Q4 2023 Marine Products Corp Earnings Call

Participants

Ben M. Palmer; President, CEO & Director; Marine Products Corporation

Michael L. Schmit; CFO, VP & Corporate Secretary; Marine Products Corporation

Brandon Rollé; MD & Senior Research Analyst; D.A. Davidson & Co., Research Division

Craig R. Kennison; Director of Research Operations and Senior Research Analyst; Robert W. Baird & Co. Incorporated, Research Division

Presentation

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.
(Operator Instructions) I would like to advise everyone that this conference call is being recorded.
I would now turn the call over to Mr. Schmit.

Michael L. Schmit

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 M. Palmer

Thank you, and good morning. Before we begin, I want to remind you that some (inaudible) appreciate everybody joining the call this morning. Our fourth quarter results reflect the ongoing normalization of retail boat sales as the multiyear post-COVID consumer demand boost subsides. In response to the 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 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 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 boat shows.
With regard to dealer inventory, I'd say we are 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 reinitiating 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 dealers carrying cost of inventory. The interest rate outlook remains somewhat unclear, and we hope more clarity on the direction of rates and the magnitude of possible rate cuts will help consumers get 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 to perform certain tasks to leverage the skill of our craftsmen and reduce unnecessary physical 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 equipment will have the capability to supply a sizable portion of our energy needs at our Nashville, Georgia manufacturing site.
So before turning the call over, I'd 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 [health] of our environment.
Now Mike will provide an overview of the financial results.

Michael L. Schmit

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 $0.03 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 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 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% or 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 1/3 of the 620 basis point contraction.
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 M. Palmer

Thank you, Mike. In closing, I'd like to mention capital allocation. I'll 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.
Silver lining of the current soft environment may be an increasing willingness of private boat makers to seek an exit. While our discipline has caused us to pass on the transaction at 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 of the brand portfolio and increase our marketing capabilities 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 we do not identify -- if we do not identify significant investment opportunities, we're likely to continue our long-standing 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.

Question and Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Brandon Rollé with D.A. Davidson.

Brandon Rollé

I guess, first, just on the production and where it is right now, could you talk about your production levels, to your plan for that over the next 3 months compared to maybe where it was last year. And you had talked about inventory levels, you are 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 M. Palmer

Good morning, Brandon. Probably in terms of our current production level, we adjusted kind of during the third and fourth quarters. So it's probably easier or better to talk about kind of where we go from here relative to the fourth quarter. So we indicated here that the early results of the boat shows have been consistent to maybe slightly positive to last year.
We've had some shows that had some negative weather, so it's sort of hard to get a read -- an appropriate read on activity levels and so forth. But we're generally pleased with how the early results of the boat shows are coming through. We indicated in -- or I indicated in my comments that with some of that recent -- some of the recent quarters we've had and indications from dealers, we think we'll be increasing production slightly in the first quarter of next year. But we kind of adjusted down to where during the fourth quarter that we think is an appropriate rate where we could, again, assess demand, watch demand and then we'll adjust production accordingly as we move forward.
So we're hopeful and expect with this -- with our retail program and retail incentive programs of other manufacturers that dealer inventory will clear out, and it will make room for us to increase production further as the year moves forward.
And with respect to field inventory, I think it's been documented that some of the other segments of our industry have maybe slowed down a little bit sooner than our segment of the market. It took us a little -- but we benefited from the really strong demand that we had for our products. So I think some of the aluminum products, I think, have experienced some more inventory than they would want to have. But -- so I'd say that's the primary area.

Brandon Rollé

Okay. Great. And you had mentioned the boat show performance as 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 M. Palmer

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 and 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.

Michael L. Schmit

Yes. And I'll just add that 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 in the Northeast, Northwest, because the weather is something that really -- we're not really considering that as indicative of what's going on in the market. But we attended the Atlanta Boat Show, for instance. I was at their last show this year and the crowds were the same, if not a little bit better. And what we heard from our dealers, as Ben mentioned, was that things definitely are about the same, if not slightly better than last year. So -- and we were in a great place last year. So we were very encouraged by that.

Brandon Rollé

Okay. Great. And then on your new retail incentive program, could you dig in a little deeper on are these incentives going to the dealers just like helping out with -- are they wholesale incentives? Or are they retail incentives as well or a combination of both?

Ben M. Palmer

What we announced and talked about today and discussed the impact as a retail program. It's a program that we work with the dealers to be able to offer the retail consumers at those shows and in the showrooms. And of course, the impact on the fourth quarter -- and the program started late in the fourth quarter, and it's still in effect, so we were required, of course, from an accounting purpose to record what we think the -- an estimate of the cost of that retail incentive program on sales that had already been recorded. So that's where we talked about the fact that our gross margin this quarter was significantly impacted because we had to record an estimate of how much we thought we would pay out in retail incentives or 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. But it's significant, and we think it will encourage retail buyers to order and that will filter through to additional dealer orders to restock their inventory. So that's the idea. So it's just a little more normalized. It's not outsized. It's not huge. It's really more normal. If you go back kind of pre-COVID days.

Michael L. Schmit

Yes. I'll just add 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 [float ship] 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 Rollé

Okay. Great. And just given where inventories are at and 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 M. Palmer

That's a difficult question. I'll just answer it by saying, I mean, to quantify it is difficult. What we do, our process is we work with our dealers. We have periodic order points during the year that go to our dealers, and they're looking at their inventory levels and together with us, we decide what's an appropriate number of boats that need to be delivered over time so that they have sufficient inventory to meet their retail demand, right? Nobody wants to miss out on a sale. So you need to have -- it helps to have inventory on hand to be able to [meet] that other buyers that walk in the door that are ready to execute.
So we're working with the dealers. We're obviously watching the boat shows. We'll have another order point coming up in the next few weeks. We're getting some early indication that says they're pleased with movement in their inventory. So we're very disciplined in that regard in terms of making sure that we're aligning production with actual demand and dealer inventory. Certainly, you have to make a projection about what you're going to need in the future, but it helps if sales accelerate and right now, we're seeing some of that. So that should be positive. We would expect and hope to be able to increase production again later this quarter to be able to support some spring and summer sales as well to bring inventory even -- down even further.

Brandon Rollé

Okay great and then...

Operator

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

Ben M. Palmer

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

Operator

Sorry. My apologies. We want to take a question from the line of Craig Kennison with Baird.

Craig R. 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 order to target more affordable prices? And how important is that?

Ben M. Palmer

Well, I think it's a great question. At this point in time, we're not taking any definitive measures, always trying to create the best -- the balance between the best quality and the features and the benefits and the cost of the boat is always a challenge and something we're working on. But if you go back to we in the past have been responsive to those kind of shifts in consumer demand harkening back to kind of the '08, '09, '10 time frame, we came out with the H2O series, which was a lower cost unit we were able to go through and do some sign changes and work with our vendors, and we were able to come out with a product that appealed to the consumer at that period of time and in that point in an economic cycle.
At this point, we still feel that we have sufficient demand on the products that we have, but we're certainly watching that closely, and we'll make the adjustments as necessary. But right now, today, we're not doing anything in particular. Of course, we have a fairly wide range of boat sizes and features and benefits.
And to answer the question another way, we're still seeing our more expensive boats carry the most weight with respect to our results. We do sell a lot of our -- we do sell a high volume of our smaller boats, which do obviously carry a lower price point. But at this point, we are not -- we don't believe that we have the need or we've not seen the need to try to adjust the product configuration or the options and that sort of thing to lower the price. But it's a good question. At some point, that may occur.

Michael L. Schmit

Yes. I'll just add really quick, too. We haven't really seen a decline in any of our input costs. In fact, to the contrary, are they still kind of going up slightly, so you've seen a little bit of margin erosion. So we hope now the supply chains are stabilizing that things will work down because that's a 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 R. Kennison

Great. 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 M. Palmer

Yes. When we think about so many factors that go into that decision, certainly, we want a good company, a good manufacturer, a quality manufacturer. We certainly want to do something that's complementary. We don't want to overlap significantly somebody that we could leverage our really strong and dealer network that would appeal to that dealer network. Obviously, we don't have an aluminum product. That's something that I think would be attractive to us and attractive to our dealer network.
We have the opportunity to leverage that and create some benefits and then on the fiberglass side, certainly, in terms of sizes, we could do some larger boats. I don't know that our first choice would be to go significantly larger, but we think we're nicely positioned in the offshore market, perhaps a larger offshore brand. That would probably be the 2 primary ones that I think, again, would both allow us to leverage our dealer network, utilize some of the cash that we have and take advantage of the fact that 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, we'll return cash to shareholders in some form or fashion.

Michael L. Schmit

And more specifically on the aluminum pontoons, is one that we see a lot of progress that would be -- there's recent -- in recent months, demand slowed, but just kind of historically over the last 5, 10 years, demand for pontoons seems to be increasing at a higher rate than the rest of the industry. So that's very interesting.

Craig R. Kennison

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 M. Palmer

We are "not afraid of debt" and we would have other options. Obviously, we could raise equity through the secondary and so forth. But we have sales today over the last 12 months approaching $400 million. So I think we could easily -- just to pick a number. I mean we could -- $100 million or $200 million, I think, would not be a problem with our balance sheet and our cash flow generating capability and adding a quality company that's generating cash itself, it would not be a problem at all to initially fund an acquisition if they need to be funded with cash or depending on the size of the acquisition, right, that we were doing, but $100 million or $200 million would not be a problem.

Operator

(Operator Instructions) 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

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

Operator

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