MasterCraft Boat Holdings, Inc.

ladies and gentlemen thank you for standing by and welcome to the second quarter 2021 mastercraft boat holdings inc earnings conference call at this time all participants are in a listen-only mode after the speaker's presentation there will be a question and answer session to ask a question during this session you will need to press star 1 on your telephone please be advised that today's conference is being recorded if you require any further assistance please press star then zero i would now like to hand the conference over to one of your speakers today Mr. Tim Oxley, CFO. Sir, please go ahead.

Thank you, operator, and welcome, everyone. Thank you for joining us today as we discuss Mastercraft's second quarter performance for fiscal 2021. As a reminder, today's call is being webcast live and will also be archived on our website for future listening. Joining me on today's call are Fred Brightbill, Chief Executive Officer and Chairman, and George Steinbarger, our Chief Revenue Officer. Fred will begin with an overview of our progress on our strategic priorities and review our operational highlights from the quarter. I will then discuss our financial performance for the second quarter and how we see 2021 shaping up. I'll turn the call back to Fred for some closing remarks before we open the call for Q&A. Before we begin, we'd like to remind participants that the information contained in this call is current only as of today, February 10, 2021. The company assumes no obligation to update any statements, including forward-looking statements. Statements that are not historical facts are forward-looking statements and subject to the safe harbor disclaimer in today's press release. Additionally, on this conference call, we will discuss non-GAAP measures that include or exclude special or items not indicative of our ongoing operations. For each non-GAAP measure, we also provide the most directly comparable GAAP measure in our fiscal 2021 second quarter earnings release, which includes a reconciliation of these non-GAAP measures to our GAAP results. We'd also like to remind listeners that there's a slide deck summarizing our financial results in the investor section of our website. With that, I'll turn the call over to Fred.

Thank you, Tim, and good morning, everyone. I appreciate you joining us today. This continues to be a very dynamic and challenging time, and we sincerely hope you and your families have remained healthy and safe. I also want to thank our employees. who have been instrumental in our ability to deliver such a successful quarter. We have talked about it before, but it bears repeating. Our culture and employees are key drivers of our strong performance in this dynamic environment. Their health and safety remain our top priority, and we are committed to maintaining rigorous health and safety standards and closely monitoring all our production facilities. Jumping into our results for the quarter, Mastercraft Boat Holdings delivered record second quarter financial results. exceeding the guidance we provided last quarter. Our performance this quarter, the most profitable second quarter in Mastercraft's history, demonstrates continued momentum on implementing and executing our consumer-centric strategic plan and the robust retail demand we are experiencing across all our brands. The results are a testament to the continued execution of our value-enhancing growth strategy. As a reminder, Our strategy is centered on four key pillars designed to achieve one overarching objective, to drive sustainable, accelerated growth. During the quarter, we continued to execute against each of these four pillars, consumer experience, digital marketing, operational excellence, and human capital development. First, we continued our investments in expanding and top-grading our product development and engineering team. These investments will be an important component of our market share and financial growth plans. Our relentless focus on learning more about our consumers' growing needs and expectations has allowed us to further refine our product development process as we continue to build our product development and engineering team over the remainder of the year. Second, we continue to activate a consumer-driven digital marketing strategy across our organization to increase brand awareness, create a community of interest, expand our target market, improve lead generation, and ultimately drive sales and market share gains. Most recently, we launched several immersive digital experiences for consumers to learn about our brands in a 360-degree digital environment. We launched the Mastercraft experience in January and followed that up with the launch of the Crest and Aviara experiences earlier this month. A Nautic Star experience is in the final stages of development and will be deployed to consumers within a matter of days. These unique digital showrooms allow consumers to immerse themselves in each of our brands in a way they would typically do in a traditional in-person boat show. The flexibility to research our brands and the safety of their homes while connecting consumers with our dealers in a safe, socially distanced manner is truly unique. Since launching these digital experiences, we have seen a dramatic increase in traffic to our digital properties and new leads, which we believe validate the creative approach we have taken to ensure consumers' needs are addressed during this dynamic time. We will continue to invest in digital solutions that bring awareness and new consumers to our brands, and this investment will increasingly drive market share gains. Third, we sustain the acceleration of operational excellence programs across all our manufacturing facilities to drive throughput improvements and enhance quality. Across all our brands, we expertly manage supply chain issues related to the COVID-19 pandemic and labor constraints while executing an aggressive production ramp-up. At each of our facilities, we are now running at record production rates and will continue to increase production throughout the year to meet the robust retail demand. Despite the inefficiencies realized during a production ramp-up, the dynamic supply chain environment, and increasing labor costs, the company delivered gross margins of 24.7 percent in the second quarter, up 340 basis points versus the prior year. The Nautic Star turnaround continued to gain momentum. NauticStar increased throughput to meet retail demand, with wholesale unit shipments for the quarter up 5% year over year, and gross margins up more than 200 basis points year over year. While there's still work to do, we are confident in the long-run prospects of the NauticStar brand. And fourth, we remain focused on strengthening our human capital framework to attract, develop, and retain a highly skilled and specialized workforce. We continue to successfully meet our skilled labor recruiting needs at all our facilities. We have seen some labor rate inflation due to the tight labor market, but as evidenced by our growing gross margin performance, we have been able to mitigate most of this increase through our superior material cost management and overhead absorption as volumes increase. Looking more closely at the quarter, we are encouraged by the momentum we are seeing all around the four strategic growth priorities and will continue to proactively adapt our strategy to the business environment. As of today, across our brands, our wholesale production plans remain fully committed. In addition, the percentage of our order book that is already retail sold is at record levels and growing. Dealer inventories remain at historically low levels. And consistent with our message last quarter, we believe it will be fiscal 2022 before dealer inventories reach optimal levels. Combined with the current supply and demand dynamic in the industry, this provides us with wholesale growth visibility greater than at any time in the recent past. As we continue to execute on our consumer-focused strategic plan, we are well-positioned to outperform relative to our competition and generate tremendous value for shareholders. Against this backdrop, promotional activity has remained relatively benign. although we are seeing greater promotional activity as we enter the boat show season. As I previously discussed, we have deployed non-traditional boat show alternatives and are seeing some very early wins. We believe the higher quality and leading market share position of our brands, our relatively mature and sophisticated dealer network, and our digital marketing capabilities provide us a competitive advantage. Let me now briefly review some of the latest developments across our brands. At Aviara, our retail performance continues to exceed expectations. Our order book is completely sold out for the remainder of the year, as MarineMax and its customers continue to appreciate Aviara's progressive style, elevated control, modern comfort, and quality details, which are unmatched in the luxury day boat segment. As you will recall, Given this extraordinary performance, we purchased a dedicated Aviara facility in Merritt Island, Florida, to accelerate Aviara's next phase of growth. We remain on track to have Aviara fully transitioned out of Mastercraft's Vanora, Tennessee facility to the new Merritt Island facility within our fiscal third quarter. We expect wholesale volumes to increase sequentially throughout the remainder of the fiscal year and into fiscal 2022. While the increase in overhead due to the new Merritt Island facility will have a dilutive near-term impact on margins and profitability, we believe the additional capacity will set the brand up for many years of future growth in sales and profit. In addition, moving Naviera out of the Mastercraft facility frees up much-needed capacity for Mastercraft. At Crest, we experienced continued strength in retail performance during the fiscal second quarter. This underscores the attractiveness of the Crest brand the value it delivers at an attainable price point, and the easy-to-use and new boater-friendly nature of the pontoon segment. Crest's most recent model redesign, the Ultra Luxury Savannah model, has been extremely well received, and it is already sold out for the 2021 model year. With our investment in product development and engineering, additional model refreshes and launches are in development for model year 2022 and beyond. Crest's exceptional execution of its operating and strategic priorities delivered another outstanding quarter financially, with wholesale unit volumes up nearly 37% and gross margin increase of more than 800 basis points year over year. We are well on our way to achieving our goal of delivering gross margins in the low 20% range. Similarly, at NauticStar, we experienced continued retail momentum in the second fiscal quarter, As previously stated, Nautic Start improved production throughput sequentially in the quarter and improved its gross margin by more than 200 basis points year over year. Our turnaround plan remains on track, with initiatives in place to further ramp up production, improve overall quality, and enhance the product offering. Our expectation remains that it will take until next year to see the full benefits of these efforts. but we are confident that NauticStar is on track to deliver meaningful and sustainable profitability improvement over time. At Mastercraft, the retail performance during the fiscal quarter was phenomenal. Entering the current fiscal third quarter, we are running at record production rates at the Mastercraft facility as we continue to aggressively ramp up production to provide dealers with critical inventory ahead of the upcoming boating season. Importantly, we will continue to emphasize quality to further differentiate Mastercraft from the competition. Our wholesale order books are sold out through the remainder of the year, and we have already begun to take orders for model year 2022 to provide dealers with the inventory visibility needed to continue selling boats. Combined with the incremental dealership changes we highlighted last quarter, Mastercraft is primed to take market share heading into the heavy summer selling season. On a financial basis, Excluding the impact of Aviara, the Mastercraft brand saw increased net sales on wholesale unit and ASP growth. Additionally, the brand achieved exceptional fiscal second quarter gross margin levels, driven by consumers continuing to add features and options to their orders. We expect to continue to ramp up production throughout the year, which will result in some labor inefficiencies in the short term, but allow us to better meet the wholesale demand from our dealers as they look to stock up heading into the summer selling season. Importantly, our progress and business fundamentals are setting us up for an outstanding fiscal year 2021. We remain committed to building on this progress through investments to further strengthen our competitive position, grow our categories, and deliver long-term shareholder value guided by our strategic priorities. Looking at how far we have come over the past six months gives us the confidence that we will continue to deliver superior growth in sales and profit. I will now turn the call over to Tim, who will provide more color on our financial results.

Tim. Thanks, Fred. Looking at the top line, net sales for the second quarter were $118.7 million, an increase of $19 million, or 19.1 percent, compared to $99.6 million for the prior year period. The increase was primarily due to higher sales volumes, a favorable mix of higher priced and higher contented models, and lower dealer incentives. As Fred mentioned, this was the most profitable second quarter in the company's history. Gross profit increased $8.1 million to $29.3 million, compared to $21.1 million for the prior year period. This increase was principally driven by a favorable mix of higher priced and higher contented models, higher sales volumes, and lower dealer incentives. This favorability was partially offset by higher compensation costs and costs associated with the transition of Aviera to our new Merritt Island facility. Our gross margin was 24.7% for the second quarter, an increase of 340 basis points compared to the prior year period. The increase was primarily attributable to favorable overhead absorption driven by higher sales volume, higher prices, lower dealer incentives, and materials cost containment, partially offset by higher labor costs. Operating expenses were $12.3 million for the second quarter, an increase of $1.5 million, or 14.1%, compared to the prior year period, principally driven by higher general and administrative expenses, resulting from higher incentive compensation costs and additional investments related to product development. This increase was partially offset by lower selling and marketing costs, primarily due to the timing of anticipated expenses, which has been delayed by the COVID-19 pandemic until later in the fiscal year. Turn to the bottom line, adjusted net income increased to $14.3 million, or $0.75 per diluted share, computed using the company's estimated annual effective tax rate of approximately 23%. This represents an increase of 74.4% compared to adjusted net income of $8.2 million, or $0.43 per diluted share in the prior year period. Adjusted EBITDA was $21.3 million for the second quarter, compared to $13.6 million in the prior year period. Adjusted EBITDA margin was 17.9 percent, up 430 basis points from 13.6 percent in the prior year period. Turning to our liquidity and balance sheet, as of January 3rd, we had $12.1 million of cash in our balance sheet. With our revolving credit facility fully repaid, we ended the quarter with more than $47 million in liquidity. Due to the continuation of strong retail demand trends, historically low dealer inventory, the strength of our order book across our brands, and the increasing production rates we deliver to each segment over the course of the quarter, we are raising our guidance for fiscal 2021. Importantly, our guidance assumes that we can operate all our facilities throughout the year without any COVID-19 related disruptions. For the full fiscal 2021, Consolidated net sales is expected to grow in the mid to high 30% range year over year, with adjusted EBITDA margins in the low 15% range and adjusted earnings per share growth approaching 100% year over year. For the third quarter, consolidated net sales is expected to be up in the mid 30% range year over year, with adjusted EBITDA margins approaching 15% and adjusted earnings per share growth approaching 60%. As Fred commented in his prepared remarks, the addition of overhead with the new Aviara facility and production inefficiencies we're experiencing as we aggressively ramp up production across all our facilities, combined with the investments we're making for future growth, including new talent in our product development and engineering department, and investments in digital marketing, will impact our adjusted EBITDA margins in the short term. As we ramp up production and gain efficiencies, in the new Aviera plant and see the benefits of these strategic investments later this year and beyond, we expect to drive meaningful operating leverage to the bottom line. I'll turn the call back over to Fred.

Thank you, Tim. To reiterate my earlier comments, we are pleased by the progress we have made during the quarter and the first half of fiscal 2021 to accelerate production, efficiently manage our supply chain to meet increased consumer demand across our brands, and generate record earnings in each of the first two quarters of fiscal 2021. We continue to believe the increased retail momentum we've experienced from consumers seeking the boating lifestyle and our brands will endure and lead to meaningful long-term growth for the company. We remain laser focused on our mission to deliver the best consumer experience. We are steadfast in our belief that this is our differentiator and what brings people to Mastercraft and the reason they remain with us. As we manage through an unprecedented dynamic business environment near term, we remain committed to long-term value creation for our shareholders and all stakeholders. We will continue to be a purpose-driven business committed to our consumers, our dealer and vendor partners, and our people. Operator, you may now open the line up for questions.

Thank you. Ladies and gentlemen, if you have a question at this time, please press star then one on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from the line of Joe Altobello with Raymond James. Your line is open. Please go ahead.

Thanks. Hey, guys. Good morning. So just kind of looking at the quarter, big picture, it looks like sales are a little better today. than we expected, EBITDA margins were a lot better. I guess first question, what surprised you the most in the quarter, and how much of that came from things like lower dealer incentives, which might come back next year?

I think the efficiencies of our ramp-up across our facilities was better than expected. Doesn't mean that we're not dealing with particular supplier issues on a day-to-day basis. But, you know, they delivered and exceeded our expectations.

I would say, Joe, to your second point, yes, I do expect some increase in incentives as time goes on. However, again, given the supply-demand dynamic and our expectation that the pipeline really won't be replenished into 2022, I still expect discounts to be less than they would have been historically.

Got it. That's helpful, Fred. Thanks. And just in terms of your guidance, it implies a significant deterioration in EBITDA margins in the second half, particularly in the fourth quarter. How much of that is the overhead that you're taking on at Merritt Island? Is it all of it?

I'd say that's a big chunk of it. In addition, we have additional G&A and sales and marketing expenses They are timed into the second half. We had some events that, due to COVID, were pushed from the first half into the second half. So you'll see additional spend in the second half more than normal.

And the continued investment in the digital marketing initiative. Got it.

Great. Thank you, guys.

Thank you. And our next question comes from the line of Eric Wold with B. Riley Securities. Your line is open. Please go ahead.

Thank you. Good morning, guys. A couple of questions. I guess one, just tried to sink the comments in terms of kind of seeing, you know, higher content and models, et cetera, higher price models with the kind of the sequential decline in ASPs within the Mastercraft segment, you know, between where it was in Q4, Q1, where it is in Q2. Is that anything to do with the Aviar production transition or is that purely just a mixed shift in Mastercraft?

Are you looking at,

Yeah, Eric, it's a mixed shift. I mean, as we continue to ramp up production, obviously we're, you know, we obviously are building to what our dealers need. So in any given quarter, depending on where there's demand, that'll impact the models that we run through. You know, we offer 14 different models in the lineup today. So, you know, we, in any quarter, you can see some variability there. But even on a, if you just look at it on a model basis, we are seeing higher ASPs across the lineup as consumers continue to add more and more features to each particular model.

Yeah, keep in mind versus prior Q2, we're up a double digit at Mastercraft.

No, definitely. It's more of just what you were shipping out that quarter versus what you're seeing in the order books coming in.

Absolutely, correct. And remember, Q2 is historically a stocking quarter. That's where dealers are taking votes that they intend to stock in their lineup. While we are seeing a higher percentage of consumer retail sold shipments, that certainly plays into it just from a quarter standpoint.

Okay. And then we talked about it's likely going to be until fiscal 22 until dealer inventories reach optimal levels. How are you thinking about expanding the dealer network in that environment and Is there an opportunity to take share, or do you need to take care of your existing dealers first with derivatory needs versus spreading it around to new dealers?

Yes, we would take care of existing dealers first. And, of course, it varies by brand, but some of our brands have plans to continue to expand their dealer network. Mastercraft's a much more mature dealer network, and it's essentially been top grading there much more than expanding there.

Yeah, and if you look particularly at Crest, as they've continued to very efficiently ramp up, that allows us to more aggressively go after dealer expansion. That dealer network is not as mature as Mastercraft, so there's tremendous white space. So we'll continue to do that, and as the turnaround plan continues to develop at NauticStar, that will continue to increase production. So as Fred said, first priority will be to meet the demands of our existing dealers, but then we're already thinking ahead to what do we think future capacity and demand will be, and therefore how do we grow the network to ensure that we're growing the brands as efficiently as possible.

Perfect. Thank you, guys.

Thank you. And our next question comes from the line of Craig Kinison with Baird. Your line is open. Please go ahead.

Hey, good morning. Thanks for taking my question as well. Fred, you mentioned that there was some discounting creeping into the environment, which I guess is a little surprising given that you're sold out. Maybe just add a little color to what's going on there, please.

Well, if you listen to the Malibu call, they talked about the year-end program they ran just as an example. So we are, you know, utilizing minimal incentives, the lowest we've ever used. And I don't expect, we don't have plans to add substantial incentive programs. Having said that, we will react as necessary to the competitive environment and, you know, I think it's just prudent for us to expect that there may be some brands that resort to price.

Okay, thank you. And then you made several comments where several brands or at least several models are sold out through the fiscal year. Is there a way to frame the maximum capacity for each of your brands? It feels as though you know, no matter how good demand is, you are basically at capacity for most of your production. And so those of us looking at your revenue trends shouldn't expect much upside because you just don't have the ability to produce those units. Is that fair?

I think that's categorically untrue. We are continuing to ramp up throughout the year and plan to continue to ramp next year. So we are nowhere near capacity constrained. We have significant runway. I mean, Think of moving Aviera from the Vinor facility to its own dedicated facility, 140,000 square foot. It gives that tremendous runway and allows us the ability to grow that very dramatically. And then it frees up space here to allow us to reconfigure the plant in Vinor, Tennessee, to add at least another 20% capacity to Mastercraft. And Mastercraft is still ramping up today even without that capacity. So, no, we have a very long runway ahead of us at every one of our brands and have plans to not only continue to ramp today. And again, today we're balancing labor and supply chain constraints as well as, you know, the physical capacity of the plant. But As we need capacity, those plans are underway and in place, and we'll continue to have that. So, no, I would categorically disagree that there's any constraint based on our ability to produce longer term.

Yeah, my mistake. I misunderstood what you meant by sold out. Just you had mentioned the supply chain as well. I imagine really the big risk there is just a COVID outbreak among your suppliers or within your own community. Are you seeing any change in that behavior as the vaccine rolls out with just fewer work stoppages, spotty shutdowns?

Actually, no, not yet at all. I mean, we continue to dodge and have to manipulate around supply chain issues every day. They're not systemic. You know, they pop up and we deal with them and another one pops up. So, yeah. Unfortunately, I think it's still going to be some time before that fully stabilizes. But one would hope as the vaccines get out there, not only in the United States, but around the world, you know, the supply chain will stabilize. That's my expectation as we go into next year.

All right. Thank you, Fred. You're welcome.

Thank you. And our next question comes from the line of Mike Schwartz with Truist Securities. Your line is open. Please go ahead.

Hey, guys. Good morning. Fred, Tim, just wanted to dig a little bit into some of the gross margin color you provided in your commentary, and thanks for that. If I'm doing the math correct, it looks like the Mastercraft segment gross margins were up somewhere at 200, 300 basis points year over year. I'm just wondering, one, is that correct? And then, two, are there any of the associated Aviara costs or inefficiencies included in that number?

As you know, Mike, Aviara is part of the Mastercraft segment for now, so there is some headwind associated with having Aviara included in that segment. When we list the Mastercraft segment, it includes the Aviara results.

Right, so there was some headwind in the quarter. Okay, that's helpful. Fred, you mentioned that Mastercraft's production volumes in the third quarter are, I don't remember if you said all-time highs, but maybe how should we think about the production volumes of the next couple quarters? I know there's some supply chain issues, but as we look back to maybe fiscal year 19, I think you were doing between 800 and 900 units per quarter. Is that the right way to think about it, at least over the next quarter or two?

Yeah. I would think about our volume sequentially continuing to increase as we progress through the remainder of the year. And next year, I would hope to be able to enter the year and hold production much more stable. But we will continue to ramp up sequentially in the third quarter, and we're already seeing that success, and into the fourth quarter. So we will continue to step up in each one of these.

All right, thank you.

Thank you. And this does conclude today's question and answer session as well as today's conference call. Ladies and gentlemen, thank you for participating. You may disconnect. Everyone, have a great day.