Marine Products Corporation

Good morning and thank you for joining us for Marine Products Corporation's third quarter 2024 Financial Earnings Conference call. Today's call will be hosted by Ben Palmer, President and CEO, and Mike Schmidt, 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. Schmidt.

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 the number of known and unknown risks. Please refer to our press release issued today along with our 2023 10K and other public filings that outline those risks, all of which can be found at .marineproductscorp.com. In today's earnings release and conference call, 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. Today's press release 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.

Thanks, Mike, and thank you all for joining our call. Third quarter results remain negative compared to prior year, as we had signaled they would, in a very difficult demand environment. We and our peers in the marine industry continue to navigate a tough period, managing costs and production as best we can until consumer demand picks up. There have been some minor positive developments regarding channel inventory levels and interest rates. However, dealers continue to exhibit caution with respect to new orders. We have reduced costs as appropriate through manufacturing headcount reductions and scaled back our production to allow showroom inventories to shrink. We are taking decisive and prudent measures in the near term without sacrificing longer term opportunities or jeopardizing our operations. With regard to dealer inventory, levels of our products in the field have come down and we are comfortable with current levels. While we don't disclose detailed quarterly dealer inventory counts, we are pleased that boats in the field are trending lower. On a sequential basis compared to the second quarter of this year, field units were down 13% and versus prior year were down 4%. Just as we did last quarter, we have extended our promotional programs as we believe these are critical to supporting our dealers and incentivizing consumers. We have also enhanced our third party floor plan financing program to include added features and more promotional capabilities. We were also encouraged to see the first interest rate cut in several years come through in September with a 50 basis point cut by the Fed. We reiterate that while we don't believe a single Fed cut will have a traumatic impact on demand, we consider it a first step toward reducing dealer carrying costs and lowering consumers borrowing costs. More rate cuts are expected and hopefully downward momentum in financing costs will lure buyers back into the market. Our August dealer conference in South Florida was an exciting event as we celebrated Chaparral's 60th anniversary and connected with many of our dealers. We unveiled new models, colors, features and options across both Chaparral and Ravallo lineups and the dealer response was very positive. We approached each model year as a new opportunity to refine our offerings and give customers products that continuously raise the high bar for quality and design they have come to expect from our brands. Board patterns clearly remain a headwind, but we assure you there is no shortage of enthusiasm within our dealer network. Now, Mike will provide an overview of the financial results.

Thanks, Ben. For the third quarter of 2024 compared to the third quarter of 2023, sales were down 36% to $49.9 million. Driven by a 40% decrease in the number of both sold. Price and mix netted to a positive 4%. Gross profit decreased to $9.2 million with a gross margin of 18.4%. Down 630 basis points versus last year's strong results. On a sequential basis, gross margin declined only slightly from .9% in the second quarter. Significant efforts have been made to control labor expenses. However, we are also being impacted by under absorption of fixed costs. SG&A expenses were $5.6 million in the quarter. Down 36% or $3.1 million compared to last year's third quarter. These expenses decreased primarily due to costs that vary with sales and profitability, such as incentive compensation, sales commissions, and warranty expenses. SG&A as a percentage of sales was .3% consistent with last year's third quarter. Diluted EPS was 10 cents in the third quarter. Down from 30 cents last year when we had a 4 cent per share gain from a real estate transaction related to a warehouse sale. EBITDA was $4.3 million down from $13 million last year, which included the $1.8 million real estate transaction gain. Year to date, we have generated operating cash flow of $24.9 million and free cash flow of $21.3 million. CAPEX was $3.6 million and picked up in the third quarter with the solar panel installation project at our manufacturing facility. We still expect CAPEX to be approximately $5 million for the full year. I'll now turn it back over to Ben for a few closing remarks. Thank you,

Mike. We know our employees, dealers, and investors are feeling the consequences of weak end market demand, but we remain steadfast in our commitment to manage prudently through this difficult patch. We've returned a significant amount of cash to our investors this year through both our regular 14 cents per share quarterly dividends and the 70 cents special dividend we paid out in the second quarter. We still ended the third quarter with over $53 million in cash on the balance sheet, testament to our strong cash generation despite the lackluster environment. We have ample liquidity to see us through this current down cycle, make investments in the business, and execute on potential acquisition opportunities. However, as we noted last quarter, over time, if we do not deploy substantial capital, we'll look at further actions to return cash to our investors. Lastly, we're also fortunate that the highly destructive hurricanes that passed through the southern states in recent weeks inflicted minimal damage at our Nashville, Georgia production facility. We know, however, that not everyone in the community fared as well, and we have offered many forms of support to our community and our employees facing hardships. We are also mindful of all our dealers who have endured severe disruptions in their local markets, and we are working diligently to support them. So from what we've been told, they are faring relatively well with respect to storm recovery. That said, we have seen some minor ordering delays in the early weeks of the fourth quarter, as that is when Hurricane Milton caused the most disruption. But before we turn the call over for questions, I'd like to thank our employees for their contributions every day and our vendors and dealers who continue to partner with us for mutual success. With that, Operator, please open the line for questions.

Thank you. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. And your first question comes from the line of Griffin Bryan with DA Davidson. Please go ahead.

Yeah, thanks, guys. So I'm just kind of curious how the cadence of retail played out throughout the quarter, right? So we got the September retail numbers yesterday. Actually, it seems like there's some categories that kind of improved a decent bit. So, are you guys seeing anything like this in October? And do you think this kind of marks the bottom or is it a bit too early to tell?

Hey, Griffin, this has been appreciate your question. I would say nothing in particular. What we look to that provides the biggest ray of light at this point is more broadly that the team's done a fantastic job getting our production levels down such that we can begin to see a decline in the field inventory. So that especially looking at that impressive 13 percent decline in field inventory in the third quarter, despite the fact that we were still producing, but obviously more more boats were being sold at retail than we were shipping the dealer. So that's that's a great time, especially given that third quarter typically is a seasonally relatively weaker, relatively weaker quarter. So we were very pleased to see that. But if it's really hard to point at any any particular model or size or whatever that it's driving that. But but it's good to see some of those positive overall industry results to.

Fair enough. And then you mentioned that your dealer levels are at a reasonable level. Do you think this is kind of like a broader trend or something that you guys are seeing specifically? And then with those reasonable levels, what are your dealers appetite to take on? Not a year, 25 units at this time.

Well, again, if we if we could have our way, we would love our field inventory to be even lower, but we are comfortable where it is at this point, given what we've been through in the last 12 plus months. We think we've done a team's done a good job navigating through this period of time. The dealers are are stepping up and helping us. You know, obviously we want to have as much production as we can have, but we tried to reach that appropriate equilibrium where we have some level of production. So that requires them to be committed to taking 25 models and they're they're stepping up. They know that, you know, to hopefully meet whatever demand they're going to have, especially next spring that they need to begin to take some boats now. So they're doing a great job partnering partnering partnering with us to get some reasonable order flow at this point in time, and we'll just have to react to what you know what happens over the next few quarters. You know, typically, obviously, fourth quarter is the seasonally weak periods of not expecting, you know, strong retail environment, but everybody's looking forward to the winter boat shows and next spring. That's what we're all trying to plan for and project project out for and like I said, the team's doing a great job navigating through that working with our dealers who are who are supporting us in that regard. And we really appreciate that.

Got it. And then on the promotional front, we've seen some Williams and tuning some pretty drastic rebates on model year 24 units. You know, I just put any sort of pressure on you guys and maybe just kind of talk about your philosophy for promotions in this retail environment and how they'll kind of play out for the rest of the year.

Well, I think at this point, you know, demand is, you know, continues to be weak. Our philosophy is, I would say our promotional program at this point is a little closer to what it traditionally is. We're not getting super aggressive because we think with our inventory levels that again, they're reasonable compared to where we are at this point in time. We're not so certain that offering really super high incentives are going to do anything other than just shake those few people that are looking for really, really low pricing. So we're trying to look at it longer term, trying to manage it over over the cycle over the season. So we are not responding with again, significantly elevated programs. We'd rather have really more normal. I mean, we certainly stepped up some to support the dealers, but we're we don't believe, you know, having with the position of our inventory and where we are and with our models and demand, we don't we don't feel that we need to have super aggressive programs in place at this point.

Fair enough. And then, you know, we've seen one of your competitors announced that they're exiting the Marine industry. I'm not necessarily expecting you guys to comment on that specifically, but maybe just kind of speak to the current M&A market within Marine more broadly.

Sure. This is this Mike. Yeah, we saw that and we honestly haven't had a lot of time to look at it in detail since we've been working on our quarter end. But, you know, as we stated, we have been looking for opportunities to grow our business, possibly through M&A. And we are starting to see some deals out there. You know, so we think that that's a positive sign that there will be opportunities for companies like us that have a strong balance sheet and want to grow. You know, there's nothing kind of specific to call out on that right now, other than we are encouraged that we believe opportunities will be out there. So, yeah, we'll see how it shakes out and hopefully we'll see something that will be a great long term fit for us.

Got it. And just last one for me. So, you know, you kind of mentioned the first rate cut being good for floor plan interest, but not necessarily a needle mover. I guess I'm curious, you know, if you think there's a certain point where the cuts actually do start to make an impact on retail demand, then maybe just kind of what are you guys forecasting internally in terms of rate cuts as you kind of plan out for your 2025?

Well, Griffin, it's a good question. I wish we had that kind of prognostication. Again, we're not necessarily trying to set our production levels based on rate cuts. It's really more of a feel sort of thing, you know, getting feedback from our dealers and our vendors and our salesmen who are dispersed across the country in this market to get a feel for where our dealer partners are and how they're feeling and what we're feeling. And we're really more we're going to react probably to whatever happens more than we're trying to forecast it. We're comfortable with the production levels we are at right now. We wish they were higher, but we've adjusted to a level that we can remain steady until demand does pick up. And we feel that we'll be able to react to that fairly quickly. So we're more monitoring that, monitoring the overall demand picture. Certainly interest rates can factor into that, but may not always. So we think certainly any additional cuts would certainly be positive and would help many different sectors of the economy or ask the opportunity to help many different parts of the economy. So we'll just continue to watch it. And I do think some additional cuts are probably necessary to achieve some improvement, but we'll just wait and see. It's a reasonable question, but we don't try to predict cuts and then set our production rates based on that. But we're certainly interested and glad that there has been that initial cut that occurred.

Yeah, I'll just add we just look at it as things heading in the right direction, right? Something we were all looking for for a long time. And we're also, I think as we mentioned our press release today, been working with our vendors and our dealers of making enhancements to our floor plan financing, which will help get rates down for both our dealers and hopefully ultimately the consumers. So all those things, I think are heading in the right direction that coupled with our lower inventory in the field seem to be positive signs. So we're hopeful as rates continue to come down that things will keep moving in the right direction.

Got it. That's all from me. Best of luck with the rest of your guys. Thank you.

Again, if you would like to ask a question, press star, then the number one on your telephone keypad. There are no further questions at this time. I will now turn the conference back over to Mr. Ben Palmer for closing remarks.

Thank you very much. Griffin, appreciate you with your questions and everybody who listened in. We appreciate it and have a good rest of the day.

A recording of today's call will be available on marine products corp dot com within two hours following the completion of the call. This concludes today's call. You may now disconnect.