CorMedix Q4 2023 Earnings Call Transcript

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January 25, 2024

There are 5 speakers on the call.

Operator

Good morning, and thank you for joining us for Marine Products Corporation 4th Quarter 2023 Financial Earnings Conference Call. Today's call will be hosted by Ben Palmer, President and CEO Mike Schmidt, Chief Financial Officer. At this time, all participants are in a 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.

Operator

I would like to advise everyone that this conference call is being recorded. I will now turn the call over to Mr. Schmidt.

Speaker 1

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 ks and other public filings that outline those risks, all of which can be found atwww.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.

Speaker 1

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.

Speaker 2

Thank you and good morning. Before we begin, I want to remind you that some of this apologize. Appreciate everybody joining the call this morning. Our 4th quarter results reflect the ongoing normalization of retail boat sales as the multi year post COVID consumer demand boost subsides. In response to this slowdown, we have adjusted production to meet current order patterns as the retail channel works through excess inventory.

Speaker 2

We believe we are now in a steady balance of production and sales. However, our 4th quarter results showed significant declines versus the prior year. 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. 1st and foremost, we believe our current production and shipment schedule together with our incentive programs should now facilitate a net reduction in dealer inventories.

Speaker 2

While still early, we are seeing order flow that would justify a step up in production later during the Q1. 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. Stimulate buying, we have returned to a historically normal level of retail incentives, which had been minimal these past few years.

Speaker 2

We launched a program in the Q4 to move dealer inventory and we see other manufacturers doing the same. Mike will comment further on promotional activities 4th quarter results reflected an outsized impact reinitiating these programs. We've talked previously about economic uncertainty and the new reality of higher rates. Rates not only affect the monthly payments for consumers who finance their boats, but also dealers carrying costs of inventory. 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.

Speaker 2

Despite a choppy environment, we will remain focused on areas of the business within our control. We will continue to invest in R and D to support new innovative features, products and design improvements to differentiate ourselves in the marketplace. For example, we are delivering premium interior materials, 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. 2nd, we are very pleased with our existing dealer network and believe we have room to grow in that infrastructure.

Speaker 2

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 We look forward to sharing in our dealer's success as a result of these collaborative efforts.

Speaker 2

Another investment we're making is selective automation of our plants. We are increasingly using robotics to form 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.

Speaker 2

This equipment will have the capability to supply a sizable portion of our energy needs at our national 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 demand environment. Now, Mike will provide an overview of the financial results.

Speaker 1

Thanks, Ben. I'll start with a few quick financial highlights for the year and then go into some more detail about the Q4. For the full year 2023, net sales were $384,000,000 up slightly versus last year. Diluted EPS was $1.21 up 0 point 0 $3 And EBITDA was down 4% to $52,000,000 We generated strong operating and free cash flow in 2023. Operating cash flow was $57,000,000 and after CapEx of $10,000,000 free cash flow was $47,000,000 for the year.

Speaker 1

CapEx included investments in warehouses and some new trailers. During the year, We paid $19,000,000 in dividends and we finished 2023 with cash of $72,000,000 to no debt. Now I'll cover our Q4 results with year over year comparisons to the Q4 of 2022. Net sales fell 35% to $70,900,000 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.

Speaker 1

However, this gain was offset by increased retail incentives reported 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 percent to $13,500,000 with a gross margin of 19% were down 6 20 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.

Speaker 1

The 4th quarter retail incentive program represented nearly $2,000,000 reduction in net sales and gross profit, equating to about 1 third of the 6.20 basis point contraction. Furthermore, the majority of the incentive 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 and A expenses were $7,700,000 in the quarter, down 38% or $4,800,000 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.

Speaker 1

Diluted EPS was $0.16 in the 4th quarter, down $0.35 in the same quarter last year. EBITDA was down 58 percent to $6,500,000 with EBITDA margin decreasing 4.90 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.

Speaker 2

Thank you, Mike. In closing, I'd like to mention capital allocation and 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 twenty twenty three had some challenges, it was still a solid full year, which we generated $47,000,000 of free cash flow.

Speaker 2

We ended the year with no debt and a highly liquid balance sheet with over $70,000,000 in cash. One of the benefits of being conservative and disciplined during recent market buoyancy. As 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 vote makers to seek an exit. Our discipline has caused us to pass on transaction at elevated valuations on peak earnings since recent years.

Speaker 2

It has resulted in a cash accumulation that we are looking to deploy. We are targeting complementary high quality that would enhance our distribution and 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 and 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.

Speaker 2

We wholeheartedly believe we have some of the best boatmakers 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. We're looking forward to showcasing our new products in the coming weeks. With that, operator, please open the line for questions.

Operator

Your first question comes from the line of Brandon Rule with D. A. Davidson. Brandon, the floor is yours.

Speaker 3

All right. Good morning. Thank you for taking my questions. I guess first, just on the production and Where it is right now, could you talk about your production levels, your plan for that over the next 3 months compared to maybe where it was last year? And you had talked about inventory levels.

Speaker 3

You were comfortable with your inventory in the field, but overall was a little high. Would you be able to comment Areas where you felt like in the industry, inventories might be a little elevated?

Speaker 2

Again, good morning, Brandon. Probably in terms of our current production level, we adjusted kind of during the 3rd Q4. So it's probably easier or better to talk about kind of where we go from here relative to the Q4. So we indicated here that the early Results of the boat shows have been consistent to maybe slightly positive. The last year we've had some shows that have had some negative weather, so hard to get a read, an appropriate read on activity levels and so forth, but we're generally pleased with how the early Results that the boat shows are coming through.

Speaker 2

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 Q1 of next year, but we've kind of adjusted it down to where during the Q4 that we think is an appropriate rate, where we could can 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, the dealer inventory will clear out and it will make room for us to increase production further as the year goes 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 bit. We benefited from The really strong demand that we had for our products.

Speaker 2

So I think some of the aluminum products, I think, have Experience some more inventory than they would want to have. But so I'd say that's the primary area.

Speaker 3

Okay, great. And you had mentioned the boat show performance is 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? Yes.

Speaker 2

Bob, thank you. 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, 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.

Speaker 2

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.

Speaker 1

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 weather. So we're sort of discounting that. I mean the fact that they didn't have great attendance in the Northeast, Northwest because of 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 there last year, I was there this year, and The crowds were the same, if not a little bit better.

Speaker 1

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.

Speaker 3

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 on just like helping out with are they wholesale incentives or are they retail incentives well or a

Speaker 2

combination of both? What we announced and talked about today and discussed the impact is a retail program. It's a program that we work with the dealers to be able to offer to retail consumers at both shows and in the showrooms. And of course, the impact on the 4th quarter And the program started late in Q4 and it's still in effect. So we were required, of course, for an accounting purpose To record what we think the estimate of an estimate of the cost of that retail incentive program on sales that had already been recorded.

Speaker 2

So that's where we talked about the fact Our gross margin this quarter was significantly impacted because we had to record an estimate How much we thought we would pay out in retail incentives for 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.

Speaker 2

It's not outsized. It's not huge. It's really more normal if you go back kind of pre COVID Thanks.

Speaker 1

Yes. I'll just add it 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 the float your boat incentive and you can read more about it on our Roballo and Chaparral websites. Lot of information on those websites about it.

Speaker 3

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?

Speaker 2

That's a difficult question. I'll just Answer it by say, 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 they have sufficient inventory to meet their retail demand, right?

Speaker 2

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, the 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.

Speaker 2

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 summer sales as well to bring inventory even down even further.

Speaker 3

Okay, great. And then

Operator

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

Speaker 2

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

Operator

Sorry. My apologies. We're going to take a question from the line of Craig Kennison with Baird. Craig, the floor is yours.

Speaker 4

Sure. Thanks a lot. Hopefully Brandon can good morning. Thanks for taking my question. Yes.

Speaker 4

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?

Speaker 2

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. That's 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 'eight, 'nine, 'ten timeframe. 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 were able to come out with a product that appeals to the consumer at that period of time and in that point in an economic cycle.

Speaker 2

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.

Speaker 2

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.

Speaker 4

At some

Speaker 2

point, that may occur.

Speaker 1

Yes, I'll just add really quick too. We haven't really seen a decline in any of our input costs. In fact, contrary, they still kind of going up slightly. So you've seen a little bit of Margin erosion. So we hope now that supply chains are stabilizing that things will Work down because that's the tough thing too with the supply chain and the input cost of boats has really increased.

Speaker 1

So the higher price of boats have really reflected that in the whole industry.

Speaker 4

Great. Thank you. And then I think you had mentioned your strong balance sheet and a 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 both categories where you have particular interest?

Speaker 2

Yes. When we think about There are 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 dealer network as it would appeal to that dealer network.

Speaker 2

Obviously, we don't have an aluminum product. That's something that I think would be attractive to us 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,

Speaker 4

that

Speaker 2

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.

Speaker 1

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

Speaker 2

area.

Speaker 4

Thank you. And 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?

Speaker 2

We are not afraid of debt, and we would have other options. Obviously, we could raise Equity through secondary, so forth. But we have sales Today or the last 12 months, approaching $400,000,000 So, I think we could easily just to pick a number, mean, we could $100,000,000 or $200,000,000 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 it needed to be funded with cash or depends on the size of the acquisition, right, that we were doing, but $100,000,000 or $200,000,000 would not be a problem.

Operator

There are no further questions at this time. I would like to turn the call back over to our CEO, Ben Palmer. Okay.

Speaker 2

Well, thank you very much everyone for being on the call and look

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