Title

Presentation

Marine Products Corporation misses on earnings expectations. Reported EPS is $-0.40039 EPS, expectations were $0.08.

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. 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: 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: 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 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% 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.

Mike Schmit: 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 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 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 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.

Ben Palmer: 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 $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, a 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 some minor — we have seen some minor ordering delays in the early weeks of the fourth quarter, as that is when Hurricane Milton caused the most disruptions. 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: Thank you. [Operator Instructions] And your first question comes from the line of Griffin Bryan with D.A. Davidson. Please go ahead.

Griffin Bryan: 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. It actually 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?

Ben Palmer: Hey, Griffin. This is Ben. I 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 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% decline in field inventory. In the third quarter, 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 that 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: 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 model 2025 units at this time?

Ben Palmer: 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 the team’s 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 try to reach that appropriate equilibrium where we have some level of production. So that requires them to be committed to taking 2025 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 not expecting a 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 out for. And like I said, the team’s 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: Got it. And then on the promotional front, we’ve seen some OEMs instituting some pretty drastic rebates on model year 2024 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: Well, I think at this point, demand is continued 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 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 are — 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: 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?

Mike Schmit: Sure. This is 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 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 that’s a positive sign that there will be opportunities for companies like us that have a strong balance sheet and want to grow. And 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.

Griffin Bryan: Got it. And this 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: 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 field 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 positive and would help many, 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.

Mike Schmit: Yeah. I’ll just add, we just look at it as things heading in the right direction, right? Something we were all looking 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 to make an enhancement 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.

Griffin Bryan: Got it. That’s all from me. Best of luck with the rest of your guys.

Ben Palmer: Thanks, Griffin.

Mike Schmit: 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: Thank you very much. Griffin appreciates 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 two hours following the completion of the call. This concludes today’s call. You may now disconnect.