Earnings Call Transcript - MPX Q1 2020

Operator, Operator

Good morning, and thank you for joining us for Marine Products Corporation's First Quarter 2020 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 a listen-only mode. Following the presentation, we will conduct a question-and-answer session. 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

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 2019 10-K and our other SEC filings that outline those risks. All of which are available on our website at marineproductscorp.com. If you've not received our press release and would like one, please visit our website 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 first quarter of 2020 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. We decreased production in the first quarter in order to reduce dealer inventories. We accomplished this goal as dealer inventories declined by almost 10% by the end of the first quarter compared to the prior year. Early during the fourth quarter, we had planned to increase production because of many indications of a strong retail selling season. However, as the impact of the COVID-19 pandemic began to emerge in mid-March, it became clear that macro events would disrupt boating retail selling season. At the end of March, we temporarily suspended our manufacturing operations out of concern for our employees, their families, and our community. At this time, we hope to resume production in early May. As we will review our market share at the end of the first quarter, I'm pleased to report that Chaparral continues to be a market share leader in its sterndrive recreational boat category. Robalo also continues to be a market share leader in the outboard category. And the combination of Chaparral and Robalo outboard models held the highest outboard market share in their size category. We announced this morning that our board of directors declared a regular quarterly dividend of $0.08 per share, a reduction of $0.04 compared to the previous quarter’s dividend. During the first quarter, we did not repurchase any shares of common stock in the open market. With that overview, I'll turn it over to our CFO, Ben Palmer.

Ben Palmer, Chief Financial Officer

Thank you, Rick. Net sales for the first quarter of 2020 were $59.1 million, a 28.8% decrease compared to the first quarter of last year. Unit sales declined by 28.9% during the quarter. Average selling prices were unchanged. Gross profit for the first quarter was $12.1 million, a decrease of 35.3% compared to the first quarter of 2019. Gross margin during the current quarter was 20.5% compared to 22.5% in the first quarter of 2019. Gross margin as a percentage of net sales declined due to manufacturing cost inefficiencies caused by lower production in the first quarter of this year compared to the prior year. Selling, general and administrative expenses were $7.3 million in the first quarter of 2020, a decrease of $2.6 million compared to $9.8 million in the first quarter of last year. These expenses decreased due to expenses that vary with lower sales and profitability, including incentive compensation and warranty expenses. These expenses were 12.3% of net sales in the first quarter of 2020 compared to 11.8% of net sales in the first quarter of 2019. For the quarter ended March 31, 2020, we reported net income of $4.2 million, a decrease of 43.7%, compared to net income of $7.5 million in the first quarter of 2019. Diluted earnings per share were $0.12 in the first quarter of this year compared to $0.22 in the first quarter of 2019. Our effective tax rate during the first quarter of 2020 was 14.4% compared with 16.3% in the first quarter of last year. Our international sales decreased by 44.6% and accounted for 5.7% of total sales. Our international sales to Canadian dealers only decreased moderately. Our sales to other international markets decreased much more significantly. The cash balance at the end of the first quarter was $20.1 million, an increase of $1.7 million compared to cash and marketable securities of $18.3 million at the end of the first quarter of 2019. As Rick mentioned, at the end of the first quarter of this year, dealer inventory levels were almost 10% lower compared to the first quarter of 2019. We will begin to manage our backlog as we resume production. Although we temporarily shut down production at the end of March, we did ship some boats in April, which had been manufactured and for which there were firm dealer orders. With that, I will turn it back over to Rick.

Rick Hubbell, President and CEO

Well, thanks, Ben. Along with other companies across the globe, we have faced unprecedented and unexpected business challenges in the past two months. During this time, we are providing consistent communication to our dealer network and have assisted their efforts to conduct virtual walkthroughs and private viewing appointments. We're managing through this disruption and our present actions are guided by an enduring belief in the long-term appeal of recreational boating for the American consumer. In fact, we are encouraged by reports that several of our dealers enjoyed very strong sales in March and April as families temporarily left homes in urban areas to shelter-in-place in areas offering recreational boating as an opportunity for safe activities with their families and friends in an outdoor setting. As another indicator of increased interest in our products during this time, we are pleased to note that our web traffic and the number of social media engagements have increased significantly during the past few weeks. We look forward to resuming our production operations during the week of May 4. Thank you for joining us this morning, and we'd be happy to take any questions you may have.

Operator, Operator

We will now take our first question from Mr. Eric Wold of Riley. Please go ahead.

Eric Wold, Analyst

Thank you, and good morning.

Rick Hubbell, President and CEO

Good morning, Eric.

Eric Wold, Analyst

A couple of questions. I guess, obviously, knowing the plants were shut down at the end of March, I'm assuming that the majority of the shipping reduction in the quarter was due to your decision to reduce production levels to manage dealer inventory. So I guess, assuming we stay on track for an early May reopening of the plants, is there a way to frame what the impact to production levels in Q2 would be if you lose those first five or six weeks of the second quarter and get back to kind of the reduced production levels that were in place?

Ben Palmer, Chief Financial Officer

This is Ben. As you can imagine, that's a very difficult question. But we're going to do our best to get up as quickly as we can to the prior production levels. We have plans in place to get the workforce back on the timeframe that we've discussed here. We'll certainly have to be managing the supply chain and have been working on that, but that's dependent upon some of our key component manufacturers, many of which we think have resumed or are making plans to resume their production very soon. So a worthwhile question. But difficult at this time to see. I mean we're just going to ramp up as quickly and as comfortably as we can, and we will see. As we pointed out in our comments here, we did have a number of boats that had been manufactured that we did continue to ship a little bit in late March but even into April, even though production was shut down for the whole month of April. So there were some sales there, again, without manufacturing operations continuing.

Eric Wold, Analyst

Okay. That's helpful. I guess, what is the process of bringing employees back and ramping in H2? Were the employees let go? Are you still in communication with them? Or just maybe a sense of the workforce and how it is relative to where it was prior to being shutdown?

Rick Hubbell, President and CEO

Again, it can be fairly complicated, but we do have mechanisms to be able to communicate with the employees. And at this point, I guess it's been a little over a month since we ceased production, but we are assisting them with filing for unemployment and things like that, so we do have a communication channel with them. But as you can imagine, it will be complex to get to each of them and have them come back in a coordinated manner but we've been working really hard to make that happen, and we'll just have to see how it goes. But we've worked hard to have some kind of communication mechanism. We're in a community. We pointed out in our press release that the majority shareholders and our Chairman's family made a substantial gift to the community in which many of our employees live down there. They were very appreciative of that. So that's another way to remain connected to the employees, many of whom came themselves with their families to get meals. And so that was another way to stay in contact, and we're hopeful that will be useful too. Having seen them more recently than a month ago, so we'll just have to see how it goes.

Eric Wold, Analyst

Okay. And then just a final question from me. I know it's been a challenging environment regarding demand. You mentioned that some of your dealers are experiencing good demand even with the stay-at-home orders. How are dealers responding to this situation? Are they maintaining relatively stable pricing as we approach the key summer period, or is there some discounting starting to emerge?

Jim Landers, Vice President of Corporate Finance

Eric, this is Jim here. It's hard to say there may be some extra discounting. But in general, we think of supply and demand as being fairly inelastic right now. Either you want a boat or you don't. And also with dealer inventories across all product lines declining, we've actually found that our dealers' inventories are in really good shape, meaning lower. So we don't see this as a discounting environment. We're more interested in what demand will be and being able to meet that demand.

Rick Hubbell, President and CEO

Yes. We're not hearing anything at this point about significant additional discounting. As you said, going into the stronger retail selling season, I think dealers, for the most part, have been holding firm and, to be honest, haven't been placing lots of additional orders, but that's certainly reasonable and understandable at this very moment. However, we think they're comfortable with their current inventory, working with the floor plan lenders, and we're comfortable to see how we come out of this and how everybody gets back out, getting out of their houses and getting back on the lake. It really has been impressive, and it feels good to see how many people are heading to the lakes to get away from things, and that has to be a good thing if that many people are getting out and enjoying the lake. That has to provide a nice bit of foundation of demand for recreational boating. So we're pleased with that.

Eric Wold, Analyst

That’s helpful. Thank you, guys.

Jim Landers, Vice President of Corporate Finance

Thanks.

Rick Hubbell, President and CEO

Thanks, Eric.

Operator, Operator

It appears you have no further questions at this time. I would now like to hand the call back over to Mr. Jim Landers for any final remarks.

Jim Landers, Vice President of Corporate Finance

Thank you. Eric, thanks for the questions, and thanks to the other people who called to listen in. That will do it for us now. But everybody, have a good day. Stay safe, and we will talk to everyone soon. Thanks.

Operator, Operator

Ladies and gentlemen, this concludes our call for today. As a reminder, this call will be available for replay on marineproductscorp.com within two hours at the conclusion of today's call. Thank you all very much for your participation, and you may now disconnect.