Q4 2023 Marine Products Corporation Earnings Call

Good morning, and thank you for joining us for Marine products Corporation's fourth quarter 2023 financial earnings Conference call.

Today's call will be hosted by Ben Palmer, President and CEO, and Mike Smith, Chief Financial Officer.

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.

Ben M. Palmer: I'd like to advise everyone that this conference call is being recorded.

I will now turn the call over to Mr. Smith.

Mr. Smith: Thank you and good morning.

Mr. Smith: Before we begin I want to remind you that some of the statements that will be made on this call could be forward looking in nature and reflect a number of known and unknown risks.

Mr. Smith: Please refer to our press release issued today, along with our 2022 10-K and other public filings the outline those risks all of which can be found at www Dot Marine products Corp Dot com.

Mr. Smith: In today's earnings call.

Mr. Smith: And in our press release, we will be referring to several non-GAAP measures of operating performance and liquidity.

Mr. Smith: We believe these non-GAAP measures allow us to compare performance consistently over various periods.

Mr. Smith: Our press release issued today.

Mr. Smith: Our website contain reconciliations of these non-GAAP measures.

Mr. Smith: The most directly comparable GAAP measures.

Mr. Smith: I'll now turn the call over to our President and CEO Ben Palmer.

Ben M. Palmer: Thank you and good morning, before we begin I'll remind you that some of this.

John.

John: I appreciate everybody joining the call. This morning, our fourth quarter results reflect the ongoing normalization of retail boat sales.

Mr. Smith: As the multi year post COVID-19 consumer demand those sides and.

Mr. Smith: In response to this slowdown we have adjusted production to meet current order patterns retail channel works through excess inventory.

Mr. Smith: We believe we are now in a steady balance of production and sales. However, our fourth quarter results showed significant declines versus argued.

Mr. Smith: Yes year over year comparisons are likely to persist near term.

Mr. Smith: In the meantime, we focus on making sound operational and financial decisions to position the company for sustainable long term growth.

First and foremost we believe our current production and shipment schedule together with our incentive programs should now facilitate a net reduction in dealer inventory.

Mr. Smith: Still early we are seeing the order flow that would justify a step up in production lighter during the first quarter. So that is an encouraging sign as we start the calendar year and get positive feedback from recent boat shows.

Mr. Smith: With regard to dealer inventory I would say, we're comfortable with the level of our products in the field as we were disciplined in not pushing too much product into the channel. However.

Mr. Smith: However, we do get the sense that dealer inventories overall are a bit high.

Mr. Smith: Stimuli buying we've returned to historically normal level of retail incentives, which had been minimal. These past few years launched a program in the fourth quarter to move dealer inventory and we see other manufacturers during this time.

Mr. Smith: Mike will comment further on promotional activities as fourth quarter results reflected an outsize impact re initiating these programs.

Mike Smith: We've talked previously about economic uncertainty on the new reality of higher interest rates rates not only affect the monthly payments for consumers to finance their boats, but also dealers carrying costs.

Mike Smith: The interest rate outlook remains somewhat unclear and we have more clarity on the direction of rates and the magnitude of possible rate cuts will help consumers get more.

Mike Smith: Despite a choppy environment, we will remain focused on areas of the business within our control.

Mike Smith: We will continue to invest in R&D to support new innovative features products and design improvements to differentiate ourselves in the marketplace.

For example, we are delivering premium interior materials as well as showcasing additional safety and comfort.

Mike Smith: We believe our reputation for innovation and product leadership has helped us maintain our leading market share over the years.

Mike Smith: Second we're very pleased with our existing dealer network and believe we have room to grow in that infrastructure.

Mike Smith: Rather than dilute our existing dealers by pursuing an overlapping a competitive distribution, we see opportunities to strengthen existing relationships even further.

Mike Smith: We recently hosted our most intensive dealer training conferences, yet arming them with our lightest selling and customer education tools.

Mike Smith: We are committed to consistently elevating our partnerships with them.

Mike Smith: Fissioning chaparral and robalo for continued success in their short showrooms.

Mike Smith: We also conducted more advanced technical and repair training for dealer service personnel.

Mike Smith: We received incredible feedback from these events.

Look forward to sharing in our dealer success as a result of these collaborative efforts.

Mike Smith: Another investment, we're making is selective automation of our plants, we are increasingly using robotics perform certain tasks leverage the skill of our craftsman.

Mike Smith: And reduce unnecessary physical demands.

Mike Smith: This drives a safer production environment and allows our workers focus in areas that drive maximum quality and consistent.

Mike Smith: In addition to investments inside of our facilities, we have a significant solar panel installations slated for later this year.

Mike Smith: Beyond the environmental benefits of using alternative energy sources, we expect this project to drops in cash savings.

Mike Smith: This equipment will have the capability to supply a sizable portion of our energy needs are national Georgia manufacturing site.

Mike Smith: Before turning the call over I'd, just reiterate that we are confident in our opportunities to invest in the business and that will focus on preserving as much margin as possible as we continue to assess bands of our environment now Mike will provide an overview of the financial results. Thanks Ben.

Mike Smith: I'll start with a few quick financial highlights for the year and then go into some more detail about the fourth quarter.

Mike Smith: For the full year 2023, net sales were $384 million up slightly versus last year.

Mike Smith: Diluted EPS was $1 21.

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Mr. Smith: And EBITDA was down 4% to $52 million.

Mr. Smith: We generated strong operating and free cash flow in 2023.

Mr. Smith: Operating cash flow was $57 million and after capex of $10 million free cash flow was $47 million for the year.

Mr. Smith: Capex included investments in warehouses, and some new trailers.

Mr. Smith: During the year, we paid $19 million in dividends.

Mr. Smith: And we finished 2023 with cash of $72 million and no debt.

Mr. Smith: Now I'll cover our fourth quarter results.

Mr. Smith: With year over year comparisons to the fourth quarter of 2022.

Mr. Smith: Net sales fell 35% to $79 million driven by a 34% decrease in both soul.

Mr. Smith: The average gross selling price of our boats increased by 4%, which reflected changes in mix as well as increases to cover higher input costs. However, this gain was offset by increased retail incentives recorded during the quarter.

As Ben mentioned during the quarter, we launched a new retail incentive program, which applies to boats, we sold to dealers during the quarter as well as.

Ben: Boats that remained in our dealers' inventories that we had shipped in prior quarters.

Ben: While the program had a relatively minor topline impact there was a more noticeable impact on our gross margin.

Mike Smith: Gross profit decreased 51% to $13 5 million.

Mike Smith: With a gross margin of 19%.

Mike Smith: Down 620 basis points.

Mike Smith: While gross profit and margin would have fallen due to the decline in boats sold the reduction was exacerbated in the quarter by the incentive program launch.

Mr. Smith: The fourth quarter retail incentive program represented nearly $2 million reduction in net sales and gross profit.

Mr. Smith: Waiting to about one third of the 620 basis point contraction.

Mr. Smith: Furthermore, the majority of the incentives related to boat shipped to dealers in prior quarters.

Now that we have normalized incentives and if also adjust our production schedule to align with current demand, we expect less significant quarterly impacts and better gross margins going forward.

Mr. Smith: SG&A expenses were $7 $7 million in the quarter down, 38% or $4 8 million compared to last year. These.

Mr. Smith: These expenses decreased due to costs that vary with sales and profitability such as incentive compensation sales commissions and warranty expense.

Mike Smith: Diluted EPS was <unk> 16 in the fourth quarter down 35 in the same quarter last year.

EBITDA was down 58%.

$6 5 million with EBITDA margin decreasing 490 basis points to nine 2%.

Mike Smith: Year over year comparisons are likely to be challenging for the next couple of quarters, but while we don't give explicit financial guidance Directionally, we believe sequential volume and sales changes will be relatively stable in the near term.

Mike Smith: And that our cost reduction activities and normalized incentives should support gross margin improvements going forward.

Ben: I'll now turn it back over to Ben for a few closing remarks. Thank.

Ben: Thank you Mike.

Ben: Closing I would like to mentioned capital allocation like a couple of strategic comments first we have maintained our attractive <unk> 14 per share quarterly cash dividend for our shareholders.

Ben: A sound financial profile and believe our compelling dividend yield offers investors an attractive tangible capital return.

Ben: Next while the second half of 2023 had some challenges it was still a solid full year, which.

Mr. Smith: Which we generated $47 million of free cash flow.

Mr. Smith: We ended the year with no debt and a highly liquid balance sheet with over $70 million in cash.

Mr. Smith: One of the benefits of being conservative and disciplined during recent market buoyancy instead as the tide turns we are well positioned to invest prudently and opportunistically.

Silver lining of the current soft environment, maybe an increasing willingness of private boat makers <unk>.

Mr. Smith: While our discipline this caused us to pass on transaction and elevated valuations on peak earnings recent years. It has resulted in a cash accumulation that we are looking to deploy.

Mr. Smith: We are targeting complementary high quality boat manufacturers that would enhance our distribution and brand portfolio and increase our marketing capabilities.

Mr. Smith: And manufacturing capabilities.

Mr. Smith: And we're very interested in increasing our scale and positioning ourselves as a buyer of choice and the M&A landscape.

Mr. Smith: While difficult to pinpoint timing it is fair to say that we do not identify if we do not identify significant investment opportunities.

Mr. Smith: Likely to continue our long standing practice.

Turning capital to shareholders.

Mr. Smith: So before we turn the call over to questions I'd like to thank our employees for a great year commitment and dedication.

Mr. Smith: We wholeheartedly believe we have some of the best bow bakers in the industry.

Mr. Smith: And their teamwork and pride underpinning chaparral and robalo success.

Mike Smith: We received good feedback in orders from recent boat shows were looking forward to showcasing our new products in the coming weeks.

Mike Smith: With that operator, please open the line for questions.

Mike Smith: At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.

Mike Smith: We will pause for just a moment to compile the Q&A roster.

Mike Smith: Your first question comes from the line of Brandon Rolle with D. A Davidson.

Brandon Rolle: <unk> the floor is yours.

Brandon Rolle: Alright. Good morning, Thank you for taking my.

Brandon Rolle: Thank you for taking my questions I guess first.

Brandon Rolle: Just on the production end.

Brandon Rolle: Where it is right now could you talk about your production levels.

Brandon Rolle: Your plan for that over the next three months compared to maybe where it was last year and you had talked about inventory levels are you comfortable with your inventory in the field, but overall was a little high would you be able to comment on <unk>.

Brandon Rolle: Areas, where you felt like in the industry inventories.

Brandon Rolle: Inventories might be a little elevated.

Brandon Rolle: Yes, good morning, Brandon.

Probably in terms of our current production level.

Brandon Rolle: Adjusted kind of during the third and fourth quarter, So, it's probably easier or better to talk about kind of where we go from here relative to the fourth quarter. So we.

Brandon Rolle: We indicated here that the early results of the boat shows have been.

Brandon Rolle: Consistent to maybe slightly positive to last year, we had some shows that it adds negative weather. So those are hard to get a read at appropriate read on activity levels and so forth, but we're generally pleased with how the early results from the boat shows are coming through we indicated and I.

Brandon Rolle: I indicated in my comments.

Mr. Smith: With some of that recent.

Mr. Smith: Some of our recent orders we have in indications from dealers, we think we'll be increasing production slightly.

Mr. Smith: In the first quarter of next year, we kind of adjusted down to where.

Mr. Smith: During the fourth quarter that we think is an appropriate rate.

Where we could again assessed demand watch demand and it will adjust adjust production accordingly, as we move forward. So we're hopeful and expect with this with our retail program and and retail incentive programs of other manufacturers that dealer inventory will clear out and that will make room for us to incur.

Mr. Smith: Production further.

Mr. Smith: Last year, this court and with respect to build inventory.

Mr. Smith: Yes.

Mr. Smith: Thank you it's been documented that some of the other.

Mr. Smith: Segments of our industry.

Now maybe slowed down a little bit sooner than.

Mr. Smith: In our segment of the market.

Mr. Smith: It took us a little bit we benefited from the really strong demand that we had for our products. So I think some of the aluminum products I think.

Mr. Smith: Experienced.

Mr. Smith: Some more inventory.

Mr. Smith: They would want to have but so I'd say, that's the primary area.

Mr. Smith: Okay, Great and you had mentioned the boat show performance is being slightly positive or encouraging at least what where you are specifically seeing at these boat shows in terms of attendance or retail sales or was it a combination of both debt.

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Mr. Smith: I gave you guys a more positive view on this space moving forward.

Mr. Smith: Okay. Thank you it's both of those things <unk> you get a feel just seeing attendance the number of people and get a sense for the excitement and of course the tangible measure is.

Mr. Smith: Orders that are placed at the show and.

Brandon Rolle: And like I said, we had.

Brandon Rolle: Similar or in some cases slightly better sales than a year ago and a year ago things were.

Brandon Rolle: Still relatively positive so we take that as a good sign.

Brandon Rolle: But we're certainly not going to move production up until until we have firm indications of orders from our dealers. So we are constantly assessing that yes.

Brandon Rolle: Yeah, and I'll, just add that even that's really that comment was referring to a lot of the boat shows here in the south because I think in the northwest northeast, especially there was a lot of negative impact due to weather. So we're sort of discounting that I mean, the fact that they didn't have great attendance and the northeast northwest because of weather it is something that really.

Brandon Rolle: We're not really considering that is indicative of what's going on in the market.

Brandon Rolle: We attended the Atlanta boat show for instance, I was there last year and this year.

Mr. Smith: The crowds were the same if not a little bit better.

Mr. Smith: And what we heard from our dealers as Ben mentioned was that things definitely are.

Mr. Smith: About the same if not slightly better than last year. So.

Mr. Smith: We were in a great place last year. So we were very encouraged by that.

Mr. Smith: Okay, Great and then on your new retail incentive program could you dig in a little deeper on are.

Mr. Smith: Or are these incentives going to the dealers just like helping out with or the wholesale incentives or are they retail incentives as well or a combination of both.

Mr. Smith: Well, what we announced and talked about today and discuss the impact as a retail program.

Brandon Rolle: It's a program that that we work with the dealers to be able to offer to retail consumers at boat shows and in the showrooms and and of course the impact on the fourth quarter.

And the program started late in the fourth quarter and it.

Mr. Smith: It's still in effect. So we will required for accounting purposes to record what we think the estimate of an estimate of the cost of that retail incentive program on sales that had already been recorded so thats, where we talked about the fact that our gross margin this quarter as was significantly impacted because we had.

Mr. Smith: Record an estimate of.

Mr. Smith: How much we thought we would pay out in retail incentives are all the boats. We've sold up to this point that are still in dealer inventory. So it's an estimate as we always do with those types of programs.

Mr. Smith: But but it's significant and we think it will encourage retail buyers.

Mr. Smith: Order and that will filter through to additional dealer orders to restock their inventory. So that's.

Brandon Rolle: That's the idea so it's just a little more normalized is not outsized it's not.

Mr. Smith: Not huge it's really more normal if you go back kind of pre COVID-19.

Mr. Smith: Yes ill just add that kind of answer your other question. It is a combination of both those incentives to both the dealers and some of that flow through to retail it is called the float your boat.

And Sam and you can read more about it on our robalo and chaparral website, there's a lot of information from those websites about it.

Sam: Okay, Great and just given where inventories are at in the current retail demand I guess, how much destocking do you feel like needs to take place in the industry too.

Sam: You know really get back to normalized production levels.

Sam: Yeah.

Sam: Yes.

Sam: That's a difficult question.

Sam: Just answer it by saying I'm going to quantify it as is difficult what we do our processes. We worked with our dealers we have periodic order points during the year that will go to our dealers.

Sam: They're looking at their inventory levels and together with US we decide whats an appropriate number of boats that need to be delivered over time, so that they have sufficient inventory to.

Sam: To meet their retail demand right nobody wants to Miss out on a on a sale. So you need you need to add it helps to have inventory.

On hand to be able to meet that.

Sam: The buyers that walk in the door.

Brandon Rolle: We're ready to execute so so we are working with the dealers. We're obviously watching the boat shows we will have another order point coming up in the next few weeks, we're getting Smith early indication that says.

Brandon Rolle: They're pleased with.

Brandon Rolle: With the movement in their inventory. So we're very disciplined in that regard in terms of making sure that were aligning production with.

Brandon Rolle: With actual demand and dealer inventory certainly have certainly you have to make a projection about what youre going to need in the future.

Brandon Rolle: But it helps if sales accelerate and.

Brandon Rolle: And right now we're seeing some of that so that should be positive we.

Brandon Rolle: We would expect.

Brandon Rolle: And hope to be able to increase production again later this quarter to be able to support some spring and summer.

Brandon Rolle: Sales as well to bring inventory.

Brandon Rolle: Even further.

Brandon Rolle: Okay, Great and then.

Brandon Rolle: Your next question.

Brandon Rolle: And our line of Craig Kennison with the operator, Brandon may have been cut off there can you check ins.

Brandon Rolle: Oh, sorry.

Brandon Rolle: My apologies.

Brandon Rolle: One moment.

Brandon Rolle: Yes.

Brandon Rolle: Okay.

Brandon Rolle: We want to take a question from the line of Craig Kennison with Baird Craig deploy Joyce.

Oh sure Thanks, a lot and hopefully Brandon.

Craig Kennison: Thanks for taking my question.

Craig Kennison: Yes, I wanted to touch I guess on affordability in a different way you mentioned some of the promotions that you've got but I'm wondering if you foresee any changes to product mix or just the change any change in the product itself in.

Craig Kennison: In order to target more affordable prices and how important is that.

Craig Kennison: Well I think it's a great question at this point in time.

Not taking any definitive measure is always trying to.

Craig Kennison: Create the best balance between the best.

Craig Kennison: Quality and the features and the benefits on the cost of the boat that's always a challenge and something we're working on but but if you go back to.

Craig Kennison: We in the past have been responsive to those kind of shifts in consumer demand.

Craig Kennison: Getting back to you.

Craig Kennison: Kind of a way to 910 timeframe, we came out with a.

Craig Kennison: The H two O series, which was the lower cost unit, we were able to go through and do some <unk>.

Craig Kennison: John changes and work with our vendors and we were we were able to come out with a product that appeal to the consumer.

Craig Kennison: At that period of time and in that point in time.

Craig Kennison: In an economic cycle.

Craig Kennison: At this point, we still feel that we have.

Craig Kennison: Sufficient demand on the <unk>.

Products that we have but we're certainly watching that closely and we'll make the adjustments.

Craig Kennison: As necessary, but right now today, we're not doing anything in particular of course, we have a burial early.

Wide.

Craig Kennison: Wide range of both sizes and features and benefits.

Craig Kennison: And to answer the question another way, we are still seeing our more expensive boats.

Craig Kennison: Carry the most weight with respect to our results.

Craig Kennison: Do sell a lot of our we do sell a high volume of our smaller boats.

Which do obviously carry a lower price point.

Craig Kennison: But at this point, we are not we don't believe that we have the need or we have not seen the need to try to adjust.

Craig Kennison: The product configuration, or the or the options and that sort of thing to lower the price.

But it's a good question some point that may occur.

Craig Kennison: Really quick to you know, we haven't really seen a decline in any of our input cost in fact on the contrary they still kind of going up slightly so you've seen a little bit of margin erosion. We hope now the supply chain to stabilize in that.

Craig Kennison: Things will.

Craig Kennison: <unk> worked down and because thats the testing too with the supply chain.

Craig Kennison: And the input cost of boats.

Is it really increased so the higher price.

Craig Kennison: Boats that really reflected that in the whole industry.

Craig Kennison: Great. Thank you and then I think you had mentioned.

Strong balance sheet and a desire to expand the portfolio if acquisition opportunities.

Craig Kennison: Come available I am curious where you see.

Craig Kennison: Again holes in your portfolio or opportunities too.

Craig Kennison: Expand your portfolio. They are both categories, where you have particular interest.

Yeah, when we think about.

Craig Kennison: Yes, there are so many factors that go into that decision.

Craig Kennison: Certainly we want.

Craig Kennison: A good company good manufacturer.

Craig Kennison: Quality manufacturer.

Craig Kennison: We certainly want to do something that's complementary we don't want to overlap significantly.

Significantly somebody that we could leverage our really strong in <unk>.

Craig Kennison: Dealer network as it were.

Appeal to that dealer network, obviously, we don't have an aluminum products.

Mr. Smith: That's something that I think would be attractive to us and attractive to our dealer network, we have the <unk>.

Mr. Smith: Opportunity to.

Leverage that.

Mr. Smith: Some benefits and then.

Mr. Smith: And then on the fiberglass side certainly in terms of sizes, we could do some larger boats don't know our first choice would be to go significantly larger but.

Mr. Smith: We think we're nicely positioned in the <unk>.

Mr. Smith: Offshore market perhaps.

Mr. Smith: A larger offshore brand.

Speaker Change: That would probably be the two primary ones that I think again with both.

Mr. Smith: Allow us to leverage our dealer network.

Mr. Smith: Utilize some of the cash that we have in and take advantage of the fact that we're.

Mr. Smith: We are able to generate a lot of cash and so we do want to invest that prudently and again as we indicated if we're not able to find something.

Mr. Smith: Return.

Mr. Smith: <unk> cash to shareholders in some form or fashion.

Craig Kennison: And more specifically on the aluminum pontoon is one that we see a lot of progress.

Mr. Smith: That would be yes.

Mr. Smith: Recent in recent months the demand slowed but just kind of historically over the last 510 years demand.

Mr. Smith: Two months.

Mr. Smith: Kris and at a higher rate than the rest of the industry.

Mr. Smith: Barry.

Mr. Smith: Interesting.

Mr. Smith: Alright.

Thank you and I'm just looking at your balance sheet, a lot of cash no debt how much debt are you willing.

Mr. Smith: To take on.

Mr. Smith: While you are still comfortable with your cash flow profile.

Mr. Smith: We are quote unquote not afraid of that.

Mr. Smith: And we would have other options, obviously, we could.

Mr. Smith: Great.

Mr. Smith: <unk>.

Mr. Smith: Equity through secondary so forth.

Mr. Smith: But are.

Mr. Smith: We have sales today or this last 12 months approaching $400 million.

So.

Mr. Smith: I think we could easily just to pick a number I mean, we could.

Mr. Smith: Okay.

Mr. Smith: 100, or $200 million I think would not be a problem with our balance sheet and our cash flow generating generating capability and adding a quality company that's generating cash itself.

Mr. Smith: Not be a problem at all.

Mr. Smith: Sure.

Mr. Smith: Initially fund an acquisition if it needs to be funded with cash.

Mr. Smith: Yes.

Mr. Smith: Depending on the size of the acquisition right that we were doing but.

<unk> $200 million not me.

Mr. Smith: It will be a problem.

Mr. Smith: Great Hey, thank you.

Greg: Thank you Greg.

At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.

Greg: There are no further questions at this time I would like to turn the call back over to our CEO Ben Palmer.

Ben M. Palmer: Alright, well. Thank you very much everyone for being on the call and look forward to catching up with you later take care.

Ben M. Palmer: Ladies and gentlemen that concludes today's call. Thank you all for joining you may now disconnect.

Ben M. Palmer: [music].

Yes.

Ben M. Palmer: Yes.

Ben M. Palmer: Okay.

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Sure.

Ben M. Palmer: [music].

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Ben M. Palmer: Yes.

Ben M. Palmer: [music].

Ben M. Palmer: Yeah.

Ben M. Palmer: Okay.

Ben M. Palmer: Okay.

Ben M. Palmer: Yes.