Marine Products Group, LLC Q1 FY2023 Earnings Call

Good morning and thank you for joining us for Marine Products Corporation's First Quarter 2023 Financial Earnings Conference Call. Today's call will be hosted by Ben Palmer, President and CEO; and Mike Schmit, Chief Financial Officer. Also hosting is Jim Landers, Vice President of Corporate Services. 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.

Thank you, 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, reflecting a number of known and unknown risks. I'd like to refer you to our press release issued today, our 2022 Form 10-K, and 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, please visit our website. In today's earnings release and conference call, we refer to EBITDA, which is a non-GAAP measure of operating performance. We use this non-GAAP measure because it allows us to compare performance consistently over various periods without regard to changes in our capital structure. We're also required to use EBITDA to report compliance with financial covenants under our credit facility. Our press release issued this morning and our website contain a reconciliation of this non-GAAP financial measure to net income, which is the nearest GAAP financial measure. Please review this disclosure if you're interested in seeing how it's calculated. We'll make a few comments about this quarter and then be available for your questions. I will now turn the call over to our President and CEO, Ben Palmer.

Thanks, Jim, and thank you all for joining our call this morning. I will begin with a few highlights regarding our first quarter 2023 earnings press release that was issued this morning. Marine Products Corporation once again generated record net sales during the first quarter as we experienced improvement in our supply chain issues and transportation availability relative to the prior year period. We were able to complete and ship a larger number of substantially completed boats in our inventory and deliver them to our dealers. Average selling prices increased primarily due to a favorable model mix at both Chaparral and Robalo. In addition, the increased unit shipments during the quarter allowed our dealers to begin building their inventory in preparation for the upcoming 2023 spring retail selling season. Dealer inventories are trending towards more normalized levels; however, inventory remains below pre-pandemic levels. We also announced this morning that our Board of Directors declared a regular quarterly cash dividend of $0.14 per share. With that overview, I'll now turn the call over to Mike Schmit, our CFO.

Thanks, Ben. I'll begin with an overview of the company's first quarter 2023 financial results. Net sales for the first quarter of 2023 were a record $118.9 million, a 55% increase compared to the first quarter of last year; unit sales increased by 40%, and average selling prices of our boats increased by 12%. As Ben mentioned, these increases were driven by our ability to complete and ship a favorable mix of boats to satisfy both dealer and retail demand as we continue to see significant improvements in our supply chain. Gross profit in the first quarter of 2023 was $29 million, a 58% increase compared to the first quarter of last year. Gross margins for the first quarter of 2023 were 24.4%, a slight improvement over the 24.0% for the first quarter of 2022, as we saw some benefits from manufacturing efficiencies. Selling, general, and administrative expenses for the first quarter of 2023 were $14.5 million, an increase of 57% compared to $9.2 million in the first quarter of last year. This increase is due to costs that typically increase with higher sales and profitability, such as incentive compensation, sales commissions, and warranty expenses. These expenses for the first quarter of 2023 also included a non-cash pension settlement charge of $2.1 million. Selling, general, and administrative expenses were 12% of net sales in the first quarter of both years, but they were 10% of net sales in the first quarter of this year when excluding that non-cash pension settlement charge. As we complete the final termination of our pension plan, which is expected in the second quarter, we do not expect to make any cash contributions in connection with the transfer of the plan liabilities to a third party because of the plan's fully funded status. EBITDA in the first quarter of 2023 was $15 million, an increase of $5.4 million or 56% compared to the first quarter of last year. We reported a record quarterly net income of $11.5 million in the first quarter of this year, a 64% increase compared to $7.1 million in the same quarter of last year. Diluted earnings per share were $0.34 in the first quarter of this year compared to $0.21 in the first quarter of last year. Our international sales, which account for approximately 7% of our total sales, increased by 89% compared to last year. Our cash balance at the end of the first quarter of 2023 was $62.6 million, a $19.4 million increase compared to the cash balance at the end of last year. This strong cash balance is the result of improvements in our logistical processes and availability of materials and components, which allowed us to ship more boats than we produced during the quarter. Dealer inventories are increasing towards more normalized levels but continue to be lower than pre-pandemic levels. These moderately higher inventories will benefit our dealers as we enter into the height of the retail selling season. The outcome of the winter boat shows was generally favorable, and our dealers continue to request both boats that they have already sold to retail customers as well as additional inventory for the upcoming selling season. That said, we continue to monitor macro indicators such as consumer confidence, slowing economic activity, and increasing interest rates, all of which could weaken demand for recreational boats. I'll now turn it back over to Ben for a few closing remarks.

Thank you, Mike. Our market share remains strong. Chaparral sterndrive market share remains number two in its size category. The combination of Chaparral and Robalo's outboards held the third highest market share in their size category. Our successive quarters of record sales are the result of the hard work of the Chaparral and Robalo management team, our other dedicated employees, and our strong dealer network, as well as the appeal of the quality and design of our products. I'd like to thank you for joining us this morning, and we'll be happy to take any questions that you have.

And congratulations on progress on your pension as well. My question was on the availability of credit. I'm wondering if there's been any change in credit availability in the wake of the recent bank collapses.

Craig, this is Ben. Certainly, the credit line providers to the dealers have, I would describe it as they've not been proactive in increasing the lines, but we've been successful in coordinating with them, the service line providers to increase them as appropriate. We have not heard that there's any particular delays in increasing credit lines because of the issues in the market. But that's not to say that there may be some of that going on in the background, but we're not hearing that directly.

Anything on the consumer side in terms of either significantly higher rates in the wake of that collapse or just not approving at the same rate on applications.

We have not with our model mix. It continues to be kind of higher-end boats, and most of those purchasers are cash-only buyers who are not as sensitive to rates. So we've not seen any significant impact on our results or any of the dealers' attitudes or reactions to any particular types of boats that they're looking to receive from us, so none that we've seen so far.

Perfect. Thank you. And then I'm curious just about inflation. I'm not sure what visibility you have on the actual retail selling price of the boats that you sell, but I know during the pandemic, dealers had an opportunity to get full MSRPs perhaps or even better. But now it's a more competitive environment. I'm just curious from a consumer perspective, what do boat prices look like in some of your models? Are you seeing inflation fade a little bit from a consumer perspective?

I would say again that the higher rates we are incurring slightly higher dealer incentives because of the floor plan program that we have in place where we share or pay for a period of time some of the interests. So that's an impact between us and it has affected our margins. We're helping the dealers with respect to rebuilding their inventories, but not much else. Do you have any other detail?

Yes, I'll add to that. Obviously, the rate of inflation was increasing quite rapidly during the pandemic and shortly thereafter, and some of that was driven by the material costs of making the boats and the supply chain issues. As those have cleared up, the rate of inflation is subsiding for our manufacturing, and so that is passing along to the customer. We don't anticipate boats increasing at the same rate they had. As Ben mentioned, at the same time, we're seeing incentives for dealers, making it a little easier for customers to buy boats. Part of that is just supply and demand, and some of that is just passing along the costs. As our costs normalize, I think the costs and rate of increase for boats for the end customer will normalize as well.

Yes, we're seeing some production in some of the costs; some of the manufacturing components aren't coming down as quickly or nearly as fast. Ultimately, as Mike said, hopefully, there won't be a need for large increases going forward. But I guess where I was going with my earlier comment was that we have not seen any pressure to put any additional incentives in the system. We don't have direct visibility into what dealers are charging the end consumer in all cases. We expect that there will be some moderation, and there will be some more normalized discounting by dealers as we move forward. I expect that to happen as inventory normalizes.

Hey guys, good morning. I wanted to follow up on a comment in the release and the prepared remarks that the winter boat shows were generally favorable, which doesn't sound great honestly. Can you just give a little bit more detail on the retail environment? How it compares to what you would have expected entering the start of the calendar year or any recent insights beyond the winter boat shows?

Yes. Hey Fred, this is Jim. That comment was intentional. It was mixed. We had some boat shows where we sold more boats, both Chaparral's and Robalo's, than in the previous year, which were very strong, plus a lot of follow-up sales initiated at boat shows but not finalized. That said, there were a few shows that were not as good. There's no geographic or demographic trend to identify there. In some cases, it might have been weather or other factors. We have also noted that spring is coming kind of late in some regions, delaying impulse purchases. Overall, the boat show season was generally favorable.

I think some of the larger shows were better than some of the smaller ones. The smaller shows were a little more lackluster, not bad, just not as strong as some of the larger shows.

Yes, we attended a few of them, like Jim and I went to Miami and it was surprising how busy it was. We saw that reflected in our numbers as well; all those shows did really well. The same story here in Atlanta. The boat show here was pretty successful, particularly focused on Chaparral. We've heard some of the smaller boat shows weren't as strong as they were pre-pandemic, but I'd say the larger ones, at least the ones we attended, were quite good.

Yes.

Really helpful. Outside of shows, in terms of the normal day-to-day color you're hearing from dealers, is that in line with their expectations? Perhaps a little softer given some of the weather issues? How would you characterize the non-boat show retail demand?

From the dealers' perspective, we're looking at their current orders in hand and expectations for spring. We have had little to no pushback on the orders that we plan to ship them. When talking to dealers about what's going to be available in the coming weeks, we've had little to no cancellations or deferrals. They are still willing to accept as many boats as we can reasonably shift to them. This indicates good overall demand across our dealership, giving them confidence in continuing to receive boats. Our field inventory is up but probably only half to two-thirds as large as it was pre-pandemic. There's still plenty of room there. We're hopeful that there will be a lot of sell-through, and those inventory levels will typically decrease following the selling season. So we believe the outlook for the rest of the year remains quite positive, but as we mentioned, we are monitoring all factors closely related to dealer behavior, economic weakness, and so on. Right now, we still see it remaining quite strong.

Great. Lastly, you mentioned improvement in supply chain and improved component availability. Where are the specific items you're seeing relief? Is it in outboard engines, windshields, wire harnesses, where are you seeing the biggest improvement?

I'd say all of the above, but it's kind of two steps forward, one step back. We had significant improvement but then faced issues getting outboard engines for instance, but then those would slow down. So it's much better than it was the last few quarters, which is why we were able to complete and ship more boats than we manufactured. We're still not 100% through the woods; it's just a matter of all over the place like a game of whack-a-mole.

Yes. Also Fred, it’s Jim. Transportation is better now.

Yes, that's a great point.

And there are no further questions at this time. I would like to turn the conference over to Jim Landers for closing remarks.

Okay. Thank you. We appreciate everybody who called in and the questions. We hope everybody has a good day. We will talk to you soon.

And this concludes today's conference call. A replay of today's conference will be available on marineproductscorp.com within two hours following the completion of the call. Thank you for your participation. You may now disconnect.