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?

Thanks, Brad. Looking at the top line, net sales for the second quarter were a record $159.5 million, an increase of $40.8 million, or 34.4%. compared to $108.7 million for the prior year period. This increase was a result of higher wholesale unit volume, favorable model mix, and price increases. As Fred mentioned, this was the most profitable second quarter in the company's history. Gross profit for the second quarter increased $5.9 million to $35.2 million, compared to $29.3 million for the prior year period, principally driven by higher sales volume, price increases, and favorable model mix. This favorability was partially offset by higher material and labor costs driven by inflationary pressures and production inefficiencies from supply chain disruption. Our gross margin was 22.1% for the second quarter, a decrease of 260 basis points compared to the prior year period. The decrease was primarily attributable to higher material and labor costs and incremental overhead costs from the new Aviara plant acquired in the second quarter of fiscal 2021. Price increases partially offset these higher costs for the quarter. Although lower on a year-over-year basis, our gross margin increased by 120 basis points sequentially from our first quarter. As Fred indicated, we expect the combined effect of our model year and mid-cycle price increases to mitigate the expected cost inflation for the remainder of the year. Although we saw some small benefit from these increases during this second quarter, The impact will be phased in during this second half, with the full benefit being fully realized in the fourth quarter. Operating expenses were $14.6 million for the quarter, an increase of $2.3 million, or 18.8%, compared to the prior year period. General and administrative expense increased as a result of increased variable compensation costs and investments in information technology. Selling and marketing expense increased due to timing of prior year expenses being impacted by the COVID-19 pandemic, resulting in lower costs for the prior year quarter. However, SG&A as a percentage of net sales was the lowest for a second quarter since becoming a public company as we prudently managed costs. Turning to the bottom line, adjusted aid income for the second quarter increased to a second quarter record of $17.2 million, or $0.91 per diluted share, computed using the company's estimated annual effective tax rate of approximately 23%. This compares to an adjusted net income of $14.3 million, or $0.75 per diluted share, in the prior year period. Adjusted EBITDA was a record $25 million for the second quarter, compared to $21.3 million for the prior year period. Adjusted EBITDA margin was 15.7 percent, down 220 basis points from 17.9 percent in the prior year period, due to supply chain disruption and inflationary pressures that drove material and labor costs higher. Turning to our balance sheet, we ended the quarter with nearly 98 million of total liquidity, including 13.6 million of cash, and more than 84 million of availability under a revolving credit facility. Working capital has increased nearly 24 million during the first half of our fiscal year. This was primarily driven by higher inventories due to increased production and increased safety stock to mitigate supply chain disruption. We have also built a backlog of nearly completed boats, which are awaiting the last few components necessary to ship the units. Fiscal year to date, we reduced our outstanding debt by more than $19 million, and we ended the quarter with a net leverage of 0.6 times adjusted EBITDA. In late June 2021, the Board authorized our $50 million share repurchase program. Given our recent operating performance, financial results, and the unprecedented wholesale visibility we currently have, we believe our stock represents an incredible value at recent prices. Because of this, we have spent approximately $11.4 million to repurchase nearly 415,000 shares for our common stock during the first half of fiscal 2022. This represents more than 20% of the authorized program. We expect to continue to opportunistically return cash to shareholders through the program while prioritizing high return investments in the business that create meaningful shareholder value. Looking forward, we are once again raising our guidance for the full year on the strength of operating performance, continuing strong retail demand, and unprecedented wholesale visibility. While we believe our team can continue to expertly navigate the challenging environment, we are expecting the supply chain in our second half to remain constrained. This will impact the cadence of our second half deliveries to be more Q4 weighted. More specifically, due to an acute Tier 2 electronic supplier issue, shipments at our Mastercraft brand will be deferred into our fiscal Q4 period as they catch up on delivering a key component. Despite this revenue deferral and the associated profitability headwind, We are confident the team can execute against our strategic and operating priorities to deliver another record year in net sales and profitability for our shareholders. For the full year of fiscal 2022, consolidated net sales growth is now expected to be up in the 25% range. Despite the manufacturing inefficiencies we continue to experience due to supply chain disruptions, we continue to expect our adjusted EBITDA margins to be in the 18% range. We now expect adjusted earnings per share growth to be up in the 32 percent range year-over-year. This guidance reflects a further increase to our already expected record year of all organic growth. Driven by growth-oriented projects, we continue to expect capital expenditures to be in the $25 million range for the full year. For the third quarter of fiscal 2022, consolidated net sales growth is expected to be up in the 12 percent range. driven by the previously mentioned revenue deferral. These units will be substantially completed in Q3 but not shipped until Q4. Adjusted EBITDA margins will be in the 17% range and adjusted earnings per share growth up in the 4% range year over year. Our guidance assumes minimal improvements in the supply chain environment for the remainder of our fiscal year. As such, we do not expect to fully realize the benefit of our unconstrained capacity during fiscal 2022. We remain laser focused on mitigating the supply chain headwinds and delivering to shareholders another record year of organic sales growth and margin expansion. With that, I'll turn the call back to Fred.

Thanks, Tim. We are pleased by our record-setting pace for fiscal 2022. Despite the severe levels of disruption faced by the industry, we definitely manage the supply chain to increase production year over year at each of our brands. This exceptional execution resulted in industry-leading organic growth and market share gains. We expect demand from consumers seeking the boating lifestyle to endure and to lead to continued strong growth for our company. As we've managed 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, dealer and vendor partners, and people. Operator, you may now open the line for questions.

As a reminder, to ask a question, please press star then 1. If your question has been answered and you'd like to remove yourself from the queue, press the pound key. Again, that's star 1 to ask a question. We have a question from Kevin Condon with Baird. Your line is open.

Hi, good morning, everyone. I just wanted to ask a little bit about channel inventory and specifically your comment on it taking until fiscal 2024 to get back to optimal levels and then some of the assumptions within that. As we look at this year, just given the supply constraints in the strong sustained retail demand, do you expect making any progress like adding to dealer inventory in fiscal 2022? And with that, as we look out into 23 and 24, is it really reliance on supply chain getting better to actually take up wholesale accounts to get inventory back into the channel? Or is there an expectation for retail to flatten out or potentially back off of it?

Let me start by saying that I anticipate we'll end the year in a little bit healthier overall inventory position than we did last year, end the fiscal year. But it was really tight last year. So that improvement is still going to be not nearly where we would like to be. So I think we'll be in a little bit better shape for the second half of the summer selling season. But it is very dependent on the supply chain continuing to improve. We expect modest improvement for this year. We hope that pace just continues. That's based on a variety of factors. Major suppliers are adding capacity. They've been able to catch their breath in some cases, but that still does not preclude the occasional severe disruption like we're experiencing at the end of this quarter, which ends up being more of a timing phenomenon than it is an overall damper on demand and throughput because we're able to build ahead. So, you know, I think we catch up a little bit this summer, but then it takes through next summer for us to really get back where we would like to be optimally. I don't know if that answers all of the points that you were raising, but, you know, it's difficult to predict the supply chain, so our business plans are predicated on a tough slog for a while. But in spite of that, we still think we can make substantial progress.

I'd like to add that as we think about our dealers' optimal inventory level, we expect them to carry less inventory than they have traditionally. Said another way, we expect their inventory turns to be a bit higher than normal. So that's what we're shooting for, mitigates the risk for the dealers and ourselves.

Great. Thanks. And then if I could just a quick one on pre-sold units and price protection. I think you had mentioned doing some of that on pre-sold orders. Is there an approach there? Can you just elaborate on what goes into your strategy to price protect units on pre-sold?

Yeah. Hey, Kevin. It's George. So we have price protected some boats. We still have a handful, not more than a handful, obviously, but we'll have some continuing price protection here into our third quarter. But we expect that to be fully flushed out through this third quarter, which will allow us to realize the full benefits of our price increases in Q4. And so that has been communicated to dealers and consumers. And so we're managing through that and getting the last units out as quickly as we can to get that product to consumers' hands. but we expect the price increases to moderate here in our third quarter and be fully done with that by fourth quarter.

Kevin, the overall context there clearly is we entered the year thinking we were going to be able to produce at higher levels, and the supply chain has inhibited us from doing that. As a result, our plans with dealers in terms of delivery have been extended, so they've made commitments, and they're partners, so you know, we share in that extension with them, even though it causes us some duress in the near term, it's the right thing to do.

Makes sense. Thanks for taking my questions, and congrats on a strong quarter.

Thank you.

Thank you.

Again, to ask a question, please press star then 1. Our next question comes from Michael Swartz with Truist. Your line is open.

Hey, guys. Good morning. This is Lucas. I'm from Mike. I just had a quick question on guidance. For fourth quarter, you would imply really strong EBITDA margins. Can you give us a little bit more color as to your comfort with that or any detail you could add?

Yes. When we look at our margin guidance for the year, I'm more confident in that than I am in the timing between Q3 and Q4. As we mentioned with the supply chain disruption, there may be some Some timing differences between those quarters. We recognize that the guidance that we backed into in quarter four is very high, but it will shake out timing-wise between those quarters, and I'm more confident in the year than I am on the timing.

Sounds good. Thank you.

There are no further questions. Ladies and gentlemen, thank you for participating in today's program. You may now disconnect. Everyone, have a great day.