Marine Products Group, LLC Q3 FY2023 Earnings Call

Good morning and thank you for joining us for Marine Products Corporation's Third 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. I would like to advise everyone that this conference call is being recorded. Mike will get us started by reading the forward-looking disclaimer. Please go ahead.

Thank you and good morning. Before we get started today, I would 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 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 have 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 are also required to use EBITDA to report compliance with our financial covenants under our revolving 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'll now turn the call over to our President and CEO, Ben Palmer.

Thank you, Mike, and thank you all for joining our call this morning. I'll begin with a few highlights regarding our third quarter 2023 earnings press release that was issued this morning. Marine Products Corporation's third quarter results reflect a reduction in boat deliveries to dealers compared to the prior year that approximate our new production rates. The decreased production corresponds to the normalization of retail boat demand that has occurred during 2023 following the significant post-COVID demand. Our dealers expressed continued optimism at our recent annual dealer conference, bolstered by the launch of our new 2024 models. They did, however, note some concerns about potential economic slowdown and the impact of higher interest rates. On a positive note, supply chains continued to improve from earlier this year, but certain components remain challenging. During the quarter, our dealers continued to rebuild their inventories, trending to more normalized levels, and we have asked them to return to a more typical ordering process to assist us in scheduling our production. Dealer inventory of Chaparral and Robalo models remains healthy and below pre-pandemic levels. We expect to manage our production to approximate retail demand over the coming quarters, so dealers are able to service demand out of planned inventory. We also announced this morning that our Board of Directors declared a regular quarterly cash dividend of $0.14 per share. And with that overview, I'll now turn it back over to Mike Schmit, our CFO.

Thanks, Ben. I'll begin with an overview of the company's third quarter 2023 financial results. Net sales for the third quarter were $77.8 million, a 22% decrease compared to the third quarter of last year. Unit sales decreased by about 24%. Average selling price per boat increased by approximately 5% versus the prior year, primarily due to favorable model mix and to a lesser extent, price increases to cover higher costs of materials and components. Production and sales were negatively impacted by about 3 days during the third quarter due to Hurricane Idalia. Gross profit in the third quarter was $19.2 million, a 23% decrease compared to the third quarter of 2022. The gross margin for the third quarter was 24.7%, a slight decrease over the 25% for the third quarter of last year. Selling, general and administrative expenses were $8.8 million in the third quarter of 2023 compared to $10.3 million in the third quarter of last year. These expenses decreased due to costs that vary with sales and profitability, such as incentive compensation, sales commissions, and warranty expense. We also recorded a net gain on disposition of assets of $2 million during the quarter, which included $1.8 million related to a real estate transaction. EBITDA in the third quarter was $13 million, a 14% decrease compared to $15.2 million in the third quarter of 2022. EBITDA, as a percentage of net sales was 16.7% in the third quarter of 2023 compared to 15.1% in the prior year. We generated net income of $10.4 million in the third quarter, a 9% decrease compared to $11.5 million in the third quarter of 2022. Diluted earnings per share were $0.30 in the third quarter compared to $0.34 in the third quarter of last year. Our international sales, which accounted for approximately 6% of our total sales during the third quarter, decreased by 12% compared to the third quarter of last year. As Ben mentioned, our dealer inventories are increasing toward more normalized levels and continue to be lower than pre-pandemic levels. These moderately higher inventories have allowed our dealers to meet current demand as well as purchase our 2024 models. I'll now turn it back over to Ben for a few closing remarks. Thanks.

Our market share remains strong. I'm very pleased to report that the most recently reported data indicates that Chaparral sterndrive market share was number two in its size category. In addition, the combination of Chaparral and Robalo outboards holds the third highest market share in their size category. We received very positive feedback on our new 2024 models from our dealers. They are designed to appeal to the retail customer while allowing us to efficiently produce high-quality boats. Our new Chaparral 267 SSX will be featured on the upcoming cover of Boating Magazine. We, like our dealers, see additional uncertainty in the market over the coming quarters, but our field inventory remains healthy and backlog supports our current production schedule into 2024. I'd like to thank you for joining us this morning. We'll be happy to take any questions you have.

Your first question comes from Brandon Rolle with D.A. Davidson.

I guess to start, from a retail perspective, what have you seen over the last 30 days as we head into the winter months and I guess, how are you thinking about retail in 2024 at this point?

Brandon, this is Jim. Maybe I can kick off with an answer there. The past 30 days have not been very different from the past few months probably. People are a little bit concerned about interest rates. The economic slowdown issue is always a discussion but it's just a seasonally slow time of the year. Our dealers, as everybody has mentioned, have been cautious. They haven't cancelled any orders, but they're asking us to slow down a little bit. Part of that is interest rates on their part. Their carrying costs for inventory are higher than they were. So that order and delivery period has just extended a little bit. I don't know if anyone else has anything to add.

No, I think that's right, Brandon. This time of year, obviously, the third quarter is a normal seasonally slow period. So it's a little bit difficult to gauge the future just based on the last 30 days. As it relates to 2024, we feel like we're being prudent about where we're setting our production rates. We feel really good about the level of field inventory of our models, of course. Many of our dealers carry inventory of other models as well. So there's only a certain amount of capacity the dealer has to take additional models. But again, our inventory is very healthy in terms of numbers, and certainly, the almost virtually the entire field inventory is very fresh models. So there's no concern about trying to move older models. So what we're looking forward to the next point for us to really get a good idea about assessing demand is going to come with the winter boat shows that will start later this calendar year and into early next year. So at that point in time, we'll all reassess demand, look at where dealer inventories stand, and then we'll reassess what appropriate production rates are, but we feel okay about it. We feel like we are as well positioned as possible at this point in time.

Okay, great. And just back on the inventories. Would you be able to quantify maybe the average weeks on hand for your dealers right now? And I know you had said current inventory levels are below 2019 levels. But from a dollar perspective and taking into account, obviously, higher carrying costs for these dealers, do you feel like from a dollar perspective, dealers are carrying more inventory than they did pre-pandemic?

We don't have complete visibility into our dealers' total inventory, as they don't readily share that with us, nor do the floor plan providers. I can say that the average cost of boats has certainly risen since before the pandemic. This is due to a combination of us building larger boats and dealers ordering them, which raises the average selling price. Additionally, the costs of components have increased over the last two or three years. It is up to the floor plan providers to decide the level of financing they will provide to the dealers. I am not exactly aware of their dollar inventory levels, but this may create some challenges from the financing companies' perspective, as they focus more on dollar amounts than on the number of units.

And from a unit perspective, just directionally, Brandon, we are still below where we were pre-pandemic. During kind of the last few years, dealers were probably a little less than 1/3 of what they were pre-pandemic kind of total units. Now we're probably a little bit above 2/3 plus of pre-pandemic levels. So we probably doubled where we were this time last year, but we're not sure that dealers are going to get back to pre-pandemic levels because their carrying costs, as has been mentioned, are so much higher because of higher interest rates. So also, there have been better developments on our website and other boat manufacturers' websites. So they may not carry multiple colors of the same model because they can kind of pull it up on screen and show them different features and things like that. So we think some things may have fundamentally changed. We're not sure, but we think that we're hearing that they're pretty comfortable where they're at now. But like I said, it's probably just a little over 2/3 of where we were pre-pandemic, if that helps.

No, it does. And I know you said for this quarter, results kind of reflected the reduction in production and delivery rates. Looking ahead to the fourth quarter, are you expecting a further reduction in production given where inventories are at right now exiting the third quarter? Or I guess, how should we think about production over the fourth quarter?

No, we are not planning to reduce production over the next 2.5 months. We have scheduled production based on dealer demand and the seasonality of the holidays.

Okay, great. Lastly, about the annual dealer conference, can you discuss which products are attracting the strongest orders and the mix of those products from the dealers?

We didn't really observe a change at the dealer meeting; they reviewed some of our existing models along with several new ones. There was a lot of excitement surrounding some of our new models, particularly the 267 SSX. Currently, we haven't noticed a change in the size of the boats, which I consider a positive sign. We still have strong momentum and trends with dealers, who are looking to sell larger boats effectively. So, we are happy about that. There are no significant shifts at this point regarding sterndrive versus outboard or Robalo versus Chaparral; everything seems to be continuing as it has been, with no drastic changes.

Okay. And just lastly, if I can squeeze one last one in. Just on the promotional support that you're providing to dealers at this point. Can you talk about how that trended throughout the third quarter? And any maybe step up in the fourth quarter, incremental promotional support, do you think is needed to the customer or to the dealer?

From the dealer's perspective, there has been a bit more support regarding building inventory, but it isn't significantly impactful from a retail standpoint. We did implement some minor programs during the third quarter, but they weren't substantial. We will address this issue as we head into the winter boat shows. We will evaluate inventories, our competition, and demand, and then decide on the level and type of support to create an effective incentive program for our dealers that can stimulate retail sales. That decision has not yet been made. This situation is another instance of our expectation for the industry to return to normal. Over the past couple of years, we haven't had to provide much retail incentive support, but we anticipate that there will be some form of program in the winter.

Okay, great. And just on the boat shows, outside of the Fort Lauderdale show, what other winter boat shows are you looking towards as kind of indicators of demand and allowing you to better understand what demand may look like in the upcoming year?

We have our sales team at all the boat shows, especially the major ones, and our management team also attends many of these events. We consistently evaluate sales performance and retail sentiments, so we are interested in each and every one of them. It's crucial for us and the industry to stay informed about what's happening and identify demand trends. This understanding significantly impacts how we design our incentive programs and set production rates. It's a great question, and we're focused on all of them.

It appears there are no further questions. I will turn the call back over to Mike Schmit for closing remarks.

All right. Well, I just want to thank everyone for joining our call today, and we'll now end the call. Thank you very much.

This conference call will be replayed on marineproductscorp.com within 2 hours following the completion of the call. We thank you for joining. You may now disconnect your lines.