Marine Products Corp

NYSE:MPX

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, and thank you for joining us for Marine Products Corporation's Second Quarter 2024 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 will now turn the call over to Mr. Schmit.

[Michael Schmit, executive]

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 2023 10-K 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. Our press release issued today and our website contain reconciliations to these non-GAAP measures to the most directly comparable GAAP measures. I will now turn the call over to our President and CEO, Ben Palmer.

[Ben Palmer, executive]

Thank you, Mike, and thank you all for joining our call. Second quarter results were again stable from a sequential standpoint compared to first quarter, however, remained negative compared to prior year as we had anticipated. The key themes and headwinds for the boat manufacturing industry remain the same and marine products is no exception. We and our competitors are still grappling with dealer hesitation to aggressively order boats as they attempt to clear inventory from their showroom floors.

Compounding the excess inventory issue or interest rates that remain relatively high, keeping up with pressure on dealer carrying costs. We are being proactive in managing costs and production schedules during the soft period. But simply put, we believe these challenges will continue to hamper our financial results in the near term. As we said last quarter, we've reduced our production schedules to align with lower demand. We continue to use this time to undertake projects to improve plant operations so that we will operate even more efficiently once normalized demand returns.

With regard to dealer inventory, I'll echo my comments from last quarter that we remain comfortable with the level of our products in the field. But we continue to hear that high inventories are still an issue for many dealers, often in categories where we do not compete. After several quarters of increasing field inventories, we were pleased our field inventory declined over 15% in the second quarter. We continue to support our dealers with promotions to help them stimulate demand, and we have extended our programs as we believe maintaining these incentives are crucial to motivate consumers in light of elevated financing costs.

As many of you are closely watching the interest rate outlook, we are encouraged that recent economic commentary suggests we are nearing some interest rate relief. While we don't believe a single Fed move to cut rates will have a dramatic impact on demand, it would be a first step towards potential additional future cuts and improved sentiment that financing costs could trend lower. As we are launching our 2025 model year, we're excited to host our dealers at our annual conference in Key Largo in August. This year, we have particular costs for celebration as we will mark the Chaparral brand's 60th anniversary.

Chaparral has been a leading pleasure boat brand for decades, and we believe its reputation for innovation, design, customer satisfaction and value or second to none. We can't wait to celebrate with our dealers, connect with them to see how we can support their businesses in the year ahead and introduce some exciting changes for the new model year. Without stealing the thunder from our conference, we can surely say we are bringing forth a host of incremental improvements and options and new models for both Chaparral and Robalo boats as a result of our consistent R&D and innovation programs.

We take great pride in our efforts to listen to consumer and dealer feedback when designing our boats. We approach each model year as a new opportunity to refine our offerings and give customers features, colors, options, materials and designs that maintain the high standards they are accustomed to from our brands. Again, to our dealers out there listening to the call, we look forward to seeing you in August and continuing our collaborative partnerships.

Now Mike will provide an overview of the financial results.

[Michael Schmit, executive]

Thanks, Ben. For the second quarter of 2024 compared to the second quarter of 2023, sales were down 40% to $69.5 million, driven by a 41% decrease in boats sold. Price and mix netted to a positive 1%. Of note, last year's second quarter sales of $116 million were the second highest in the company's history. While we typically focus on year-over-year comparisons, I'd also like to note that sales were sequentially stable with the first quarter of 2024.

Gross profit decreased 54% to $13.2 million, with a gross profit margin of 18.9%, down 580 basis points versus last year's very strong results. Despite significant cost reduction efforts and paring back production schedules to minimize variable costs, we are being impacted by under absorption of certain fixed costs.

SG&A expenses were $7.4 million in the quarter, down 39% or $4.7 million compared to last year's second quarter. These expenses decreased due to cost of various sales and profitability, such as incentive compensation, sales commissions and warranty expenses. Diluted EPS was $0.14 in the second quarter, down from $0.42 last year. The reported EPS of $0.14 is $0.02 lower for the second quarter and if you simply divided net income by the average shares outstanding.

This difference is a result of our calculating EPS under the 2-class method, which is required by GAAP and was primarily triggered by our second quarter special dividend. This is footnoted in our earnings release table. EBITDA was $6.5 million, down from $17.1 million with EBITDA margin decreasing 540 basis points to 9.3%. While this margin was down versus prior year, it did increase sequentially from 8.5% in the first quarter of 2024.

Year-to-date, we have generated operating cash flow of $20 million and free cash flow of $18 million. CapEx was $1.7 million and is expected to pick up in the second half of the year with our planned solar panel installation at our manufacturing facility in South Georgia. We 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.

[Ben Palmer, executive]

Thanks, Mike. I want to acknowledge that Marine Products and the rest of the marine industry are going through a challenging period following recent years unparalleled industry demand. We know these declines have presented significant hurdles for our employees, dealers and of course, shareholders. We want to assure all of our stakeholders, we are taking actions to preserve the health of our business, managing conservatively and with discipline and making sure Marine Products is positioned for success when market demand improves.

As we navigate this environment, we have remained debt-free and accumulated significant cash. As a result, we have returned a substantial amount of cash to our investors year-to-date through both our regular $0.14 per share dividends and the $0.70 special dividend we paid out in the second quarter. Even following these distributions, we ended the second quarter with over $55 million in cash on the balance sheet. This ensures ample liquidity to weather the current difficult patch in this cycle make organic investments in the business and maintain the flexibility to pursue strategic acquisitions.

However, as we noted last quarter, over time, we do not execute on transactions if we do not execute on transactions, we will look at further actions to return capital to our investors. So before we turn the call over for questions, I'd like to thank our employees for their contributions every day and our dealers who continue to partner with us for mutual success. We're excited about model year 2025 and looking forward to our upcoming dealer conference in August.

And with that, operator, please open the line for questions.

[Operator]

[Operator Instructions] We have our first question from Griffin Brian from D.A. Davidson.

[Unknown Analyst]

So can you just kind of talk about the cadence of retail throughout the quarter and why maybe we saw such a big drop in June? And then maybe speak to if those trends we saw in June are carrying over into July.

[Ben Palmer, executive]

Griffin, this is Ben. We -- as we indicated, our field inventory dropped during the second quarter. There are reporting delays between actual sales and when those get reported with registration information and things like that. But it was -- we didn't necessarily see from our perspective, of course, we're one to move from the actual retail sale. But we saw that it did have strength relative to the first quarter, which is quite typical.

And we did see that. We did -- as I indicated, again, repeating myself, we did see our field inventory decline. Obviously, there was a difference between the amount of boats that were going out of retail versus the number of boats that we were shipping to our dealers. So we were pleased with that.

And the normal pattern is that sales begin to moderate after the spring and early summer selling season. So we would expect that to be a normal pattern, but we haven't seen any -- for our results. We haven't seen a significant unusual change in the sales cadence.

[Unknown Analyst]

Got it. And then what are you guys hearing from dealers regarding their appetite to take on some of the new model year 25 units? Obviously, there's still quite a bit of destocking that needs to happen within the industry. So I'm just kind of curious what the strategy is there for both you guys and the dealers?

[Ben Palmer, executive]

Well, we are following our consistent policy of working with our dealers to -- we have various order points during the year that help us and the dealers communicate and collaborate to collect orders for the coming few weeks, several weeks and few months so that we can plan our production.

So we've -- we continue to follow that process. We are building only 2 firm orders from dealers. So that's going well from that perspective, but we're not building boats on spec or anything like that. So our cadence of production is tied to the number of orders we have in hand. Our dealers are with -- I think they would love to order more of the 25 model year boats. But -- and we understand they're mindful of their inventory that they already have in place. So we're all trying to work to balance that out appropriately between now and next spring selling season.

So we understand that, but we're working closely with the dealers, and they've been, as always, great to work with, and they understand our model and approach and so far, so good, but we'll just have to be patient and let demand pick up, take care of the overall inventory that they have in the field. And hopefully, in the coming months, we'll be able to return to a little bit more of a normal order pattern and therefore, more of a normal production levels.

[Unknown Analyst]

Got it. And then in terms of promotions, is there a possibility that you could get even more aggressive? Or is it more just kind of extending the time line of these offerings?

[Ben Palmer, executive]

We, from time to time, will tweak the programs, but we think the program is appropriate and attractive. That's a balancing act. We don't -- we, at this point, aren't panicking and feel that we need to do anything extraordinary, right? We just think it will take some time for it to work through. And we think we're a reasonable steady state right now, and we are continuing the program.

We will continue to offer those programs to support sales, obviously focused at the older model year boats. But we're comfortable with where they are right now.

[Unknown Analyst]

Great. And then kind of what data points would give you guys confidence to bring back production to a more normalized level? And is that something that's even possible this year?

[Michael Schmit, executive]

Yes. I think we don't do spec boats. So for us, the data point would be getting the orders and from our dealers. So I think when we meet with our dealers next month at our dealer conference, we'll get a lot of great data points from them on how things are going and what they're seeing. And we typically get a lot of orders for the new models at that conference, and we're expecting it to be a really large successful conference as we celebrate the 60th anniversary of the Chaparral brand this year.

So we're expecting there to be a lot of enthusiasm around some of the models, and we're expecting to get more orders then as well. So it's really just the orders we get directly from the dealers rather than anything else.

[Ben Palmer, executive]

Yes. And obviously, the third and fourth calendar quarters are seasonally slower period. So I'm not expecting at this point that retail demand is going to pick up during that period. So it's going to be dealers projecting forward, right, looking at the status of their current inventory and projecting forward to next spring, we all work collaboratively to try to smooth out our production somewhat over a particular model year.

So they realize, we realize and they realize that all the boats that are needed for next spring and summer can't be delivered in the first quarter or very early in the second quarter. So it has to be smoothed out. They understand that. We have long relationships with the dealers. So they will have to do their projections on what they see for the selling season in the future, and we'll work together with them, accumulate up the orders we have in hand and set our production levels accordingly.

So we'll just have to -- it's a reasonable question, but we'll just have to wait and see. Difficult to see that everybody is going to have a clear view of what next spring is going to look like in the near term, right? With interest rate cuts, hopefully, there'll be some enthusiasm, but I expect that people will remain somewhat conservative for the time being.

[Unknown Analyst]

Makes sense. And then just last one for me. In terms of capital allocation, what are you guys seeing in the M&A environment? And is that something you guys would still be interested in participating in at this point in the cycle?

[Michael Schmit, executive]

Yes, we're definitely interested. There just hasn't been a lot of good companies out there that are looking to sell. I mean I think everyone saw the valuations of a couple of years ago when sales were great and wanted to get a high valuation and now the projections of the overall industry are much lower. And so it's going to take some time to kind of settle in on what the new reality is and what the new kind of steady state is going forward.

So we're definitely looking. That's why we still maintained a strong cash balance. We would love to do some M&A, but we're not going to do it for the sake of doing it. We want to make sure it's the right brand and right category for us. So we're definitely looking. There just hasn't been a lot of movement in M&A in the space.

[Operator]

[Operator Instructions] Thank you. As of right now, we don't have any questions. I'd now like to hand back over to Mr. Ben Palmer for final remarks.

[Ben Palmer, executive]

All right. Well, thank you, everybody, for calling in and listening in and for your questions there, Griffin. Everybody, I hope you have a good day, and we'll hopefully connect soon. Take care.

[Operator]

Thank you. This concludes today's call. The conference call will be replayed on marineproductscorp.com within 2 hours following the completion of the call. You may now disconnect. Have a wonderful day.