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Operator: Good morning, and thank you for joining us for Marine Products Corporation’s Fourth Quarter and Year End 2022 Financial Earnings Conference Call. Today’s call will be hosted by Ben Palmer, President and CEO; and Mike Schmit, Chief Financial Officer. Also hosting is Jim Landers, Vice President of Corporate Services. 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. I would like to advise everyone that today’s conference call is being recorded. Jim will get us started by recording — reading the forward-looking statement.

Jim Landers: Thank you, and good morning. Before we get started today, I’d like to remind everyone that some of the statements that we will make on this call may be forward looking in nature and reflect a number of known and unknown risks. I’d like to refer you to our press release issued today, our 2021 Form 10-K and other SEC filings that outline those risks, all of which are available on our website at marineproductscorp.com. If you’ve not received our press release, please visit our website. In today’s earnings release and conference call, we refer to EBITDA, which is a non-GAAP measure of operating performance. We use this non-GAAP measure because it allows us to compare performance consistently over various periods without regard to changes in our capital structure.

Our press release issued this morning and our website contain a reconciliation of this non-GAAP financial measure to net income, which is the nearest GAAP financial measure. Please review this disclosure if you’re interested in seeing how it’s calculated. We’ll make a few comments about the quarter and then we’ll be available for your questions. I will now turn the call over to our President and CEO, Ben Palmer.

Ben Palmer: Jim, thanks, and thank you for everyone for joining the call this morning. Let me begin with a few highlights regarding our fourth quarter 2022 earnings press release that was issued this morning. Marine Products Corporation generated record quarterly net sales during the fourth quarter as we experienced improvement in our supply chain issues and transportation availability. This allowed us to finish a larger number of substantially completed boats that were in our inventory and deliver them to our dealers. This also led to more efficient production in our manufacturing plants, which should benefit us in future quarters. Average selling prices increased due to a favorable model mix and price increases implemented to cover increased costs, including labor, materials and components.

Our fourth quarter unit sales were the highest of any quarter in 2022, despite the impact of two holidays. In addition, the increased unit shipments during the quarter allowed our dealers to begin building their inventory to accommodate the winter boat shows and prepare for the upcoming 2023 spring retail selling season. We also announced this morning that yesterday our Board of Directors declared a regular quarterly cash dividend of $0.14 per share. And with that overview, I would like to turn the call over to Mike Schmit, our CFO.

Mike Schmit: Thanks, Ben. I’ll start with an overview of the company’s fourth quarter 2022 financial results. Net sales for the fourth quarter were a record $108.5 million, a 42% increase compared to the fourth quarter last year. Unit sales increased by 29% and average selling prices of our boats increased by 12%. Gross profit in the fourth quarter was $27.3 million, a 43% increase compared to the fourth quarter of 2021. Gross margin during the fourth quarters of both 2022 and 2021 was 25%. Selling, general and administrative expenses were $12.5 million, an increase of 47% compared to $8.5 million in the fourth quarter of last year. This increase is due to costs that typically increase with higher sales and profitability, such as incentive compensation, sales commissions and warranty expenses.

We also recorded a $1.2 million defined benefit pension plan charge related to a lump sum settlement offered to plan participants during the quarter. During Q1 2023, we expect to record a settlement charge of approximately $2.6 million associated with the final termination of this plan. We do not expect to make any cash contributions in connection with the transfer of the plan liability to a third-party because of the plan’s fully funded status. EBITDA in the fourth quarter was $15.3 million, an increase of $4.2 million or 38% compared to the fourth quarter of last year. We reported a quarterly net income of $11.9 million, a 40% increase compared to $8.4 million in the fourth quarter of 2021. Diluted earnings per share were $0.35, also a quarterly record, compared to $0.25 in the fourth quarter of last year.

Our full year financial results were also records, with net sales of $381 million, net income of $40.3 million and diluted earnings per share of $1.18. Our international sales, which account for approximately 8% of our total sales, increased by 71% compared to the fourth quarter of last year. Our cash balance at the end of the year was $43.2 million, a $29.1 million increase compared to the cash balance at the end of last year. Our cash balance increased significantly during the year because of profitable operations and diligent working capital management, with a particular emphasis on the completion and shipment of substantially completed boats in our inventory towards the end of the year. Dealer inventories continue to be lower than normalized levels, but have increased compared to the third quarter of 2022.

As the 2023 retail season approaches, demand remains strong and our dealers continue to restock inventory. We, therefore, have fully allocated our scheduled production for the first quarter of 2023 to our dealers to meet this demand. I’ll now turn it back over to Ben for a few closing remarks.

Ben Palmer: Our market share remains strong. Chaparral’s sterndrive market share remains Number Two in its size category and the combination of Chaparral and Robalo’s outboards held the third highest market share in their size category as well. Indications from the early winter boat shows, together with feedback from our dealers, remain positive. We’re not seeing any reason to modify our current level of production. However, we will continue to monitor market indications for any change in retail demand, which could occur as a result of higher interest rates or increases in economic uncertainty or softness in dealer demand for higher levels of inventory. A second successive quarter of record financial performance are the result of the hard work of the Chaparral and Robalo management team, and other dedicated employees who are continuing to confront and successfully navigate a challenging operating environment.

Thank you, again, for joining us this morning, and we’ll be happy to take any questions that you might have.

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Operator: And there are no questions at this time. Mr. Jim — I apologize. A line just came in from the line of Craig Kennison from Baird. Your line is open.

Craig Kennison: Hey, good morning. Thanks for taking my questions.

Ben Palmer: Absolutely, Craig. Good morning.

Craig Kennison: Yes, thank you so much. I’m just curious if you’re seeing any variance on the demand side at the high end versus the low end?

Ben Palmer: Craig, this is Ben. I would say, up to this point, we really haven’t seen anything significant. I think we do hear anecdotes actually that on the lower end, which are (ph) the probability or usually those are more often financed by the consumer, that there’s probably a little bit of hesitation there. But the larger boats, there seems to be less pushback. Those continue to stay quite strong. So, at this point, we ourselves have not seen much change, which is good to see in here.

Craig Kennison: Yes, that’s great. And just on the inventory front, it sounds like you’ve made a lot of progress with your supply chain and are catching up. How would you say the current level of inventory compares to, let’s say, 2019 or whatever the most normal environment was with respect to inventory?

Ben Palmer: For our inventory?

Craig Kennison: Yeah.

Jim Landers: Dealer inventory, Craig?

Ben Palmer: For our inventory.

Craig Kennison: I’m sorry. Yes. I mean dealer inventory, your dealer inventory.

Ben Palmer: Oh, dealer inventory. It is only recently begun to build. So, there’s — it’s still well below ’19 levels, well, well below ’19 levels. So, it’s only begun, as I said, to increase just a little bit. But clearly that’s something we’ll watch it. We think that’s healthy, right? We think that’s normal. Things are beginning to become a little more normalized. So that’s to be expected and not troublesome. But again, we’ll continue to monitor that.

Craig Kennison: Thanks for that. And then, I had a question on your input costs. I’m just curious, I’m sure some input costs have lowered and some still remain high. But when you look at the total bill of materials on your typical boat, what is the trend in your inflationary pressure?

Jim Landers: Craig, this is Jim. We probably agree with what you just characterized. In other words, cost of materials has been — has increased a lot, but it is starting to moderate a little bit. A lot of our materials have hydrocarbon feedstocks. So that’s moderated some. And just supply chain easing has helped cost moderate a little bit. That does not count labor. Labor continues to be high. But cost of materials is moderating some.

Mike Schmit: Yes, I think it’s more — it hasn’t — the constant increases have stopped, but hasn’t come down a lot.

Jim Landers: Yes, the rate of increase has decreased.

Mike Schmit: Yes.

Jim Landers: First derivative is now negative, I guess.

Ben Palmer: And more — probably more on the material side, the commodities, as Jim referred to, those have come down a bit. I think it’s still with components, key components that have labor associated with them and there’s a lot of — still there’s more supply chain — tends to be more supply chain issues there. That’s probably more along the lines that it’s stabilized, not necessarily declined at this point.

Jim Landers: Yes. And to be clear, we still have surprises — negative surprises. There still may be things that are — that we have to wait on or price increases happen. But in general, it is moderating a bit better.

Ben Palmer: Yes.

Craig Kennison: Yes, maybe lastly, I was curious, where are you still seeing supply chain surprises, if you will?

Ben Palmer: It’s a great question, and we talk about it often, and it really varies. It’s kind of maybe not day to day, but it’s week to week. Sometimes it can be day to day, but it’s the same old things, sometimes it’s engines, wiring harnesses and controls, gauges…

Jim Landers: Windshields.

Mike Schmit: Windshields.

Ben Palmer: Windshields. It’s a lot of the same sort of things, but it’s just not constant, which is what makes it really challenging. And I’m sure you’ve heard stories from other people as well. There’s not really anything new that’s come along and all the things that have been a problem from time to time continue to creep up. I think, toilets has been an issue.

Jim Landers: Yes.

Ben Palmer: So

Jim Landers: We had a glue shortage, but that’s now resolved.

Ben Palmer: Yes, that’s right, a little problem there.

Jim Landers: Yes, adhesive.

Ben Palmer: Right.

Craig Kennison: Got it.

Ben Palmer: Kind of more of the same old, same old, unpredictable.

Craig Kennison: Unpredictable. Yes. Well, it seems like you’re making progress there, which is great. I guess, one more question, if I could. Since dealers have struggled to get inventory of your boats and, frankly, every other brand out there, I imagine you’ve not been pursuing the addition of additional distribution. And so, I’m wondering like as your production starts to normalize, as dealers start to rebuild inventories, those core dealers become happy and they’re set. Is there an opportunity for you to expand your dealer network? Is that something that may be a dormant strategy that could reignite as production normalizes?

Ben Palmer: Well, let me answer or provide the following. We’ve been very straightforward with our dealers and our strategy has been — our team has adopted the strategy, which I think is very, very smart that we have not tried — we have not catered to particular dealers. We said we like our dealer network. It’s key to us. It’s important to us. They’re all important to us in the geographic regions where they are. So, we have allocated our production, right? We have the amount of production we’re able to generate and we’re working with the dealers to allocate that production out, and it’s very, very similar to what historical deliveries have been from a percentage basis to those dealers. So, we have not taken away from our smaller dealers and tried to direct significantly more production to the larger dealers.

We think that’s fair and appropriate. I think that has served us well and I think that will serve us well into the future. Your question is a good one, and you’re right. We have — we are always, where necessary, where we have a dealer that bows out or whatever, we are normally prepared to with another dealer to insert into an open spot from a geographic perspective. So — but our dealers are loyal to us and we try to be loyal to them. And allocating out our production is just one example of that loyalty that I think has and will serve as well.

Mike Schmit: And, I guess, I’d just add, our main focus right now is to take care of our existing dealer network. So, we don’t really have a focus on expanding that at this time. So right now, just getting through the remaining supply chain issues, making sure their inventories are up. So that’s really our main focus right now, taking care of our existing dealer network.

Ben Palmer: Yes, until there’s — until — if and until there’s any pushback from dealers saying, I have enough, right, and if we can’t redirect those to other existing dealers, so until existing dealers says, no more, then we have to decide, is there additional geographic areas, and there’s not significant ones, but there may be very selected opportunities to direct some available production. But at this point in time, our dealers are saying, send me as many as you can.

Craig Kennison: Great. And I keep promising to stop, but I have one more question.

Ben Palmer: Great. We appreciate it.

Jim Landers: That’s fine, Craig.

Craig Kennison: Thank you. In terms of dealer — I’m sorry, in terms of your consumer demand, is there any backlog with consumers? Any pre-orders that have yet to be satisfied? Or has any of that demand — has all of that demand been fulfilled at this point?

Ben Palmer: No, I would say — there still are — we still have unfulfilled orders, but certainly that’s moderated, obviously. And an indication of that is dealer inventories building, right? And that varies some by region or by dealer. But no, there still are orders to be fulfilled. And like I indicated, almost virtually every dealer is saying, send me as many as you can.

Jim Landers: Yes. A lot of our production is still retail sold, which you know the industry pre-COVID that was usually not the case.

Craig Kennison: And have you seen any changes in that pre-sold demand? Any cancellations of previous orders? Or just any slowdown there?

Ben Palmer: To this point, not a significant amount of cancellation. Certainly, the orders — retail orders on hand certainly are less than they were six to 12 months ago. But it’s still — the demand is still quite strong. We’ve not yet seen — we’ve not yet ourselves seen any softness there. Now, we are certainly mindful. As we indicated in our comments, we’re always watching and monitoring and are prepared to adjust production as necessary if demand were to weaken. But dealer field inventory continues to remain low by historical standards. So, even if things softened a bit, I don’t expect there’s going to be any hard stop or significant decline in demand. But if demand were to weaken, we’ll step back and reassess and decide if and when we need to adjust production and we’re prepared to do that. We’ve always done that to try to obviously align our production to what reasonable demand and reasonable and appropriate dealer inventory levels would be.

Craig Kennison: Great. Hey, thanks for taking all my questions.

Ben Palmer: Great. Thank you, Craig.

Mike Schmit: Thanks, Craig.

Ben Palmer: Good to hear from you.

Operator: And there are no further questions at this time. Mr. Jim Landers, I’ll turn the call back over to you for some closing remarks.

Jim Landers: Okay, Rob, thank you. Thanks for everybody who called in to listen, and we appreciate it, and hope everybody has a good day. We’ll talk to you soon. Thank you.

Operator: This concludes today’s conference call. Today’s conference call will be replayed on marineproductscorp.com within two hours following the completion of the call. You may now disconnect.