Oct 23, 2013
Executives
Rick Hubbell - President and CEO Ben Palmer - Chief Financial Officer Jim Landers - Vice President of Corporate Finance
Analysts
Jimmy Baker - B. Riley & Company
Operator
Good morning and thank you for joining us for Marine Products Corporation’s third quarter 2013 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
Thanks, Debbie. Good morning, everybody.
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 the number of known and unknown risks. I’d like to refer you to our press release issued today, the 2012 10-K, and our other SEC filings that outline those risks.
All of these are available on our website at www.marineproductscorp.com. If you’ve not received a press release for any reason and would like one, 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’ll turn the call over to our President and CEO, Rick Hubbell.
Rick Hubbell
Jim, thank you. We issued our earnings press release for the third quarter of 2013 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 a little more than 9% during the third quarter compared to the third quarter of last year. Net sales improved due to higher average selling prices per boat.
Consolidated unit sales were unchanged during the quarter compared to last year. Average selling prices increased primarily because we sold many more of Robalo sport fishing boats this year than last year and the average selling price of these boats is higher than our consolidated company average.
Gross profit increased by almost 5% during the quarter due to higher net sales. As a percentage of net sales however, our gross profit declined by 80 basis points during the quarter.
Operating profit increased by less than 1% compared to the prior year due to slightly higher SG&A expenses. Our diluted earnings per share for the third quarter of 2013 were $0.05 compared to $0.06 for the third quarter of last year.
The continued strong reception to our new 2013 Chaparral models by our retail customers has been a catalyst for additional increases in market share. The market share data for the six months ending June 30 show that Chaparral moved to a number one position in the 18 to 35-foot sterndrive boat market with the market share of 14%.
We are very proud of this market share gain, and I would like to point out this is the first time we have achieved this number one position. Year-to-date data through September are preliminary at this point, but continue to reflect similar market share and number one position.
We also announced this morning that in addition to our regular quarterly cash dividend of $0.03 per share, our Board of Directors yesterday voted to pay a special year-end dividend of an additional $0.03 per share. This special dividend rewards our shareholders for their continued support of our company and leads a strong and liquid balance sheet to pursue strategic opportunities that will enhance shareholder value over the long term.
With that overview, I will turn it over to our CFO, Ben Palmer.
Ben Palmer
Thank you, Rick. For the quarter ended September 30, 2013 we reported net income of $2 million, a 5.1% decline compared to $2.1 million last year.
Our diluted earnings per share for the quarter were $0.05 compared to $0.06 last year. Our unit sales to dealers during the quarter were essentially unchanged compared to last year.
Rick just mentioned that within our product offerings we sold a lot more Robalo offshore fishing boats. These models carry higher average selling prices than the company average.
In this quarter the model mix within Chaparral changed or within Robalo also changed to shift to higher price models. Average selling prices in our Chaparral models increased as well due to model mix and 2014 model year price increases which again shipping in the third quarter.
As a result of this change in model mix, our parts and accessories sales were also higher than the third quarter of 2013 compared to the third quarter of last year. Gross profit in the current quarter was $7.7 million, an increase of 4.8% compared to the third quarter of last year.
Gross margin in the third quarter was 18.4% compared to 19.2% last year. Gross margin declined due to higher employment cost compared to the third quarter of last year as we trained new employees.
The impact of higher labor cost was partially offset by lower materials cost as a percentage of net sales, as a shift in model mix to larger boats generate higher margins. Selling, general and administrative expenses increased by 7.3% in the third quarter of 2013 compared to the prior year and were 11.8% of net sales compared to 12% of net sales in the third quarter of the prior year.
These costs increased due to higher promotional advertising costs and higher research and development cost this quarter, as well as higher cost that vary with sales such as warranty expanse and sales commissions. U.S.
metric net sales increased by 15.5% in the third quarter of 2013 compared to the third quarter last year, while international sales declined 19.6%. International sales comprised 13.5% of consolidated net sales in the third quarter of this year, a significant decrease compared to 18.4% of consolidated net sales last year.
These declines were primarily outside of North America and sales to our Canadian dealers declined only slightly. Interest income during the third quarter was $83,000, a decrease compared to $196,000 in the third quarter 2012.
This decrease was due to lower marketable securities balance during the third quarter as compared to the prior year from liquidating a portion of our marketable securities portfolio late last year to fund our special year-end 2012 dividend. Marine Products income tax provision during the third quarter was $877,000 compared to $859,000 in the third quarter of last year.
For the full year 2013, we currently project an effective tax rate of approximately 25%. Our balance sheet remains strong.
Our cash and marketable securities balance decreased to $43.9 million at the end of the third quarter compared to $62.4 million at the end of the third quarter of 2012, again due to the special dividend we paid at the end of 2012 which totaled about $20.8 million. Total cash and marketable securities increased by $3 million during the third quarter of this year.
As we announced this morning, as Rick just mentioned, our Board of Directors has declared a $0.03 per share year-end dividend in addition to our regular $0.03 quarterly dividend. We will pay both of these dividends on December 10th to shareholders of record as of November 8th.
This special dividend will only minimally impact our balance sheet and our projected cash and marketable securities balance will continue to support our working capital and capital expenditure needs and provide for continued new development efforts. As of September 30, 2013 our dealer inventory in units has increased only slightly compared to the end of the second quarter of 2013.
We believe dealer inventories remain at reasonable levels. Unit order backlog remains strong.
Order backlog, as expected is higher than at the end of the second quarter 2013 and comparable to this time last year. And we are comfortable with our current production levels given the positive feedback from our dealer toward our 2014 models at our dealer conference a few weeks ago.
With that I will turn it back over to Rick for a few closing comments.
Rick Hubbell
Thanks Ben. As we have discussed before, we believe that the market for our products continues to improve although slowly.
The 2013 retail selling season improved compared to 2012, but fell short of our expectations due impart to cool rainy weather in the spring and delayed replacement of building infrastructure that was destroyed by Hurricane Sandy in the Northeast. In this retail selling environment we are very proud of our market share gains.
As stated earlier Chaparral currently holds the number one market share in 18 to 35 foot sterndrive boat segment. I believe that this is a result of listening to our dealers and customers and using our financial strength and industry experience to consistently invest in new product development that will produce very appealing profits.
We are also pleased with our borrowers’ recent successes, we borrow unit sales for the third quarter increased almost 50% compared to the third quarter of last year. The borrowers are now solidly in the top ten manufactures of offshore sport fishing boats.
We held our annual dealer conference during the third quarter and we have ratified by our dealers reception to our products for the 2014 model year. The new model is presented at the conference included our Chaparral 307 SSX Sportdecks which bridges the gap between our 277 and 327 SSX models.
We are also adding a larger 21-foot Chaparral H2O for the 2014. And that the model we are introducing three bay boats, our first model the 206 Cayman is available now and two larger bay boats will be available in the first quarter of 2014.
We and our dealers are excited about introducing these boats to retail consumers during the upcoming winter boat show season. We continue to work on the development of the boat tests, our new jet boat line that we discussed last quarter.
Testing of the initial jet boat designs have been encouraging and the boat tests will be available for the dealers late in the first quarter of 2014. We continue to have a good opinion that help the market potential for this new fiber glass product line.
I’d like to thank you for joining us this morning and we would be happy to take any questions you may have.
Operator
(Operator Instructions). We'll go first today to Jimmy Baker with B.
Riley & Company.
Jimmy Baker - B. Riley & Company
Hi, good morning. Congrats on the quarter and more importantly on the market leading position at Chaparral.
Jim Landers
Thank you.
Rick Hubbell
Thanks Jimmy.
Jimmy Baker - B. Riley & Company
So, you have had a lot of success with the H2O line and then are you expanding into jet boats which are relatively low ASP categories. But I mean given the success that you had there along with substantial market share gains all the way up to 35 feet, do you think there is an opportunity to extend your line the other direction into higher ASP categories than you currently participate?
Jim Landers
Jimmy, this is Jim. That is a weaker market right now.
The large boats seem to be -- I mean from a higher ASP to from a bigger boats. And that is a weaker market for us.
We are there and want to be there, but we're kind of closing that actually.
Rick Hubbell
That's historically. It has been our strength and again that segment of the market is weak, I think we still have some very products, but what we're selling is smaller boats and entry level boats.
I think we hit those points of interest about retail consumers is very well, that's where we’re focused now as we think that's where the growth opportunities are. But we will continue to monitor larger boats and the demand in that segment and we certainly can respond, we’ve got some awesome boats, boats up to 24, 26 foot range and I think we would be able to capitalize on that, it is on track, but right now we're focused on smaller boats.
Ben Palmer
And we currently have a 42 foot product right now.
Jim Landers
Okay. Jimmy let’s make them up later but one thing with the H2O is that the average H2O buyer is more likely to be a first time buyer than the buyer of another Chaparral product so we're bringing people into the market that way.
Then also the average jet boat buyer is younger than the average sterndrive boat buyer. So we're catching people earlier in their boating lives and they have a good experience with their first product and they’ll stay with us throughout their boating career.
We know demographically that that is important as well.
Jimmy Baker - B. Riley & Company
Okay. That makes sense.
So the favorable model mix within Robalo. Can you just talk about the drivers there, is that reflective of stronger retail demand and higher price offerings there or more like an inventory adjustment at the dealer level?
And then the 50% growth at retail in that line can you just remind us of the geographic concentration there, is that more Southeast and East Coast centric?
Rick Hubbell
The answer of the latter part, yes, it is more concentrated sort of in the Northeast, Southeast more of the coastal areas and not the west for sure. And again they typically on a similar size they carry higher ASPs and all this is really relatively and we're not, we're selling a few of the slightly larger Robalos, but again we're just having a lot of success with sort of the larger of the entry level Robalos and that’s really what drove things.
And the 50% increase, almost 50% increase is at wholesale truck dealers. We don’t have specific data available on the retail side, but I would think it would be similar, but that is shipments to dealers increased 50%.
Jimmy Baker - B. Riley & Company
Okay. That's helpful.
And just overall at least from the data that we see, it looked like Q3 retail demand really accelerated on industry-wide basis. Can you just talk about maybe in that critical 18 to 35 foot sterndrive category, what you’re seeing on an industry-wide basis in the third quarter, any region stand out to you as particularly strong or weak?
Jim Landers
Jimmy, this is Jim again. Yeah, September was a better month than one would expect just given the time of year it is, so we think the market is recovering.
But we did better this quarter in the Southeast in the Northeast and the Mid-Atlantic than we would have done last year. So those are the areas of strength for us.
And we do feel, again the third quarter was good. The second article in the front section belongs to internal this morning is about to this exact subject and how things like motorcycle, they mentioned boats particularly and ATVs have seen a nice surge in sales recently and you know what, consumers shouldn’t get the boredom.
But again for us it was more in Eastern half of the United States.
Rick Hubbell
I think, Jimmy, I think the reason for that might be, we can see more directly to again as shipments to dealers rather than retail sales, they can offset overtime to mirror each other eventually. And the Robalos were so strong as we indicated, those sales are stronger in the Southeast and in the Northeast certainly that contributed to the strength there.
The H2Os are still doing very, very well, but those were really, really strong last year. So there is kind of a mix in the type of product, new product that came out and again Robalos sales were very, very strong which resulted in strong distribution into the markets that we indicated.
Jimmy Baker - B. Riley & Company
That’s really helpful, thanks. So lastly I just wanted to dive a bit into margins and I’ll pass it off.
Do you see any opportunity to take some price increases here to help offset the higher employment cost and I guess just any general comments on gross margin trajectory going forward? And then separately, you called out I think higher advertising cost in SG&A, can you just talk about what you’re doing differently or more of there and how we should think about that spend going forward?
Ben Palmer
Well, Jimmy on margin progression I mean it’s lower than it has been. Volume will help us because of direct cost absorption, so the more volume we do, we feel really good about the jet boats for example, more volume we do that will help.
We’ve had some bigger boat sales, I mean slightly bigger in the third quarter, so that has helped our materials cost as a percentage of net sales. We did have, we have had some model year price increases that have gone through and done pretty well.
So there is going to be a little bit of opportunity there. But any margin progression we see is going to be based on those factors and its upward trend in margins is going to be slow, it’s going to be slow.
Advertising we’ve got some new products out there and I think that’s part of good. We’re helping our dealers as much as we can so it is for the advertising.
Jim Landers
Yeah the margins, obviously we were working on those very diligently. We think with the new jet boat [Cortex] we hope to achieve some pretty good volume there.
We think we’ll be able to leverage some of our manufacturing space and overhead without additional volume. So we think that, we talked about that being delivered we expect late in the first quarter of next year.
So mid to late next year hopefully we will see all things being equal some margin improvement there. And that’s really again, that’s one of the main reasons for the increase in headcount now as we prepare for that particular ramp up in production for those boats.
And the promotion grip, I’m sorry. Yes about promotions, it did change SG&A a bit, there is nothing in particular different than we are doing.
We are trying to help ourselves and help our dealers by investing more in promotional activities and magazines and other things. And we have the Internet advertising and things like that, but nothing in particular, reasonable question, but nothing in particular that’s driving it.
Jimmy Baker - B. Riley & Company
Okay. Thanks a lot for the time.
It’s very helpful.
Ben Palmer
Thanks, Jimmy.
Operator
(Operator Instructions) With no other questions in queue at this time, I’ll turn it back to Jim Landers for closing remarks.
Jim Landers
Okay, Debbie thank you. Thanks for the people who called in this morning, we enjoyed the discussion.
Hope everybody has a good day.
Operator
Ladies and gentlemen, thank you for your participation. This does conclude today’s conference.
I would like to remind callers that the conference will be replayed on the website within two hours following the completion of today's call. Thank you for your participation.
Have a great rest of your day.