive bow rider with a full-beam cabin, a large amount of seating, and a number of other innovative features.
This boat is one reason that our Stern Drive sales have grown in spite of continued weakness in the overall Stern Drive market. 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 signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for a question. We will take our first question from Eric Wald and B. Riley. Please go ahead.
Eric Wald (Senior Analyst)
Thank you. Good morning.
Rick Hubbell (President and CEO)
Hey, Eric.
Eric Wald (Senior Analyst)
Two questions if I may. I guess one, obviously, a strong outlook you noted from the dealer meeting. It seems pretty consistent with kind of what we heard from our annual survey. I'm just trying to get a sense of kind of below the surface, what are you hearing around maybe some anecdotal metrics, specifically any increased promotional activity out there from your competition, used boat inventory, any thoughts around that, or are we still at attractive or still at levels not being attractive to new boat buyers?
Jim Landers (VP of Corporate Finance)
Eric, this is Jim. The news is good, but there's nothing in particular to call out. As you probably know, I'm sure you know, a lot of boat sales are used boats anyway, so there's nothing special about used boat inventory, no particular regional areas of strength or relative lack of strength. Just overall, a pretty good environment at this point.
Eric Wald (Senior Analyst)
Perfect. Secondly, on M&A, there's obviously been a meaningful increase in acquisition activity in recent months throughout the industry. I'm assuming Marine Products has been kicking the tires on kind of all the targets that have been out there put up for sale. What's kept, maybe not specifically in each target, but just generally, what's kept you away? Is it the brands being offered? Is it the types of boats? Is it valuation? Do you believe you need an acquisition in the coming years to drive growth, or do you have enough runway organically?
Ben Palmer (CFO)
Eric, this is Ben. We are interested and have been looking at some candidates. There's no particular reason at this point. We would love to add something that's complementary to the portfolio, as we've talked about for years. I think it just hasn't clicked for us. Valuations are quite high, but we will continue to diligently pursue. I think relative to the need for an acquisition, we've always felt that, and by our results, you can tell that we've been able to drive some nice growth in both our sales and earnings, and we believe we'll continue to do that within the Chaparral and Robalo brand names. We are hoping that we can find another complementary acquisition. Just haven't been able to click for us just yet.
Eric Wald (Senior Analyst)
Sounds good. Thank you guys very much.
Ben Palmer (CFO)
Thank you.
Jim Landers (VP of Corporate Finance)
Thanks, Eric.
Operator (participant)
Thank you. We take our next questions from Ronald Bookbinder, from IFS Securities. Please go ahead.
Ronald Bookbinder (Analyst)
Good morning and congratulations on a terrific quarter.
Jim Landers (VP of Corporate Finance)
Thank you, Ronald.
Ronald Bookbinder (Analyst)
My first question is Nashville, Georgia, with the hurricanes that have recently come through. How is everything and everyone in Nashville?
Jim Landers (VP of Corporate Finance)
I think we were without power for a day or maybe a little more than a day, and there was not too much damage.
Ben Palmer (CFO)
Right. Yeah, no damage. We came through it very well. It was a tornado last year, hurricane this year, but we're unscathed.
Jim Landers (VP of Corporate Finance)
Yeah. Thanks for asking. Good question.
Ben Palmer (CFO)
Yeah. Appreciate it.
Ronald Bookbinder (Analyst)
That's good to hear. The strong sales, was there any sort of abnormal shift in sales from quarter to quarter that helped bring the upside there?
Jim Landers (VP of Corporate Finance)
Ron, we've talked a few times about a model mix that included larger boats. That would be the one thing we'd call out. We had a nice model mix this quarter with some of the larger boats, as Rick discussed in his comments.
Ronald Bookbinder (Analyst)
I was talking more about just timing.
Ben Palmer (CFO)
Oh, right. Yeah. Timing of shipments on occasion can have an impact. It may have had a very slight, but not significant, not enough that we felt to call it out. We did not mention it, but nothing of significance.
Ronald Bookbinder (Analyst)
Okay. On the gross margin, it was down 30 basis points, still very nice gross margins. What about higher input costs like labor and material? Any impact?
Ben Palmer (CFO)
Minimal impact on the quarter. Employee retention is something that we are really focused on. All things being equal, there may be some uptick in employee labor costs, but we hope that's going to come back to us in other improvement areas to really have no or minimal net impact. In terms of other input costs at this point, we've not seen any meaningful impacts from tariffs or anything like that. It certainly, as time goes on, if there aren't any changes, it may creep into the cost structure, but at this point, we've been able to minimize any negative impacts.
Ronald Bookbinder (Analyst)
Okay. Lastly, the buildup of inventory, we're sort of going into the off-season. Inventory was up like 20%. The dealer inventory is unchanged. Is it just that the backlog is up about 20% that you're comfortable with this inventory level?
Ben Palmer (CFO)
That's right. Also in there that we didn't call out was we did have some favorable vendor terms that we took advantage of and bought some key components a little bit ahead of time. That contributed to that appearance of that additional level. It is overall the fact that we are, throughout the season, at relatively high production levels, and we feel that inventory is appropriate at this point.
Ronald Bookbinder (Analyst)
International, with trade deals being done with Canada, Mexico, do you think that international revenue is going to rebound, or is there going to be some lingering impact from the tariffs?
Ben Palmer (CFO)
I think it'll be at this point, it's still impacting us. It's still out there and lingering, I guess. Fortunately, and it maybe does present an upside that it is a relatively small percentage of our total sales. I think the overall increases with the decreases in international is just further testament to how well we're doing domestically. We're hoping that would be great to get some of that resolved, and I think it would provide some additional demand and sales through. At this point, I think there's a lot of people that are just sort of in a wait-and-see attitude or position at this point in time.
Ronald Bookbinder (Analyst)
Okay. Great. Congratulations once again on the quarter, and good luck in the rest of the year.
Jim Landers (VP of Corporate Finance)
Thank you, Ron.
Ben Palmer (CFO)
Thank you very much.
Operator (participant)
We take our next question from Louis Moser from Mafax Investors. Please go ahead.
Louis Moser (Analyst)
Yeah. Hi. Good job on the earnings. Just wanted to know what your biggest concern is going forward into the next quarter and thereafter.
Jim Landers (VP of Corporate Finance)
Labor is one. There's a shortage of skilled labor throughout the United States in every industry, including ours. That's one. Certainly keeping an eye on tariffs and trade wars.
Ben Palmer (CFO)
I think biggest concern, I mean, certainly demand, we're in a good market, a good point in the cycle. Dealers are excited, but watching that closely. We're very comfortable right now with all the signs and signals we see at this point.
Louis Moser (Analyst)
I didn't get the figures on the back order situation. How does that compare to last year at this time?
Ben Palmer (CFO)
Back order. Yeah. We don't give specific numbers, but they are up nicely compared to a year ago.
Louis Moser (Analyst)
Moving into the next quarter, you feel comfortable?
Jim Landers (VP of Corporate Finance)
Yes. Absolutely.
Louis Moser (Analyst)
Okay. That's it. Thanks very much.
Jim Landers (VP of Corporate Finance)
Thank you.
Operator (participant)
Once again, if you would like to ask a question, please press star one It appears there are no further questions at this time. I would like to return the call to Jim Landers for any closing remarks.
Jim Landers (VP of Corporate Finance)
Okay. Thank you, Anna. We appreciate everybody calling in and listening. We look forward to seeing a lot of you in the very near future. Have a good day. Take care.
Operator (participant)
As a reminder, to the callers, conference call will be replayed on www.marineproductscorp.com within two hours following the completion of the call. This concludes today's call, ladies and gentlemen. You may now disconnect.