Marine Products Corp

NYSE:MPX

Earnings Call Analysis

Marine Products Struggles with Sales but Plans for Future Growth

In the third quarter of 2024, Marine Products reported a 36% decline in sales to $49.9 million, driven by a 40% drop in boat sales. Their gross margin fell to 18.4%, down 630 basis points year-over-year. Despite challenges, SG&A expenses decreased by 36%, reflecting cost control efforts. The company remains positive, signaling reduced inventory levels and enhanced financing programs for dealers. A recent 50-basis-point interest rate cut could gradually support consumer demand. Additionally, Marine Products aims for a $5 million capital expenditure this year and has returned significant cash to investors through dividends, highlighting its commitment to operational strength and long-term opportunities.

Navigating a Challenging Market Environment

Marine Products Corporation reported a tough quarter, with a substantial decline in demand significantly impacting their financial results. The company experienced a 36% drop in sales to $49.9 million, driven by a staggering 40% decrease in the number of boats sold compared to the previous year. The leadership acknowledged the broader industry challenges but expressed a cautious optimism based on some recent inventory developments and interest rate cuts initiated by the Federal Reserve. They are effectively managing costs and production to adapt to this difficult environment.

Strategic Cost Management and Production Adjustments

In light of declining sales, Marine Products has made prudent adjustments. They reported a 13% reduction in production units sequentially from the second quarter. Furthermore, dealer inventory of boats in the field has decreased, indicating a tightening of supply which Marine Products is cautiously managing. This approach is part of a broader strategy to support dealers and manage showroom inventories.

Promotional Initiatives and Financing Solutions

To assist dealers and stimulate demand, the company has extended its promotional programs and enhanced third-party floor plan financing options. While the company acknowledges the importance of these measures, they also recognize that merely offering promotions may not suffice in a market still exhibiting weak demand. Their strategy appears to involve sustaining reasonable promotional levels without resorting to excessive discounts, which could compromise the brand's value.

Encouraging Signs Amidst the Challenges

The recent interest rate cuts—specifically a 50 basis point reduction—are viewed positively as they may reduce dealer carrying costs and encourage consumer purchases. While significant improvements in retail demand are not anticipated immediately, the company remains hopeful that a continued decline in rates will progressively enhance their competitive position.

Financials: Current Position and Future Outlook

Gross profit fell to $9.2 million with a gross margin of 18.4%, reflecting a 630 basis point decline year-over-year. Despite these challenges, Marine Products reported $24.9 million in operating cash flow and maintained over $53 million in cash balance, underscoring their financial resilience. They also returned a notable $0.14 quarterly dividend and an additional $0.70 special dividend, showcasing their commitment to returning value to shareholders even in tough times.

Looking Ahead: Inventory and Dealer Relationship Management

The company recognizes the significance of dealer relationships and is actively working to ensure they maintain an adequate flow of new model units to meet future demand, particularly as they approach the more favorable spring season. Feedback indicates dealers are eager to order new models, suggesting a measured confidence in an eventual market recovery as conditions normalize.

Potential for Strategic Growth Opportunities

In addition to managing present challenges, Marine Products is targeting potential acquisition opportunities within the marine industry, which could provide further growth avenues. With their strong balance sheet and healthy cash position, they are well poised to take advantage of favorable M&A conditions as they emerge.

Community Commitment Amid Operational Challenges

The company faced disruptions due to hurricanes but reports minimal damage to production facilities. They have committed to supporting both their employees and the broader community during this challenging time, indicating a sense of corporate responsibility and stability in their operations.

Earnings Call Transcript 2024-Q3

[Operator]

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 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 www.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.

[Ben Palmer, executive]

Thanks, Mike. And thank you all for joining our call.

Third quarter results remained 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 head count 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, build 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 dramatic 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 Robalo lineups; and the dealer response was very positive. We approach 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. Order 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.

[Michael Schmit, executive]

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 boats 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 18.9% in the second quarter. Significant efforts have been made to control labor expenses. However, we were 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 11.3%, consistent with last year's third quarter.

Diluted EPS was $0.10 in the third quarter, down from $0.30 last year, when we had a $0.04 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 a 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.

[Ben Palmer, executive]

Thank you, Mike.

We know our employees, dealers and investors are feeling the consequences of weak end market demand, but we remained 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 $0.14 per share quarterly dividends and the $0.70 special dividend we paid out in the second quarter. And 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 were 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. Though, from what we've been told, they are faring relatively well with respect to storm recovery. That said, we have some minor -- we had seen some minor ordering delays in the early weeks of the fourth quarter, as that is when Hurricane Milton caused the most disruption.

So 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.

[Operator]

[Operator Instructions] And your first question comes from the line of Griffin Bryan with D.A. Davidson.

[Griffin Bryan, analyst]

So just kind of curious how the cadence of retail played out throughout the quarter, all right? So we got the September retail numbers yesterday. Actually it seems like there are 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?

[Ben Palmer, executive]

Griffin, this is Ben, appreciate your question. [ I would ] say nothing in particular. What we look to that provides the -- I guess, the biggest ray of light at this point is more broadly that the team has done a fantastic job of 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% decline in field inventory in the third quarter and despite the fact that we were still producing, but obviously more boats were being sold at retail than we were shipping to the dealers. So that's a great sign, especially given the third quarter typically is a seasonally relatively weaker quarter. So we were very pleased to see that, but it's really hard to point at any particular model or size or whatever that's driving that. But it's good to see some of those positive overall industry results too.

[Griffin Bryan, analyst]

Fair enough. And then you mentioned that your dealer levels are at reasonable levels. 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 model year '25 units at this time?

[Ben Palmer, executive]

Well, again 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 -- the team has done a good job navigating through this period of time. The dealers are stepping up and helping us. 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 stepping up. They know that 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 with us to get some reasonable order flow at this point in time. And we'll just have to react to what happens over the next few quarters. Typically, obviously, fourth quarter is a seasonally weak period, so I'm not expecting a strong retail environment, but everybody is looking forward to the winter boat shows [ and ] next spring. That's what we're all trying to plan for and project out for. And like I said, the team is doing a great job navigating through that, working with our dealers who are supporting us in that regard. And we really appreciate that.

[Griffin Bryan, analyst]

Got it. And then on the promotional front, we've seen some OEMs instituting some pretty drastic rebates on model year '24 units. Has this 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.

[Ben Palmer, executive]

Well, I think, at this point, demand is, 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, that 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 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 having -- with the position of our inventory and where we are and with our models and demand, we don't feel that we need to have super aggressive programs in place at this point in time.

[Griffin Bryan, analyst]

Fair enough. And then we've seen one of your competitors announce 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.

[Michael Schmit, executive]

Sure. This is Mike. Yes, 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 as we've 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, so we think that's a positive sign that there will be opportunities for companies like us that have a strong balance sheet and want to grow. There's nothing kind of specific to call out on that right now, other than we are encouraged that -- then we believe opportunities will be out there. So yes, we'll see how it shakes out. And hopefully, we'll see something that will be a great long-term fit for us.

[Griffin Bryan, analyst]

Got it. And then just last one for me. So 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 if you think there's a certain point where the cuts actually do start to make an impact on retail demand and 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.

[Ben Palmer, executive]

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, 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. 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 a positive and would help many different sectors of the economy or has 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 -- we'll 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.

[Michael Schmit, executive]

Yes. I'll just add we just look at it as things heading in the right direction, right? It's something we were all looking for, for a long time. And we're also -- I think, as we mentioned in our press release today, we've 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 consumer. 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.

[Griffin Bryan, analyst]

Got it. That's all for me. Best of luck for the rest of the year, guys.

[Ben Palmer, executive]

Thank you, Griffin.

[Michael Schmit, executive]

Thanks, Griffin.

[Operator]

[Operator Instructions] There are no further questions at this time. I will now turn the conference back over to Mr. Ben Palmer for closing remarks.

[Ben Palmer, executive]

All right, well, thank you very much. Griffin, appreciate you, your questions; and everybody who listened in. We appreciate it. And have a good rest of the day.

[Operator]

A recording of today's call will be available on marineproductscorp.com within 2 hours following the completion of the call. This concludes today's call. You may now disconnect.