Marine Products (MPX) Q3 2019 Earnings Call Transcript

Image source: The Motley Fool.

Marine Products (MPX 1.35%)
Q3 2019 Earnings Call
Oct 23, 2019, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and thank you for joining us for Marine Products Corporation's third-quarter 2019 financial earnings conference call. Today's call will be hosted by Rick Hubbell, president and CEO; Ben Palmer, chief financial officer. Also present is Jim Landers, vice president of corporate finance. [Operator instructions] 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 -- Vice President of Corporate Finance

Thank you, Brittany, 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, which 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'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 Chief Executive Officer

Jim, thank you. We issued our earnings press release for the third 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 increased slightly over the second quarter of the prior year. Net sales increased due to a 5.8% increase in average selling price per boat. These increases were partially offset by a 6.1% decrease in the number of units sold during the quarter. We continue to hold a high market share in all of our product categories.

Our Chaparral's sterndrive products holds the second highest market share in their category, approximately 15.7% for the 12 months ending June 30. 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 continue to hold the highest position in the overall outboard market with a share of 6.8%. We announced this morning that our board of directors yesterday declared a regular quarterly cash dividend of $0.12 per share plus a special year-end cash dividend of $0.10 per share.

Board of directors continued to believe the dividend level and the special year-end dividend represents a prudent use of capital to reward our shareholders. Also during the third quarter, we repurchased 85,354 shares of common stock on the open market. With that overview, I will turn it over to our CFO Ben Palmer.

Ben Palmer -- Chief Financial Officer

Thank you, Rick. Net sales for the third quarter of 2019 were 72.2 million, relatively unchanged compared to the third quarter of last year. Average selling prices, again, increased by 5.8%, consistent with continued strength in sales of larger models. Unit sales decreased as we focused production on producing our newer larger models.

Gross profit in the third quarter was 15.7 million, a decrease of 2.7% compared with the third quarter of 2018. Gross margin during the quarter decreased to 21.8% compared with 22.5% in the third quarter of 2018. Selling, general and administrative expenses were 6 million in the third quarter of 2019, a decrease of $957,000 compared with 7 million in the third quarter of last year. These decreases -- these expenses decreased due to state incentives of 1.6 million recorded during the third quarter, partially offset by higher advertising and employment-related costs.

As a percentage of net sales, SG&A expenses decreased to 8.4% in the third quarter of 2019 compared to 9.7% in the third quarter of last year. Interest income during the third quarter of 2019 was $83,000, an 18.6% decrease compared with $102,000 during the third quarter of last year. For the quarter ended September 30, we reported net income of 7.9 million, an increase of 9.7% compared to net income of 7.2 million in the third quarter of 2018. Diluted earnings per share were $0.23 in the third quarter of this year compared with $0.21 in the third quarter of 2018.

Our effective tax rate during the third quarter of 2019 was 19.8% compared with 22.9% in the third quarter of 2018. Marine Products domestic sales decreased slightly during the third quarter of 2019 compared to the third quarter of the prior year. In contrast, international sales represented 4.3% of net sales compared to only 3.1% of net sales in the third quarter of last year, that's an increase of 37.9% in this year compared to the prior year. International sales increased significantly in our Canadian markets, which were negatively impacted last year by trade tariffs.

Cash balance at the end of the third quarter was 23 million, an increase of $700,000 or 3.1% compared to cash and marketable securities of 22.3 million at the end of the third quarter of last year. As of September 30th, 2019, dealer inventories were lower than at the end of the second quarter indicating strong dealer sell-through during this retail selling season. However, dealer inventories were higher at the end of the third quarter than at this time last year and order backlog was lower. Because of these developments, we are monitoring dealer inventory levels closely and have reduced scheduled production and headcount early in the fourth quarter.

With that, I'll turn it back over to Rick.

Rick Hubbell -- President and Chief Executive Officer

Thanks, Ben. We held our annual dealer conference in August and we're pleased with both our dealers' reception to our 2020 models. Our dealers were very enthusiastic about our redesign Robalo Cayman 206. Among our Chaparral products, we showed our dealers an updated Surf Series model, our new 280 OSX and upgrades on the 300 OSX, which was new for 2019.

We are presenting a more focused model line up to our dealers and customers in 2020 than in past years. We believe that our model lineup is directed toward high demand end markets and will allow us to increase our focus on efficiency and profitability. As always, we pay close attention to the general economy and indications of demand for our products and are prepared to adjust our production to meet our dealers' requirements. I'd like to thank you for joining us this morning, and we'd be happy to take any questions you may have.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Eric Wold with B. Riley.

Eric Wold -- B. Riley FBR -- Analyst

Thank you. Good morning. A couple of questions. I guess one on -- going to the inventory comments, I guess maybe you saw up a little bit year-over-year downturn from June, maybe give us a sense of what the mix looks like and may be the age and kind of where would you want to see that inventory move to given that you're now looking to kind of adjust production a little bit? And then, I guess -- sorry, it's not to put a question on that, yes, maybe also talk about what you're seeing from dealers in terms of their desire to kind of replace an inventory, kind of take inventory in, in this environment.

Rick Hubbell -- President and Chief Executive Officer

Jim, why don't you go ahead and take that?

Jim Landers -- Vice President of Corporate Finance

Yes. Sure. Eric, this is Jim. We have a real practice of keeping our inventories lean and as much current model year as possible.

So in terms of the age of our inventory, I don't have the numbers right in front of me, Eric, but it's pretty good. I mean it's not all 2020 model inventory because we just started the year, but inventory is pretty good. Dealers are seem to be a bit cautious right now and there is -- there are a lot of mix signals in the media and some other things. And that some of the concerns are belied by the decent retail boat sales.

Boat registrations in December were decent -- in September were decent, for example. So there's mix signals right now and that just causes us to be cautious about production for the next few months. We need to get to the winter boat show season and get some better indications.

Eric Wold -- B. Riley FBR -- Analyst

OK. And then in the press release, when you talk about gross selling prices that you mentioned, sales discount decreased slightly. That indication that you've not needed to be promotional to move inventory recently and is it the right interpretation? And then, what are you seeing from the competitive landscape on that?

Ben Palmer -- Chief Financial Officer

Yes. Eric, this is Ben. That's correct. We have not had to be particularly aggressive with our promotions at this point in time.

And back to your earlier question and Jim's comments, yes, the aging of the inventory we're very, very pleased with. I think there's a lot of pushing and pulling when it comes to dealers making decisions about adding to their inventory. We have the financing companies that are being a bit cautious right now, may be prudent, may be overly cautious, but that push and pull keeps everybody, perhaps, a little bit more healthy. And there is overall may be right decisions are made.

But at this point in time, yes, there is a little bit of caution out there. We feel, again, very good about the quality of the dealer inventory and our model lineup. So we're just making these adjustments at this point in time, and we'll adjust as we see a little clear road ahead.

Eric Wold -- B. Riley FBR -- Analyst

OK. And then final question from me. On the SG&A, the 1.6 million the state incentives, maybe can you give us a sense of what that was for? And is that a one-time situation? Is that something that would be in approximately future periods as well?

Ben Palmer -- Chief Financial Officer

Good question. That is -- it is an annual incentive, but it is a large amount this year because for a variety of reasons. We had a number of years to sort of clear through in this very tight time frame. There's a number of things we needed to do to just sort of secure that and wrap that up, so they all hit here in the third quarter.

Typically, it would be no more than -- we appreciate it, but no more than 3,000 or 4,000 a year. And again, this was four, five years' worth of credits all or incentives all hitting it in first quarter.

Eric Wold -- B. Riley FBR -- Analyst

OK. And what is it for us, typically?

Ben Palmer -- Chief Financial Officer

What is it for? It's Georgia state incentive related to R&D activities. There is a process you go through. It's similar to the federal tax program. You have to go through a qualification process, and we were -- we did and the state approved it, and we'll collect those incentives over the coming few months.

Eric Wold -- B. Riley FBR -- Analyst

Thank you.

Operator

Our next question comes from Shawn Boyd with Next Mark Capital.

Shawn Boyd -- Next Mark Capital -- Analyst

Good morning. Thanks for taking the question. Can you guys hear me OK?

Ben Palmer -- Chief Financial Officer

Yes.

Shawn Boyd -- Next Mark Capital -- Analyst

Just real quick, I was curious about linearity within the quarter. Could you talk briefly about the months for the quarter and how that impacted the orders?

Jim Landers -- Vice President of Corporate Finance

Shawn, this is Jim Landers. We are -- in terms of linearity, there's not a whole lot of comment to make. Just remember that, we tried to produce our products on a regular, smooth-out production schedule which is the best way to run a manufacturing firm. Our dealers sell to the retail public and their sales may fluctuate a bit.

So there's not really a whole lot we can tell you. If you were to see the individual months of our quarter, you wouldn't see a lot of variation.

Shawn Boyd -- Next Mark Capital -- Analyst

OK. I appreciate that. So maybe if you could talk a little bit about just the order flow through the quarters or as the quarter progressed? And then you did talk about order book, I think, at the quarter end versus year over year, but I didn't hear what that actually, how much that was down?

Jim Landers -- Vice President of Corporate Finance

Yes. So we actually only disclosed those statistics in detail once a year in our 10-K. So we make qualitative comments about them during the year. And again, order flow is fairly even throughout the quarter.

If you were maybe trying to get it fourth quarter sales, I believe, our sequential third to fourth quarter decline last year was around 14%. As Ben alluded -- as Ben mentioned, we are looking at cutting production to make sure dealer inventory stay healthy. But one thing you really don't want to do is have your dealers and therefore, too much inventory. So our production and sales decline in the fourth quarter of this year will be perhaps a bit more pronounced than last year.

That's maybe the key dealer inventory is healthy.

Ben Palmer -- Chief Financial Officer

And I'll -- this is Ben. I'll elaborate on that. Jim's absolutely right, but it is typical for us that the third and fourth quarters, as you can imagine, are typically we do produce less, and therefore ship less and therefore record lower revenues typically in the third and fourth quarter, so this is not that unusual. Obviously, we're wanting to ship as many boats.

Dealers are interested in bringing boats in and moving them out as quickly as possible and that certainly benefits us as well. But as Jim said, we try to keep production reasonably steady. We -- it's not -- we don't adjust production weekly or even monthly. It's a longer-term view.

It maybe that number of orders flow in to us here in the near term and we can pivot and adjust production fairly quickly. But if there's a number of just-go issues, you have to work through to make adjustments to production. So again, it's not something that's as fluid as weekly or usually even on a monthly basis. So it's more of a longer-term view.

And as we indicated, we are taking production down a little bit at this point, not that unusual for late in the -- or after the selling -- retail selling season. So just being a little bit cautious at this point in time, and that's being supported by the floor plan financing companies indirectly, not directly, but just indirectly. They are supporting that because they are being a little bit cautious at this point in time as well.

Shawn Boyd -- Next Mark Capital -- Analyst

Sure. No, I appreciate the comments on the overall seasonality of the business. I hear you loud and clear on that. And just to kind of wrap this up, the production and headcount cuts that you've done early in Q4, just roughly how big are they versus, say, what you would have done last year going into the sequentially kind of Q4?

Jim Landers -- Vice President of Corporate Finance

Shawn, we're still on process on that, so we'll have to give an update on that one later on.

Shawn Boyd -- Next Mark Capital -- Analyst

OK. OK. And I guess, just last question from me. In terms of your production at this point and the cuts, would they be focused in particular areas or these are pretty wide spread? And I'm thinking about kind of the comment in the press release and the weakness in the sterndrive boats in particular.

But I don't know, maybe I'm guessing certain models are and maybe the higher-end models are in a much better shape in order to be able to do anything there. But if you could just elaborate maybe on kind of the spread within the products and for us that would be helpful?

Jim Landers -- Vice President of Corporate Finance

Eric, I mean it's hard to comment. That's kind of based on our order book. There is not anything that stands out as being particularly bad or particularly good. I think the trends in our models that -- our sales that we've seen over the past year or so are probably going to stay in place for the fourth quarter.

We have migrated a bit toward larger boats. That kind of continues. And we got a more focused model lineup where we think they are market opportunities for us, but there's really nothing that jumps out that would move the financial results necessarily. We are getting geared up.

That was some of the newer models that got a real strong reception from the dealer. So we're scrambling to meet that demand. Dealers wanting to get those new models in their inventory by the time for the winter boat shows. So that's something we're clearly focused on and that will be part of the ultimate driver for the results as well.

Shawn Boyd -- Next Mark Capital -- Analyst

OK. One last thing in terms of -- just as we're talking here, I'm looking back on kind of that Q3, Q4 decline. You mentioned that -- I think you said 13, 14% decline last year quarter to quarter, but you do have years where we don't see that. So if you go back to -- I mean, I'm just looking at 2017, right here 2016, was there something particular about these previous years where you did an acquisition or what have you that was driving that up? Or I'm just trying to understand more of that kind of 13 to 14% decline you discussed?

Jim Landers -- Vice President of Corporate Finance

Shawn, maybe we can discuss this later on. I mean, there's nothing that we wouldn't want to discuss publically but the boat business is very cyclical. There are some years where -- there are many years, in fact, where the cyclical nature of the boating industry overshadows the seasonal nature of it. We could point to any given year and talk about the economy and consumer demand at that time.

We can go all the way back to '19 decks and point those -- point out those things. But that you are correct that there have been some years where when there's tremendous strength and we're scrambling to catch up and keep up and things like that. So at this point, we feel good about like as we talked about we feel good about the position of the industry, but there's a little bit of caution out there. So all things being equal, shipping -- producing and shipping fewer boats in the fourth quarter makes logical sense.

If there is caution out there, people, the financing companies, the dealers, there won't be a lot of sell-through in the fourth quarter. We may look back early next year and say, "Darn, I wish we had shipped more boats and wish to have been able to deliver more boats in the fourth quarter, and we wouldn't be so behind with production in the first and second quarters of 2020. So your point is well taken. There are some years where the fourth quarter is higher than the third quarter, but there are several examples as well where the fourth quarter can be among the weakest of the year or will be the weakest of the calendar year.

Operator

Thank you. At this time, there are no further questions. I will now turn the conference back over to Jim Landers for closing.

Jim Landers -- Vice President of Corporate Finance

OK. Brittany, thank you. We appreciate everybody who called to listen in, and we appreciate the questions and look forward to some follow-up and talking to everyone, again, soon. Have a good day.

Operator

[Operator signoff]

Duration: 22 minutes

Call participants:

Jim Landers -- Vice President of Corporate Finance

Rick Hubbell -- President and Chief Executive Officer

Ben Palmer -- Chief Financial Officer

Eric Wold -- B. Riley FBR -- Analyst

Shawn Boyd -- Next Mark Capital -- Analyst

More MPX analysis

All earnings call transcripts