MasterCraft Boat Holdings, Inc.

Good day and welcome to the second quarter 2022 Mastercraft Boat Holdings, Inc. earnings conference call. At this time, all participants are in 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 then 1 on your touchtone telephone. If anyone should require assistance during the conference, please press star then 0 to reach an operator. As a reminder, this call is being recorded. I would now like to turn the call over to Tim Oxley, CFO. You may begin.

Thank you, operator, and welcome, everyone. Thank you for joining us today as we discuss Mastercraft's second quarter performance for fiscal 2022. As a reminder, today's call is being webcast live and 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 a review of our operational highlights from the second quarter. I will then discuss our financial performance for the quarter. 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, February 3rd, 2022. 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 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 2022 second 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.

Good morning, everyone. Thank you for joining us today. Our business performed extremely well during the second quarter in a very challenging and dynamic environment. These results reflect a continuation of exceptional execution against our strategic and operational priorities as we delivered a record-setting performance for the fifth consecutive quarter. Net sales, gross profit, diluted adjusted earnings per share, and adjusted EBITDA were all the highest for any second quarter in the company's history. Despite the many challenges we faced, we grew net sales organically by more than 34%, and we grew diluted adjusted earnings per share by nearly 21% year over year. When compared to our previous second quarter record in fiscal 2019, net sales were higher by more than 31%. This performance was driven by a more than 11% year-over-year increase in units. The credit for this goes to our more than 1,500 employees who continue to execute at a high level in the face of adversity. Although we achieved another record quarter, our growth in net sales and earnings has been significantly constrained primarily due to supply chain disruptions. Logistics challenges combined with supplier shutdowns, labor shortages, and capacity constraints have caused widespread but largely intermittent component delays and scarcity across the industry. These disruptions, combined with labor challenges associated with the COVID Delta and Omicron variants, limited our shipments and created significant production inefficiencies during the quarter. These challenges resulted in the deferral of shipping certain nearly completed boats to subsequent quarters. Constrained production, when coupled with continuing record retail demand for our products, is keeping dealer inventories at historic lows for this time of the year. Over the last several years, we have strengthened our supply chain team by nearly doubling headcount, including the addition of many industry veterans. This has allowed us to manage through the challenging supply chain environment better than our competitors. Historically low dealer inventories are resulting in lower retail sales across the industry. At the end of the second quarter, we estimate that our dealers are under-inventoried by approximately 2,000 units on a consolidated basis, with more than half of the shortfall at Mastercraft alone. In addition, that number is likely a conservative estimate of full extent to which retail sales are being suppressed by low inventory levels. Recent industry-wide surveys indicate that more than 90% of dealers report inventories as being too low. Limited product availability has caused our retail sales to be down for the fiscal year to date. However, our retail performance has strengthened during the quarter. When compared to the second quarter of fiscal 2021, retail sales across all our brands were up by nearly 26%, despite our average dealer inventories being down over 8% and down 54% when compared to the end of the second quarter of fiscal 2020. Although we believe product availability is limiting retail sales, we remain very optimistic about the sustainability of consumer demand due to the continuation of favorable consumer trends. As consumer preferences continue to evolve, we expect that structural changes in where and how people choose to live, work, and recreate have generated strong consumer demand for the boating lifestyle that will persist. As we enter the traditional boat show season, the impacts from COVID continue to alter the consumer shopping experience. Many of the larger boat shows have been canceled due to local restrictions or our dealers choosing not to participate because they do not have the inventory available to justify the expense. Activity at boat shows attended by our dealers support our view that there is still a strong consumer interest in the boating lifestyle and our brands. Our investment in digital marketing have led to greater awareness and lead generation across all our brands, driving record levels of retail sold orders in our system. As these boats are delivered ahead of the summer season, we expect the publicly reported SSI data to more closely reflect the favorable trends we are tracking internally. As a result of continuing robust consumer demand and production rates constrained by supply chain disruption, We expect it will be sometime in fiscal 2024 before dealer inventories reach optimal levels. This provides us with unprecedented confidence in our wholesale growth visibility subject to the uncertain supply chain and labor dynamics. As we look to increase production to improve dealer inventory levels and satisfy consumer demand, each of our facilities currently have significant capacity above and beyond what they are producing. We have approximately 20% more capacity than we are able to utilize due to supply chain constraints. Nevertheless, we are committed to aggressive long-term growth plans, which is why we have identified and are pursuing capital projects at Mastercraft, NauticStar, and Crest to allow us to ramp up production past current unconstrained capacity levels as the supply chain improves. Once completed, these production and expansion projects will give us an additional 20% to 25% capacity. As we discussed last quarter, our inflation estimates have increased significantly driven by unrelenting demand and a worsening of the supply chain. In response, we implemented additional mid-year price increases for each of our brands during the second quarter. We realized only a small benefit from the mid-year price increases during the second quarter as we price protected certain retail sold boats. We will increasingly benefit from these price increases during the second half of fiscal 2022, which will mitigate the impact of material and labor inflation for the full year. Because of our strategic focus on the consumer, industry-leading quality, and the premium positioning of many of our products, especially our Mastercraft and Aviera brands, we do not expect a degradation in consumer demand as a result of our pricing strategy. Supported by these differentiators and the strength of consumer demand for our products, We will continue to compete by offering superior products, not promotional pricing, to the consumer. We continue to progress in the pursuit of our overarching objective of driving sustainable, accelerated growth by becoming the most consumer-focused voting company. We remain determined to execute against each of the four strategic priorities, consumer experience, digital marketing, operational excellence, and human capital development. Let me now briefly review some of the latest developments across our brands. Our Mastercraft brand performed exceptionally well during the quarter and grew net sales to a second quarter record of $106.8 million. This tremendous result is due to the extraordinary efforts of the Mastercraft team and the continued success of Mastercraft's best-in-class operating model, which we leveraged to mitigate supply chain disruption and increase year-over-year shipments by nearly 15%. The ability to ramp up production faster than our largest competitors combined with our uncompromising quality standards, is the key to taking market share today and in the long run. According to the most recent All States Reporting SSI market share data, as of the rolling 12-month period ended September 30th, 2021, Mastercraft increased market share over each of its closest three competitive brands by between 80 and 300 basis points. This performance solidifies Mastercraft as the number one brand in the fastest growing and highest margin category in the powerboat industry. And while the official rolling 12-month December data is not out yet, preliminary results reflect further market share gains versus our closest three competitive brands. For model year 2022, Mastercraft unveiled one of the most aggressive model year changes in its history. The model changeover included three new boats and a myriad of new consumer-focused performance, styling, and convenience features. The new lineup has been incredibly well received by our dealers and consumers alike. We followed up on that success by launching another all-new Mastercraft model, the XT22, during the second quarter, which is already sold out for the remainder of the year. We will continue to emphasize quality and consumer experience to further differentiate Mastercraft from the competition. Mastercraft's retail sales were up significantly during the quarter when compared to the second quarter of fiscal 2021, and all model year 2022 production slots are sold out. Now on to Crest, which continued to execute its operating and strategic priorities by delivering another record-setting performance for the fourth consecutive quarter. Crest shipped the most units of any second quarter in the company's history. Crest also set a second quarter record for net sales, which increased by an impressive 41% year over year, primarily driven by a 20% increase in units. Even more impressive, given the disrupted business environment, was that Crest once again achieved a gross margin of more than 20%. Crest's ability to drive top-line growth and generate strong margins in this environment demonstrates the value of its business and the strength of its operating team. In addition, Crest retail sales were up sharply during the quarter when compared to the second quarter of fiscal 2021. At Aviara, we continue to ramp up production at the Merritt Island facility to meet exceptionally strong consumer demand. Aviara's ramp up gained momentum during the quarter as net sales were up 143%, driven by a 109% increase in units. While the increase in overhead due to the Merritt Island facility will continue to have a dilutive effect near term, impact on Aviera's margins and profitability. We anticipate the excess capacity at the facility will support at least $100 million of annual revenue over time. We expect Aviera's production to steadily increase and margins to improve over the course of the year. Furthermore, the introduction of new models beginning in fiscal 2023 will position the brand for accelerated revenue and margin growth. Aviara's retail performance is exceeding our expectations, with nearly all units produced since the brand's inception already having sold at retail. At NauticStar, supply chain disruption, most notably engine shortages and labor constraints heavily impacted second quarter production ramp-up plans and limited shipments. We continue to execute our turnaround plan with initiatives underway to further increase production and quality and enhance the product offerings. We look forward to achieving better results for this business as a supply chain and labor environment begin to normalize. Overall, despite the many challenges, we had a strong first half of fiscal 2022. We achieved industry-leading organic growth, took meaningful market share with our Mastercraft brand, advanced our Aviera ramp-up, and once again recorded strong results at Crest. We expect to build on that success during the remainder of the year. We are committed to making investments to further strengthen our competitive position, grow our brands, and deliver shareholder value guided by our long-term focus and strategic priorities. I will now turn the call over to Tim, who will provide more color on our financial results. Tim?