Earnings Call Transcript - MPX Q4 2023

Operator, Operator

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 Schmit, 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. I would like to advise everyone that this conference call is being recorded. I will now turn the call over to Mr. Schmit.

Mike Schmit, CFO

Thank you, and good morning. 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. Please refer to our press release issued today along with our 2022 10-K and other public filings that outline those risks. All of which can be found at www.marineproductscorp.com. In today's earnings call and in our press release, we'll be referring to several non-GAAP measures of operating performance and liquidity. We believe these non-GAAP measures allow us to compare performance consistently over various periods. Our press release issued today and our website contain reconciliations of these non-GAAP measures to the most directly comparable GAAP measures. I'll now turn the call over to our President and CEO, Ben Palmer.

Ben Palmer, CEO

Thank you, and good morning. Before we begin, I want to remind you that some of those - I apologize. I appreciate everybody joining the call this morning. Our fourth quarter results reflect the ongoing normalization of retail boat sales as the multi-year post-COVID consumer demand boost subsides. In response to this slowdown, we have adjusted production to meet current order patterns as the retail channel works through excess inventory. We believe we are now in a steady balance of production and sales. However, our fourth quarter results showed significant declines versus the prior year. The difficult year-over-year comparisons are likely to persist in the near term. In the meantime, we will 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 inventories. While still early, we are seeing an order flow that would justify a step up in production later during the first quarter. So that is an encouraging sign as we start the calendar year and get positive feedback from recent purchases. With regard to dealer inventory, I'd 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, we do get the sense that dealer inventories overall are a bit high. To stimulate buying, we've returned to a historically normal level of retail incentives, which had been minimal these past few years. We launched a program in the fourth quarter to move dealer inventory, and we see other manufacturers doing the same. Mike will comment further on promotional activities as fourth quarter results reflected an outsized impact from re-initiating these programs. We've talked previously about economic uncertainty and the new reality of higher interest rates. Rates not only affect the monthly payments for consumers who finance their boats, but also the dealers' carrying cost of inventory. The interest rate outlook remains somewhat unclear, and we hope for more clarity on the direction of rates and the magnitude of possible rate cuts to help consumers feel more comfortable. Despite a choppy environment, we will remain focused on areas of the business within our control. 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 benefits. We believe our reputation for innovation and product leadership has helped us maintain our leading market share over the years. Second, we are very pleased with our existing dealer network and believe we have room to grow in that infrastructure. Rather than dilute our existing dealers by pursuing overlapping or competitive distribution, we see opportunities to strengthen existing relationships even further. We recently hosted our most intensive dealer training conferences yet, arming them with our latest selling and customer education tools. We are committed to consistently elevating our partnerships with them, positioning Chaparral and Robalo for continued success in their showrooms. We also conducted more advanced technical and repair training for dealer service personnel. We received incredible feedback from these events, and we look forward to sharing in our dealer success as a result of these collaborative efforts. Another investment we're making is selective automation of our plants. We are increasingly using robotics on certain tasks to leverage the skill of our craftsmen and reduce unnecessary fiscal demands. This drives a safer production environment and allows our workers to focus on areas that drive maximum quality and consistency. In addition to investments inside our facilities, we have a significant solar panel installation slated for later this year. Beyond the environmental benefits of using alternative energy sources, we expect this project to drive some cash savings. This project will have the capability to supply a sizable portion of our energy needs at our national Georgia manufacturing site. So before turning the call over, I just reiterate that we are confident in our opportunities to invest in the business and that we'll focus on preserving as much margin as possible as we continue to assess the demands of our environment. Now, Mike will provide an overview of the financial results.

Mike Schmit, CFO

Thanks, Ben. I'll start with a few quick financial highlights for the year and then go into some more detail about the fourth quarter. For the full year 2023, net sales were $384 million, up slightly versus last year. Diluted EPS was $1.21, up $0.3. And EBITDA was down 4% to $52 million. We generated strong operating and free cash flow in 2023. Operating cash flow was $57 million, and after CapEx of $10 million, free cash flow was $47 million for the year. CapEx included investments in warehouses and some new trailers. During the year, we paid $19 million in dividends, and we finished 2023 with cash of $72 million and no debt. Now I'll cover our fourth quarter results with year-over-year comparisons to the fourth quarter of 2022. Net sales fell 35% to $70.9 million, driven by a 34% decrease in boats sold. 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 came as an 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 boats that remained in our dealers' inventories that we had shipped in prior quarters. While the program had a relatively minor top-line impact, there was a more noticeable impact on our gross margin. Gross profit decreased 51% to $13.5 million with a gross margin of 19%, down 620 basis points. 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. The fourth quarter retail incentive program represented nearly $2 million reduction in net sales and gross profit, equating to about one-third of the 620 basis point contractions. Furthermore, the majority of the incentives related to boats shipped to dealers in prior quarters. Now that we have normalized incentives and have also adjusted our production schedule to align with current demand, we expect less significant quarterly impacts and better gross margins going forward. SG&A expenses were $7.7 million in the quarter, down 38% or $4.8 million compared to last year. These expenses decreased due to costs that vary with sales and profitability, such as incentive compensation, sales commissions, and warranty expense. Diluted EPS was $0.16 in the fourth quarter, down $0.35 in the same quarter last year. EBITDA was down 58% to $6.5 million, with EBITDA margin decreasing 490 basis points to 9.2%. 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, and that our cost reduction activities and normalized incentives should support gross margin improvements going forward. I'll now turn it back over to Ben for a few closing remarks.

Ben Palmer, CEO

Thank you, Mike. In closing, I'd like to mention capital allocation and make a couple of strategic comments. First, we have maintained our attractive $0.14 per share quarterly cash dividend for our shareholders. We have a sound financial profile and believe our compelling dividend yield offers investors an attractive, tangible capital return. Next, while the second half of 2023 had some challenges, it was still a solid full year, which we generated $47 million of free cash flow. We ended the year with no debt and a highly liquid balance sheet with over $70 million in cash. One of the benefits of being conservative and disciplined during recent market buoyancy is that, as the tide turns, we are well positioned to invest prudently and opportunistically. The silver lining of the current soft environment may be an increasing willingness of private boat makers to seek an exit. Our discipline has caused us to pass on transactions and elevated valuations on peak earnings in recent years. It has resulted in a cash accumulation that we are looking to deploy. We are targeting complementary, high-quality boat manufacturers that would enhance our distribution brand portfolio and increase our marketing and manufacturing capabilities. And we're very interested in increasing our scale and positioning ourselves as a buyer of choice in the M&A landscape. While difficult to pinpoint timing, it is fair to say that if we do not identify significant investment opportunities, we're likely to continue our longstanding practice of returning capital to shareholders. So before we turn the call over to questions, I'd like to thank our employees for a great year of commitment and dedication. We wholeheartedly believe we have some of the best boat makers in the industry, and their teamwork and pride underpin Chaparral's and Robalo's success. We received good feedback and orders from recent boat shows, and we're looking forward to showcasing our new products in the coming weeks. With that, operator, please open the line for questions.

Operator, Operator

Your first question comes from the line of Brandon Rolle with D.A. Davidson. Brandon, the floor is yours.

Brandon Rolle, Analyst

All right. Good morning. Thank you for taking my questions. I guess first, just on the production and where it is right now. Could you talk about your production levels, your plan for that over the next three months compared to maybe where it was last year? And you had talked about inventory levels, you were comfortable with your inventory in the field, but overall was a little high. Would you be able to comment on areas where you felt like in the industry, inventories might be a little elevated?

Ben Palmer, CEO

Good morning, Brandon. In terms of our current production level, we made some adjustments during the third and fourth quarters, so it’s probably more relevant to discuss our plans moving forward relative to the fourth quarter. We’ve observed that early results from the boat shows have been consistent and may even be slightly better than last year. Some shows faced adverse weather, which made it challenging to accurately gauge activity levels. Overall, we are pleased with the early outcomes from the boat shows. I mentioned earlier that based on recent orders and feedback from dealers, we anticipate a slight increase in production for the first quarter of next year. However, we adjusted our production down during the fourth quarter to better assess and monitor demand, allowing us to adjust accordingly. We are optimistic that our retail program and incentives from other manufacturers will help clear dealer inventory, creating room for us to further increase production throughout the year. Regarding field inventory, it appears that some segments of our industry have experienced a slowdown earlier than ours. We benefited from strong demand for our products, but some aluminum products have accumulated more inventory than desired. That seems to be the key issue.

Brandon Rolle, Analyst

Okay, great. And you had mentioned the boat show performance is being slightly positive or encouraging at least. What were you specifically seeing at these boat shows in terms of attendance or retail sales, or was it a combination of both that gave you guys a more positive view on the space moving forward?

Ben Palmer, CEO

I think it's both of those things, right? You get a feel just seeing the attendance, the number of people and getting a sense for the excitement. Of course, the tangible measure is orders that are placed at the show. And like I said, we had similar or in some cases, slightly better sales than a year ago. And a year ago things were still relatively positive. So we take that as a good sign, but we're certainly not going to move production up until we have firm indications of orders from our dealers. So we're constantly assessing that.

Mike Schmit, CFO

I want to emphasize that my previous comment was mainly about the boat shows in the southern region. In contrast, the northwest and northeast experienced significant negative effects from the weather, which we are not considering as a reflection of the overall market. For example, at the Atlanta boat show, which I attended last year and this year, the crowds were similar, if not slightly larger. Our dealers have indicated that conditions are about the same or even a bit better than last year, and we had a favorable year last year. This is encouraging for us.

Brandon Rolle, Analyst

Okay, great. Can you provide more details on your new retail incentive program? Are these incentives aimed at dealers, and are they wholesale incentives, retail incentives, or a combination of both?

Ben Palmer, CEO

What we discussed today is a retail program that we are implementing with dealers to offer to consumers at boat shows and in showrooms. The program started late in the fourth quarter, and we are currently tracking its impact. For accounting purposes, we needed to estimate the costs associated with the retail incentive program for sales already recorded. This has led to a significant impact on our gross margin this quarter, as we've accounted for the expected payouts in retail incentives for all boats sold so far that remain in dealer inventory. This estimate is necessary for such programs, and we believe it will motivate retail buyers to place orders, which will subsequently lead to more dealer orders to replenish inventory. Overall, this approach is fairly normal and not excessive, resembling the conditions we experienced before the COVID pandemic.

Mike Schmit, CFO

Yeah, I'll just add that, to kind of answer your other question. It is a combination of both. There's incentives to both the dealers and some that flow through to retail, but it's called a Float Your Boat incentive, and you can read more about it on our Robalo and Chaparral websites. There's a lot of information on those websites about it.

Brandon Rolle, Analyst

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 to really get back to normalized production levels?

Ben Palmer, CEO

That's a challenging question. To quantify it is tough. Our approach involves collaborating with our dealers through periodic order points throughout the year. They assess their inventory levels, and together, we determine the right number of boats to deliver over time to ensure they have enough inventory to meet retail demand. No one wants to lose out on a sale, so having inventory available is crucial for serving buyers who are ready to purchase. We're actively working with dealers and monitoring boat shows. An upcoming order point in a few weeks is also on the horizon, and initial indications suggest that dealers are satisfied with their inventory movement. We are committed to aligning production with actual demand and dealer inventories. Projections for future needs are necessary, but they become easier if sales pick up, which we are currently observing. This positive trend may allow us to increase production again later this quarter to support sales in spring and summer and further reduce inventory.

Operator, Operator

Your next question comes from the line of Craig Kennison with Baird.

Ben Palmer, CEO

Operator, Brandon may have been cut off there. Can you check?

Operator, Operator

Oh, sorry. My apologies. One moment. We're going to take a question from the line of Craig Kennison with Baird. Craig, the floor is yours.

Craig Kennison, Analyst

Thank you. Good morning. I appreciate the chance to ask my question. I wanted to discuss affordability from a different perspective. You mentioned some of the promotions you have, but I'm curious if you anticipate any changes to the product mix or modifications to the products themselves to achieve more affordable pricing. How significant is this for you?

Ben Palmer, CEO

That's a great question. Currently, we are not implementing any definitive changes, as we always strive to find the right balance between quality, features, benefits, and the cost of our boats. This balance is a continual challenge that we are actively addressing. Historically, we have responded to shifts in consumer demand, recalling the period of 2008 to 2010 when we introduced the H2O series, which was a lower-cost option. We made some adjustments and collaborated with our vendors to offer a product that resonated with consumers during that economic phase. At present, we still believe there is sufficient demand for our current products, and we are carefully monitoring the situation, ready to make necessary adjustments. However, as of now, there are no specific changes in the pipeline. We do offer a diverse range of boat sizes and features. To answer your question from another perspective, our higher-priced boats continue to perform well in terms of sales. While we do sell many smaller, lower-priced boats, we don't currently see a need to modify our product configurations or options to lower prices. That being said, it’s a valid question, and we may consider it in the future.

Mike Schmit, CFO

Yes, I'll just add really quick, too. We haven't really seen a decline in any of our input costs. In fact, on the contrary, they still kind of going up slightly. So you've seen a little bit of margin erosion. So we hope now that supply chains are stabilizing that things will work down, because that's the tough thing too with the supply chain and the input cost of boats has really increased. So the higher price of boats have really reflected that in the whole industry.

Craig Kennison, Analyst

Great, thank you. And then I think you had mentioned your strong balance sheet and the desire to expand the portfolio if acquisition opportunities become available. I'm curious where you see, I guess, holes in your portfolio or opportunities to expand your portfolio, are there boat categories where you have particular interest?

Ben Palmer, CEO

When considering expansion, there are several factors we take into account. We want to partner with a reputable and high-quality manufacturer. It's important for us to choose something that complements our existing offerings without significant overlap. We have a robust dealer network that we aim to appeal to. Currently, we don't have an aluminum product, which we believe would be appealing to both us and our dealers. Additionally, on the fiberglass side, there is potential for larger boats. While going significantly larger may not be our first choice, we believe we are well-positioned in the offshore market and possibly even for a larger offshore brand. These two areas would allow us to utilize our dealer network effectively and tap into our cash reserves to create value. We are committed to investing wisely, and if we cannot identify suitable opportunities, we plan to return cash to shareholders in some manner.

Mike Schmit, CFO

We have observed significant progress in the aluminum pontoons segment. While recent months have shown a slowdown in demand, historically, over the past five to ten years, demand for pontoons has been increasing at a faster pace compared to the rest of the industry. This is a particularly intriguing area for us.

Craig Kennison, Analyst

Thank you. And just looking at your balance sheet, a lot of cash, no debt. How much debt are you willing to take on while you're still comfortable with your cash flow profile?

Ben Palmer, CEO

We are open to taking on debt and have various options available to us. For instance, we could consider raising equity through secondary offerings. Over the past 12 months, we have generated nearly $400 million in sales. Therefore, securing $100 million or $200 million would not pose a problem given our balance sheet and cash flow capabilities. If we were to acquire a company that is itself generating cash, we could easily fund such an acquisition with cash, depending on its size. In short, taking on $100 million or $200 million would not be an issue for us.

Craig Kennison, Analyst

Great. Hey, thank you.

Ben Palmer, CEO

Thank you, Greg.

Operator, Operator

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

Ben Palmer, CEO

Okay. Well, thank you very much, everyone, for being on the call, and I look forward to catching up with you later. Take care.

Operator, Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.