MasterCraft Boat Holdings, Inc.

Good day, and thank you for standing by. And welcome to the Q3 2021 Mastercraft Boat Holdings Incorporated Earnings Conference Call. At this time, our 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 the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I will now hand today's conference over to your speaker, Tim Oxley, CFO. Please go ahead.

Thank you, operator, and welcome, everyone. Thank you for joining us today as we discuss Mastercraft's third 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 Brightville, 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 third quarter and how we see 2021 finishing up. Then 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, May 12, 2021. The company assumes no obligation to update any statements, including forward-looking statements. statements that are not historical facts or forward-looking statements, and subject to a 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 third quarter earnings release, which includes a reconciliation of these non-GAAP measures to our GAAP results. We would also like to remind listeners that there is 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. Good morning, everyone, and thank you for joining us today. Building upon the record quarterly performances we delivered in our first and second quarters, the fiscal third quarter was the most profitable quarter in the company's history. This record-setting performance was driven by year-over-year and sequential unit increases in each of our segments, which resulted in the most wholesale units ever sold by the company in a quarter. To produce at these levels, given the challenging environment, is a clear demonstration of our disciplined execution and operational excellence. We've been able to scale and accelerate production while expertly managing our supply chain to deliver for our dealers and consumers in this robust demand environment. The credit goes to the more than 1,400 employees that continue to execute against our key strategic priorities and the strength of our brands. Our results are also 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 our product development and engineering team. These investments will be an important component of our market share and financial growth plan. Our relentless focus on learning more about our consumers' growing needs and expectations has allowed us to further refine our product development process and accelerate innovation. At Mastercraft Brand, we recently revealed to our dealers the upcoming model year changes for 2022, including new models and innovations, which were enthusiastically received. With this additional investment in our product development and engineering team, we are similarly well positioned to accelerate new model development and innovations for all our brands, which will begin this summer. 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. Last quarter, we launched several immersive digital experiences for our consumers to learn about our brands in a 360-degree digital environment. These unique digital showrooms allowed consumers to immerse themselves in each of our brands in a way they would typically do at traditional in-person boat shows. The results we have seen in consumer site traffic website engagement, and lead generation have been dramatic. This quarter, we also continued our investment in digital marketing by expanding many of the capabilities currently being deployed at Mastercraft and Aviara to Crest and NauticStar. By leveraging the infrastructure and process already in place at Mastercraft, we've been able to generate increased brand awareness, website traffic, and lead generation at Crest and NauticStar. 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 the relocation of our Aviera brand and the supply chain issues to aggressively ramp up production, resulting in the highest wholesale units sold in any quarter of the company's history. For example, we did not have to shut down any of our facilities as a result of the resin shortage that has impacted the boating industry. Our outstanding supply chain team have done a tremendous job of minimizing the disruptions to our operations. At each of our facilities, we are running at record production rates and will continue to increase production to meet the robust retail demand. Despite the inefficiencies realized during a production ramp-up, the dynamic supply chain environment At increased labor costs, the company delivered gross margins of 25.2% in the third quarter, up 450 basis points versus the prior year. The Nautic Start turnaround continues to gain momentum. Nautic Start continues to increase throughput to meet retail demand, with wholesale unit shipments for the quarter up 36.1% year-over-year and up 20% sequentially compared to the second quarter. Gross margins were up more than 1,200 basis points year over year and up more than 250 basis points sequentially compared to the second quarter. We remain confident in the long-term prospects of the NauticStar brand and will continue to dedicate the necessary resources and investments to bring NauticStar's operational excellence and financial results in line with our internal expectations. 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, having grown our workforce by more than 500 hourly and 50 salaried personnel from the start of this fiscal year. Fifty percent of our salary growth has been devoted to product development. We have seen some labor inflation due to the increase in tight labor market conditions, but as evidenced by our growing gross margin performance, We have been able to mitigate most of this increase through overhead absorption as volumes increase and superior material cost management. Looking more closely at the quarter, we are encouraged by the momentum we are seeing all around all four of our strategic growth priorities and will continue to proactively adapt our strategy to the business environment. As of today, across our brands, our wholesale production plan remains 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 into calendar 2023 before dealer inventories reach optimal levels. Combined with the current supply and demand dynamic in our industry, this provides us with an unprecedented wholesale growth visibility. We continue to execute on our consumer-focused strategic plan and we are well positioned to outperform relative to our competition and generate tremendous value for our shareholders. Let me now briefly review some of the latest developments across our brands. At Aviara, we successfully completed the relocation of all our manufacturing activities to the Merritt Island, Florida facility. As of the third quarter, the new Aviara facility is fully self-supported from a production standpoint. We recently celebrated the shipment of the first Aviara AV32 model produced in the new facility from start to finish, which is just the first of many more to come. Aviara's retail performance continues to exceed expectations, and our order book is completely sold out for the remainder of the year. Marine Max and its customers continue to appreciate Aviara's progressive style, elevated control, modern comfort, and quality details, which are unmatched in the luxury dayboat segment. While the increase in overhead due to the Merritt Island facility has a dilutive near-term impact on margins and profitability, the additional capacity will set the brand up for many years of future growth in sales and profit. In addition, moving Aviara from the Mastercraft facility has freed up much-needed capacity for Mastercraft, which we are busy putting to good use. At Crest, we experienced continued strength in retail performance during the fiscal third quarter, underscoring 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. Since we acquired Crest in October of 2018, our focus has been on expanding production throughput to meet the increasing demand for the brand and to drive incremental margin expansion. In the third quarter, Crest continues the exceptional execution of its operating and strategic priorities, delivering another outstanding quarter financially. Crest wholesale unit volumes set a quarterly record and were up nearly 59% year over year. Importantly, wholesale volume was also up more than 27% sequentially compared to the second quarter. Gross margins increased more than 800 basis points year over year. This marks the second consecutive quarter in which Crest achieved gross margins in excess of our 20% target. putting us well on our way to achieving consistent gross margins in the low 20% range. Similarly, at NauticStar, we experienced continued retail momentum in our fiscal third quarter. As previously stated, NauticStar improved wholesale throughput sequentially in the quarter and improved its gross margins by more than 1,200 basis points year over year. Our turnaround plan is gaining momentum with initiatives in place to further ramp up production, improve overall quality, and enhance the product offerings. Our expectation remains that we'll 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 over time. At Mastercraft, retail performance in the fiscal quarter continued its torrid pace. For the fiscal third quarter, Mastercraft set a net sales and unit shipment record. Entering the current fiscal fourth quarter, we are running at record production rates at the Mastercraft facility as we aggressively ramp up to get dealers critical inventory ahead of the boating season. Importantly, we will continue to emphasize quality to further differentiate Mastercraft from the competition. Our wholesale order book has sold out through the remainder of the year, and dealer commitments for model year 2022 have already exceeded our aggressive expectations. Combined with the incremental dealership changes we highlighted last quarter, Mastercraft is primed to take a market share heading into the heavy summer selling season. On a financial basis, excluding the impact of Aviera, the Mastercraft brand saw increased net sales on wholesale unit and ASP growth. Additionally, the brand achieved exceptional fiscal third quarter gross margin levels driven by consumers continuing to add features and options to their orders. As we integrate the prior Aviera manufacturing footprint into Mastercraft production, we expect to continue to ramp up production throughout the year, allowing us to meet to better meet the wholesale demand from our dealers as they look to capitalize on the summer selling season and continue robust retail demand from consumers. 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 nine months gives us 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 $147.9 million, an increase of $45.3 million, or 44.2%, compared to $102.6 million for the COVID-impacted prior year period. The increase was primarily a result of achieving the highest wholesale unit volume in the history of the company and lower dealer incentives as retail demand has remained robust. As Fred mentioned, this was the most profitable quarter in the company's history. Gross profit increased $16 million to $37.2 million compared to $21.3 million for the prior year period, principally driven by higher sales volumes, lower dealer incentives, and higher prices. This favorability was partially offset by the impact of model mix, higher compensation cost, and costs associated with the transition of Aviera to our new Merritt Island facility. Our gross margin was 25.2% for the third quarter, an increase of 450 basis points compared to the prior year period. The increase was primarily attributable to lower dealer incentives, favorable overhead absorption driven by the higher sales volume and higher prices, partially offset by costs associated with the transition of Avellara to her new Merritt Island facility and higher labor costs. Operating expenses were $14.7 million for the third quarter, an increase of $53.8 million or 78.6%, a decrease of $53.8 million or 78.6% compared to the prior year period, primarily driven by the recognition of $56.4 million of goodwill, and other intangible asset impairment charges in the prior year period, and lower selling and marketing costs, primarily due to the impacts of the COVID-19 pandemic. This decrease was partially offset by higher general and administrative expenses, resulting from higher incentive compensation costs and additional investment related to product development and information technology. Turning to the bottom line, adjusted debt income increased to $19.1 million, one cent per diluted share computed using the company's estimated annual effective tax rate of approximately 23%. This represents an increase of 122% compared to adjusted income of 8.6 million or 46 cents per diluted share in the prior year period. Adjusted EBITDA was 27.5 billion for the third quarter compared to 14 million in the prior year period. Adjusted EBITDA margin was 18.6%. up 500 basis points from 13.6% in the prior year period. Turn to our liquidity and balance sheet. As of April 4th, we had $29 million of cash on our balance sheet. With our revolving credit facility fully repaid, we entered the quarter with $64 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 delivered it in each segment over the course of the quarter. We are raising our guidance for fiscal 2021. Importantly, our guidance assumes continued inefficiencies in our production as we navigate through supply chain disruptions. For the full fiscal 2021, consolidated net sales is expected to approach 40% year over year, with adjusted EBITDA margin approaching 17%. and adjusted earnings per share growth up in the high 120% range year-over-year. I will now turn the call back to Fred.

Thanks, Tim. To reiterate my earlier comments, we are pleased by the progress we made during the first three quarters of fiscal 2021 to accelerate production, efficiently manage our supply chain to meet increased consumer demand, and to generate record earnings in each of our first three quarters of fiscal 2021. We continue to believe the increased retail momentum we have experienced from consumers seeking the boating lifestyle and our brands will endure and our brands will prosper and lead to meaningful long-term growth for the company. We remain laser-focused on our mission to deliver the best experience for our consumers. We're 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 and 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 for questions.

Thank you. As a reminder, if you would like to ask an audio question, please press star followed by the number one on your telephone keypad. Once again, that is star one to ask a question. And your first question is from the line of Craig Kennison with Beard.

Hey, good morning, and thanks for taking my questions. Congratulations to everybody. Question on capacity. I think in this quarter you produced collectively almost 2,100 boats. Should we think of that as your current run rate capacity? And then as we put that into the context of, you know, your – need for inventory in the channel, is that a good expectation for the quarterly run rate kind of next year?

Hey, Craig, this is Fred. I would say first and foremost, the current run rates are not capacity limited. It's been primarily limited by supply chain, and we continue to ramp up and have plans to continue to ramp up through this quarter and into next year. that production number is going to continue to increase quarter by quarter. And, you know, we do expect easing in the supply chain conditions as we move through the summer and into next year. With regard to, you know, expectations of future years, I can only say once again, our plan is to continue to increase quarter over quarter.

That's great. And then just I guess with respect to retail, you mentioned a lot of units are pre-sold. We're about to lap a difficult, I'm sorry, very difficult comparisons, right? So last year was incredibly strong with the pandemic. What gives you confidence that this retail is more sustainable than just sort of a one-time outdoor, you know, trend?

Well, Craig, you know, it's my view that, you know, the COVID experience was life-changing for a lot of people. It's not something that they're just gonna put behind them and go back to behaving exactly the same way they did before. So we had this wonderful opportunity to attract people to boating and to the boating lifestyle. I think we've taken advantage of that and will continue to. But I think while we'll see a regression to the norm in terms of historical behavior, I don't think we will revert to the exact behaviors that existed pre-COVID. People like working remote. They've realized that they have the opportunity to do that. Some businesses are encouraging that. They'll continue to buy property in areas that they prefer to live. And that happens to also often be areas where they can enjoy the outdoors or enjoy the boating lifestyle or have proximity to water. Those investments are not the kinds of things that are turned on and off quickly. We've seen significant increases in retail prices. you know, in waterfront property and property in rural areas relative to urban areas. So once again, I think there are a variety of reasons. And let's not forget, you know, COVID-19 is one version of a virus. Let's not kid ourselves to think that that's the last one that's ever going to show up. So people, I think, are going to appreciate safe, outdoor, family-oriented, enjoyable experiences, and that's what we provide.

That's great.

Hey, thanks, Fred.

You're welcome. Our next question is from the line of Eric Wold with B. Riley.

Thank you. Good morning, guys. Good morning. A couple questions, I guess. I guess one, if you did not need to shut down the production any days for the resin shortfall, where are you seeing the greatest supply chain headwinds right now that are less navigatable, so to speak? And can you estimate kind of what impact those headwoods may have had on shipments or margins in the quarter in the guidance?

Well, first of all, it's like whack-a-mole. It's a different supplier every day or every week, and they're constantly adjusting the production schedules to accommodate that. And, you know, it involves more production out of, you know, the optimal sequence of production. So... It's not just one area. As I said, I picked resin as an example, but there are countless other items and different contributing factors. Everything from the recovery from the ice storms in the south, Texas, the power outages, to container shortages and shipments from overseas. You know, we're battling all of those, and so far our team has done a phenomenal job of negotiating that. But, you know, it's tight and it's delicate. With regard to the impact on production, I mean, you know, it certainly has created significant inefficiencies, but the most important thing for us has been to ramp up and continue production and service the demand that we see out there. So, you know... If I had to guess, I'd say it could be on the order of a boat a day kind of thing.

Got it. And then when you noted that Aviara was sold out for the year, was that the current fiscal year, the calendar year, next fiscal year, just trying to gauge that demand? And then, you know, now that you've gotten the first boat out of that facility start to finish, you know, what do you think now in terms of how quickly that production can ramp out of the Merritt Island facility in the next 12 months?

Well, we're optimistic because we expect it to ramp up dramatically, okay, in summary. And in terms of our production there, we're still finishing up at the beginning of this quarter construction projects to tailor the facility. So there was still disruption and workarounds going on there that significantly inhibited that ability. Having said that, this quarter is one where we'll see significant progress and that will roll into, you know, continue that acceleration through next year. Having said that, just to create the right context, while we say we're sold out and we refer to it as this year, we have a commitment from Marine Max to take everything we can produce for the next year. So we are totally aligned with them, and, you know, the burden is on us to continue to accelerate that production to meet demand.

Perfect. Thanks, Fred.

You're welcome. Your next question is from the line of Joe Altibello with Raymond James.

Hey, guys. Good morning. Good morning, Joe. So revenue in the quarter, obviously, better than you expected, much better than you expected. And I would imagine that's largely a function of you being able to ramp up production than any material change in retail demand or ASPs, for example. What went better than you expected on the manufacturing front? Were supply chain constraints actually less than you feared in the quarter?

Yes, Joe. This is Tim. Absolutely. We've been able to navigate the supply chain disruptions without having to shut down our facility. And so that was a pleasant surprise for us because of how challenging that environment is.

Okay. But, Joe, just to tie it all together in terms of not just production but demand, retail demand has exceeded our expectations. So we started building some inventory in the fall. And, you know, over the last couple of months, we haven't been able to build any further pipeline, you know, with our dealers, as much as we're ramping up.

Okay, so it was a little bit of better capacity, a little bit of better retail, it sounds like. Yeah. Okay. And secondly, on EBITDA, you're guiding for, I guess you're guiding to apply a sequential margin decline from Q3 to Q4. That's fairly unusual for your business, right? Why are we going to see that margin pressure in Q4 when you outperform so significantly in Q3 on the margin side?

One of the big things in Q4 going on is the uncertainty about the supply chain. So we're trying to be a little conservative with that regard. Hopefully we'll be able to avoid any significant impacts, but this is probably going to be the toughest quarter with regard to supply chain challenges.

Got it. Okay. Thank you, guys.

Your next question is from the line of Brett Andrews with KeyBank Capital Markets.

Good morning, guys. Good morning. Any color you have on how many of your production slots are retail sold either in the fourth quarter or into 2022? I know you said record levels, but just if you have any numbers around that.

Let me just be clear on that. We have demand on everything that we can build, and it's going to flow through. There's not going to be carryover inventory at the dealer level. So whether it's 85%, whether it's 95%, it's not going to have an impact, I think, in any way, shape, or form on what we produce or the health of our dealers. You know, we have commitments again next year. This is the time of the year that we get those commitments from our dealers, and they are rolling in above our estimates, above our internal targets. So once again, we just continue to be faced with a situation where we need to ramp production up as fast and as high as we possibly can.

Got it. No, understood. Okay. And then we mentioned it, I think, a few times on the call, but is there any way to quantify maybe what you're seeing at retail so far in April and May? And then, you know, as we get through May and into June with channel inventory so low, just how are you thinking about, you know, your ability to, you know, satisfy, you know, really the peak seasonal demand this year?

Yeah, hey, Brad, it's George. So, you know, obviously the quarter – retail was just phenomenal across all four brands. We saw that continue into April just fantastically. You know, May and June is where we're starting to see some tougher comps here over the next several weeks. So we do expect, you know, we obviously are hopeful, but given how much inventory we've been able to get into the field, the fact that we've been able to increase production, we're confident and we do have record levels of retail already sold slots that we will be able to meet that customer demand while still having tremendous opportunity from a channel fill opportunity going forward in 2022. So we feel very good relative to the competition, you know, our ability to have enough inventory to meet demand. Got it.

All right. Thanks, guys.

Once again, to ask an audio question, please press star 1. And your next question is from the line of Mike Schwartz with Truist Securities.

Hey, guys. Good morning. Good morning. Fred, maybe just wanted to continue. I think you were saying you're confident in the Mastercraft business gaining market shares in the summer months. Maybe just provide a little color context what exactly gives you that confidence.

I think we're ramping up at a faster rate than historical market shares are. would indicate. So that's what gives me confidence that we'll ultimately be getting share. In addition to the significant changes that were made during this past year or so with regard to dealer upgrades and expansion.

Yeah, Mike, as we look at some of the digital marketing initiatives we've implemented and lead generation, it's just off the charts, to be quite frank. So the activity that our dealers are seeing And to Fred's point, the fact that we have a high degree of confidence that relative to the segment, particularly at Mastercraft, we've been able to get more inventory out to the field relative to the competition, that we feel comfortable that that inventory will be there. And then, therefore, that will translate to market share gains. We also, as Fred alluded to on the call, we've got a tremendous model year changeover with new innovations, new products that we think are absolutely going to really drive demand for the Mastercraft product in particular. We also have some new product and innovations coming at the other brands as well. But as we think about Mastercraft, we think that'll be a tremendous, tremendous market share mover for us over the summer and will also lead to increased demand going forward.

Okay, great. And then just maybe looking at some of the investments you're making in the business, I think you've called out product development and engineering teams as part of that. I guess what have you identified with bringing these new teams on as maybe the biggest opportunities or areas you may not have been as competitive in the past, just in terms of your product line?

I don't think there's an area that we haven't been competitive in. We have continued to improve across the product offerings, so it's not targeted at any one specific area. It's a continuous improvement process. I feel once you have the opportunity to appreciate what we're offering for model year 2022, you'll have a much better sense of the breadth of those improvements that And once again, then we're making commitments in terms of investments, not only for model year 23 beyond 22, but for future years beyond that. And unfortunately, from a competitive disclosure standpoint, I don't want to get into detail about what those specific innovations are.

Yeah, Mike, the way that I think about it as well is in particular product development, it's a bandwidth issue, right? As we continue to grow, And we've got tremendous organic growth opportunities with Aviara and NauticStar and Crest from a product standpoint. It's about making sure that we've got the resources in-house to be able to drive those initiatives, drive that product development innovation, and make sure that we're not sacrificing the potential at any one brand because of lack of resources. So it's just as much as we continue to grow and we see opportunity from a product side, it's making sure we've got the team that can execute on it.

And I just add, final, Mike, you know, our innovations and improvements are totally driven by what we believe is the impact on the consumer and their appreciation and that best experience goal. It's not driven for innovation for innovation's sake. It's a process we've developed here to make sure that we have a loud and clear voice of the customer that we're responding to. Okay, great. Thanks, guys. You're welcome.

And at this time, there are no further questions. We'll turn it back over to the panel for any further presentation or closing remarks.

We have none to make. I appreciate it. Thank you, everyone, for joining us, and have a great day.

Thank you. This concludes today's conference call. You may now disconnect.