MasterCraft Boat Holdings, Inc.

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 and our fiscal 2022 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'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.

Good morning, everyone. Thank you for joining us today. Our business performed extremely well during the third quarter as we delivered our highest net sales, gross profit, diluted adjusted earnings per share, and adjusted EBITDA for any quarter in the company's history. These results reflect a continuation of exceptional execution against our strategic and operational priorities as we delivered a record-setting performance for the sixth consecutive quarter. The hard work and determination of our team in the face of a challenging environment made this momentous achievement possible. Impressively, we grew net sales organically by more than 26%, and we grew diluted adjusted earnings per share by nearly 20% year over year. This represents the fifth consecutive quarter of year over year net sales growth of more than 25%. Although we achieved another record quarter, our growth in net sales and earnings was once again constrained due to supply chain and COVID disruptions. Logistics challenges, combined with shutdowns, labor shortages, and capacity constraints at our suppliers have caused widespread but largely intermittent component delays and scarcity across the industry. These disruptions, combined with labor challenges associated with COVID, limited our unit shipments and created significant production inefficiencies during the quarter. These challenges delayed the conversion of work and process inventory to finished goods and resulted in additional costs not typically experienced in a normal production environment. Constrained production and higher production costs combined with higher than expected inflation in the quarter has created significant, but we believe temporary, margin headwinds. Driven by our consumer-centric strategy, we are prioritizing product availability and quality over cost to meet the continuing strong retail demand as we head into the summer boating season. The constrained production environment and the continuing robust demand for our products is keeping dealer inventories at historic lows for this time of the year. Low dealer inventory has resulted in lower retail sales across the industry, including our brands. An independent survey of our dealers during the quarter revealed that most of those surveyed described inventories for our brands as being too low, while no dealers in the survey described inventories for any of our brands as too high. Our dealer inventories at the end of the third quarter were down year over year by 4%. When compared to the end of the third quarters of fiscal 2020 and 2019, dealer inventories were lower by 48% and 52%, respectively. Although we believe product availability is limiting retail sales, we remain optimistic about the sustainability of consumer demand. 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. 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. A recent report by the National Marine Manufacturers Association, or NMMA, reported that first-time boat buyers topped 420,000 in 2021 on a par with 2020 levels. This represents two consecutive years of new voter entrance at levels not seen since the Great Recession. Investments in consumer acquisition have allowed us to capitalize on the expansion of our industry's addressable market, leading to greater awareness and lead generation across all our brands, and driving record levels of retailed sold orders in our system. As a result of continuing robust 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 confidence in our wholesale growth visibility in the face of an uncertain macroeconomic backdrop. We will continue to progress in the pursuit of our overarching objective of driving sustainable, accelerated growth by being the most consumer-focused recreational boat manufacturer. We remain determined to execute each of our four strategic priorities, consumer experience, consumer acquisition, operational excellence, and human capital development. We recently received an acknowledgment of the success of our strategic focus on the consumer and quality. In February, the National Marine Manufacturers Association announced the recipients of the 2021 Marine Industry Customer Satisfaction Index Award for Excellence in Customer Satisfaction. The annual CSI award recognizes marine manufacturers who attain the highest levels of satisfaction as voted on by consumers. We are proud that, once again, Mastercraft and Crest received this award. This is the 11th consecutive year that Mastercraft has received this honor and the third consecutive year for Crest. Let me now briefly review some of the latest developments across our brands. Our Mastercraft brand performed well during the quarter and grew net sales to a record $120 million. despite ongoing part shortages that impacted production volume and cost as we previewed for investors on our fiscal second quarter call. 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. Mastercraft has increased production sequentially each quarter this fiscal year, and we expect to be producing at record levels in the fourth quarter. The ability to ramp up production during this time of limited product availability while maintaining our uncompromising quality standards is key to growing market share. According to the most recent All-States Reporting SSI market share data, as of the rolling 12-month period ended December 31, 2021, Mastercraft increased market share over each of its closest three competitive brands by between 50 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 March data is not out yet, preliminary results reflect continuing market share strength versus our closest three competitive brands. Mastercraft's retail sales remain strong during the quarter when compared to the third quarter of fiscal 2021, and all model year 2022 production slots are sold out. For model year 2022, Mastercraft unveiled one of the most aggressive model year changes in its history, including the launch of four new boats, which have been incredibly well received by our dealers and consumers. We followed up on that success by announcing the exciting addition of the most powerful tow sport boat engine in the world at the Miami International Boat Show, which will be available only in a Mastercraft beginning in model year 2023. This 630 horsepower, 665 foot-pounds of torque, supercharged 6.2 liter engine option highlights the unrelenting emphasis on consumer experience, innovation, and performance, which differentiates Mastercraft from the competition. Finally, I would like to recognize Mastercraft's attainment of a major workforce safety milestone. During the quarter, Mastercraft surpassed 2 million hours worked without a lost time incident. As of today, we have continued to add on to this impressive safety record, having attained more than 2.4 million hours and 547 days without a lost time incident. This achievement showcases our unrelenting commitment to safety, an essential element of Mastercraft's core values in building and delivering world-class tow sport boats. We salute our workforce for this outstanding achievement. Now on to CREST. which delivered another record-setting performance for the fifth consecutive quarter. Crest shipped the most units of any quarter in the company's history. Crest also set a quarterly record for net sales, which increased by 28% year over year, primarily driven by a 17% increase in units, while achieving a gross margin of nearly 20%. Crest's ability to drive top-line growth and generate strong margins in this environment demonstrates the success of the Crest acquisition and highlights our value-enhancing growth strategy. According to the most recent All-States Reporting SSI market share data, as of the rolling 12-month period ended December 31st, 2021, Crest increased market share by 40 basis points. Crest retail sales remained robust during the quarter when compared to the third quarter of fiscal 2021, and all model year 2022 production slots are sold out. At NauticStar, supply chain disruption and labor constraints have created operational challenges which heavily impacted our third quarter production ramp-up plans and limited shipments. Nautic Star's turnaround plan has not progressed at a pace that meets our expectation, which resulted in a change in leadership in February. Functional leaders from Mastercraft, augmented by third-party consultants, have been deployed to accelerate operational improvements. More details about our progress will be shared on future earnings calls. At Aviera, we continue to ramp up production at the Merritt Island facility to meet exceptionally strong consumer demand. Aviera's ramp up gained additional momentum during the quarter as net sales were up 330%, driven by a 263% increase in units. The increase in overhead due to the new Merritt Island facility will continue to have a dilutive near-term impact on Aviera's margins and profitability. However, We expect Aviera's production to steadily increase and margins to improve as we finish fiscal 2022 and continue into fiscal 2023. Furthermore, the introduction of new models in the near future will position the brand for accelerated revenue and margin growth. We continue to anticipate our capacity at Aviera facility will support at least $100 million of annual sales over time. According to the most recent All States Reporting SSI Margin Shared Data, As of the rolling 12-month period ended December 31st, 2021, Aviera increased its market share by 310 basis points in the 30 to 43-foot premium day boat segment. We are very pleased with the overall performance of the company despite the many challenges facing the industry. We remain on track for a record-setting fiscal 2022 and continue to sustain industry-leading organic net sales growth while gaining market share. We expect to build on that success as we wrap up the year and head into fiscal 2023. 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 third quarter were a record $186.7 million, an increase of $38.9 million, or 26.3%, compared to $147.9 million for the prior year period. This increase was due to higher prices favorable model mix, higher option sales, and higher wholesale unit volume. As Fred mentioned, this was the most profitable quarter in the company's history. Gross profit for the quarter increased $4.8 million to $42 million compared to $37.2 million for the prior year period, principally driven by higher net sales. This favorability was partially offset by higher input costs driven by inflationary pressures and production inefficiencies from supply chain disruptions. Our gross margin was 22.5% for the quarter, a decrease of 270 basis points compared to the prior year period. Lower margins, particularly at NauticStar, were the result of supply chain disruptions and inflationary pressures that limited production and drove input costs higher. Price increases partially offset these higher costs for the quarter, as our gross margin increased by 40 basis points sequentially from our second quarter. Operating expenses were $14.5 million for the quarter, a decrease of 100,000 or approximately 1% compared to the prior year period. SG&A as a percentage of net sales was once again the lowest for any quarter since becoming a public company as we continued to prudently manage cost. Turning to the bottom line, adjusted net income for the quarter increased to a record $22.4 million or $1.21 per diluted share. computed using the company's estimated annual effective tax rate of approximately 23%. This compares to an adjusted net income of $19.1 million, or $1.01 per diluted share in the prior year period. Adjusted EBITDA was a record $32.1 million for the third quarter, compared to $27.5 million for the prior year period. Adjusted EBITDA margins were higher year over year for each of our segments, except NauticSTAR, which was heavily impacted by supply chain disruption, inflationary pressures, and other operational challenges. The dilutive impact on margins from NauticStar more than offset the margin improvement at Mastercraft, Crest, and Aviera. As a result of our consolidated adjusted EBITDA margin was 17.2% for the third quarter, down from 18.6% for the prior year period. Turning to our balance sheet, we ended the quarter with nearly $106 million of total liquidity, including $13.8 million of cash and more than $92 million of availability under our revolving credit facility. Working capital has increased by $28 million during the fiscal year to date. This was primarily driven by higher raw material and work in process inventories due to increased production, increased safety stock to mitigate supply chain disruption, and the delayed conversion of whip-to-finish goods. Fiscal year to date, we reduced our outstanding debt by more than $28 million, and we ended the quarter with net leverage of 0.5 times adjusted EBITDA on a trailing 12-month basis. Given our recent operating performance, financial results, and the unprecedented wholesale visibility we currently have, we believe our stock represents an outstanding value at recent prices. Because of this view, we've split approximately $21.5 million to repurchase nearly 811,000 shares of our common stock fiscal year to date. This represents more than 40% of our $50 million program authorized in June of 2021. We expect to continue to opportunistically return cash to shareholders through the program while prioritizing financial resiliency and high return investments in the business that create long-term shareholder value. Looking forward, we once again raised our net sales guidance for the full year on the strength of our operating performance, continuing strong retail demand and unprecedented wholesale visibility. While we believe our team can continue to expertly navigate the challenging environment, we're expecting the supply chain to remain constrained and inflationary pressures and production inefficiencies to continue to weigh on margins. We will continue to prioritize delivering consumers their boats heading into the summer season. Higher than previously expected inflation is partially being driven by recent geopolitical events, including the Ukraine-Russian war. For the full year of fiscal 2022, consolidated net sales growth is expected to be up in the 30% range. Because of supply chain disruption and inflationary pressures combined with operational challenges at NauticStar, we expect our adjusted EBITDA margins to be in the high 16% range. We expect adjusted earnings per share growth to be up in the 30% range year over year. Due to project delays driven by supply chain and labor disruptions, we are lowering our capital expenditures estimate to $20 million for the year. Our guidance assumes minimal improvements in the supply chain environment for the remainder of our fiscal year. Despite the supply chain and profitability headwinds, we are confident in delivering another record year for our shareholders. I will now turn the call back to Fred.

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

Certainly. Ladies and gentlemen, if you have a question at this time, please press star then 1. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Our first question comes from the line of Joe Altabello from Raymond James. Your question, please.

Thanks, you guys. Good morning. So first question, kind of trying to understand the commentary this morning on supply chain, not a surprise. And your results in the quarter, because if I look at my model and I look at street estimates and I look at your guidance, you know, sales were well above, even though margins slightly above. So it sounds like supply chain issues weren't that big of a deal in the quarter, but perhaps got worse in April and maybe early May. So I hope to understand the commentary versus what you delivered this morning for 3Q.

While we met our guidance, the supply chain was disruptive and created inefficiencies. And so while it's been intermittent, it's gotten a bit worse in the last month or so. And we continue to meet those challenges, and we're very pleased that we delivered on the guidance. But make no mistake, supply chain was disruptive during the quarter.

Okay, but it did get a little bit worse. Any particular areas? I know you guys have talked about things like engines and windshields and computer screens in the past. Is there one specific area, or is it pretty widespread? And it sounds like it's largely at NauticStar, or am I misinterpreting that?

No, it's across the products, certainly affecting Mastercraft significantly as well as NauticStar. NauticStar, it can be items like engines. as well as other items. But at Mastercraft, it's been a whole range of different items. And we tend to solve the problem and move on, but it creates a disruption during that period. So it's not any one item. It's been a variety of different items. In Mastercraft's case, though, it's not engine supply. It's more like screens or windshields or tanks or a whole variety of items at different times.

Anything that has a chip in it is likely to have certainly inflationary pressures and is subject to disruption. Okay.

Just one last one for me, Agnes. Is it more on the manufacturing side from your suppliers or is it more on the logistics side in getting those components and parts to your facilities or both?

Okay. It's more on the manufacturer's side, but certainly there have been logistics challenges. But again, those tend to be short-term intermittent disruptions. Of course, what's going on in China with the lockdowns and so on has a ripple effect through the supply chain. And so we have to work hard sometimes with our suppliers to help them source their components.

On the logistics side, certainly we've spent more on expedited freight than we have in the past. And that is one of the inefficiencies associated with the supply chain disruption.

Okay, great. Thank you, guys.

Thanks, Joe.

Thank you. Our next question comes from the line of Craig Kenison from Baird. Your question, please.

Hey, good morning. Thanks for taking my questions as well. I guess I wanted to understand demand trends a little bit better. I think, first of all, you said you were sold out of some brands. Which brands are you sold out of for this model year? Sold out in all brands. All brands, okay. And do you, at this point then, are you taking, I guess, pre-orders, or are you taking deposits down on future model years?

No, we have not yet released pricing on pre-orders. 2023 model year, so that will happen shortly, at which point we will start booking those orders. Having said that, out of the orders that are booked, most of them are retail sold, but not all of them. So some dealers still have the opportunity to convert what would have been a stock order to a consumer order and give delivery within this model year.

Sorry, Craig. What were you saying? No, go ahead. I was going to say, really, our leading indicator of the demand is having discussions with our dealers on what they would like to buy for the upcoming fiscal year. And that demand is very strong, and they're the closest to the action as far as the consumer demand. So very strong indications of demand for fiscal 23.

So that makes sense from a consumer perspective. Are all of those boats spoken for?

All of which boats?

Yes.

No, they're not all retail sold. So consumer still has the opportunity in some dealers to be able to convert what would have been a stock order to their specific order. Got it.

And a disproportionate number of the boats are retail sold. So even though they're not all retail sold, it's higher than normal.

Makes sense. Okay. And then I guess I'm just reading the newspaper like everybody else and would love your perspective on the potential for a recession and how you prepare your business for what seems like an inevitable part of the business cycle.

Well, we think that our strategic pillars are a big part of that. And if you think about the way we're spending our money now and making investments in dealer acquisition and building up our marketing and lead management capabilities and what we're doing to continue to build a brand and the introduction of new models, we've been very aggressive there. And the recent models, while this year we're experiencing the results of having completed some introductions of fairly large models, We beefed up the smaller end of our product line and will continue to do so. So that positions us very well for a broad spectrum of price points as we head into the future. And remember, we have a quite variable cost structure. underlying. But in the near term, make no mistake, we're making investments today in dealer training and in distribution expansion and upgrading that's going to position us very well. And there's still markets that we're relatively underserving like international.

Yeah, and Craig, I would add, as we stated in the prepared remarks, if you look at where our dealer inventories are relative to historical levels, I think we quoted somewhere right around 50% down from 2019 and 2020 levels, our business as a whole has never been better positioned to withstand an economic downturn. so we still have the ability to produce it wholesale even with a significant decline in retail. So we'll obviously make sure that we don't ever go back to a situation where we've got too much inventory in the channel, but because we have such an empty basket, it does insulate us and give us the ability to continue to deliver it wholesale.

Thanks, George. And I guess lastly, if you don't mind, just curious what you've seen in terms of recent demand trends, like in April and May post-quarter. We've heard some noise about weather being a factor in some markets, but I'm curious if you've seen any evidence of a slowdown yet based on some of the economic headlines.

We haven't. I mean, obviously, I think the weather has impacted the delivery of some boats that we have shipped. But what we're hearing from dealers is that we're not seeing any orders or commitments from consumers to no longer take delivery of the boats. So from our perspective, the demand continues to remain strong. The consumer still is very interested in the boating lifestyle. We talk about some of the structural reasons behind people where they're living and how they choose to work and spend time with their family. We think all of those things remain very strong and position us. We think our consumer tends to be healthier overall, but we've not seen any or heard any orders being canceled. If anything, the weather has just more delayed the delivery of the boat to the end consumer, but not impacting overall demand.

Craig, there was an interesting... There was an interesting article last week in the Wall Street Journal talking about the migration of people to rural areas, and in particular that over 55 group, which obviously tends to be a very wealthy group, moving to specifically boat-centric areas. They were targeting around the country the areas of high migration, and it plays right into our strengths. Perfect. Hey, thank you.

You're welcome.

Thanks, Greg. Thank you. Our next question comes from the line. Mike Schwartz from True Securities. Your question, please.

Hey, guys. Good morning. Just maybe first start off with just a point of clarification. I think, Fred, maybe in your remarks, you had indicated in the third quarter that EBITDA margins for all brands were up year over year except for NauticStar. Is that what I heard? Yes. Okay. So just a follow-up to that, I guess NauticStar is 10% of your consolidated revenue, but it would appear that, I mean, I guess the math would tell me that NauticStar actually lost money in the quarter. Is that a fair observation?

Yes, that's true.

Okay. And did things, I guess as it pertains to NauticStar, did things progressively get worse throughout the quarter? I know there's some supply issues and particularly related to engines, but just maybe diagnose what's happened there. And I know you have new leadership coming in, but maybe what the strategic plan is there going forward.

The fundamental focus is on improving the operation. It was a company we acquired that was, you know, sole proprietor kind of business, very thin, and converting it, you know, to be a subsidiary of a public company was something that, we frankly didn't do a good job of initially. We ramped up production, and the systems that existed at the company essentially imploded on themselves. And so we have to rebuild all the fundamental operating systems from the ground up, and that's what we've been doing there. Thought we had the right leader in there to be able to do it. Turns out we didn't, so we made that change. We now have our strongest process leadership, function by function, involved in doing that. as well as some external resources. So, you know, it's a bootstrap ground up rebuilding the business activity and that's what we've been focused on during the quarter. And of course, sometimes when you undertake those activities, because that change was made in the third quarter we're talking about, you know, it doesn't always get better before you uncover some of the rocks and deal with those.

Right, and I fully appreciate that the supply chain, the operational environment has certainly gone against NauticStar as it has every company. But when I look back, that company was acquired, I think it was about five years ago, and I think revenue is basically flat versus where it was back then. I mean, is there a point in time where you begin to consider maybe strategic alternatives? Does it fit with the portfolio? Is it worth being part of a public company, et cetera? Yeah.

All alternatives are evaluated and considered by management as well as by the board.

Okay. Thank you. And just maybe another question quickly. Just provide us some color sense of just your – I guess your pricing strategy going forward and specifically as you move into model year 23. Have you – I guess, are you considering more kind of off-cycle or mid-cycle price increases? It sounds like something went through in the March quarter. So, maybe talk about how you think about pricing over the next 12 months.

Yeah. Hey, Mike. It's George. So, our preference, strong preference, and I think this goes for the dealers and the end consumer as well, is to not have to implement a mid-cycle price increase. So, We're spending a lot of time and doing a lot of work with our internal team and our vendor partners to try to estimate what the inflation for all of our material and labor is going to be for this upcoming model year. and try to bake that into our price increase here effective July 1st for all of our brands. So, you know, we're going to do everything we can to avoid having to do anything mid-cycle. It creates a lot of disruption both internally but obviously with the end consumer. And so, you know, we're very focused on delivering on that and doing the work now to make sure we get that nailed down as best as possible. Okay, great. Thank you.

Thank you. As a reminder, if you have a question at this time, please press star, then 1. Our next question comes to the line of Eric Watt from B. Riley. Your question, please.

Thank you. Good morning. A couple questions. I guess one is to follow up on Nautic Star. I know you're kind of looking at everything there to kind of ramp that back up. But just on the engine side, knowing that you made the switch or the – configuration to be able to accept, you know, Mercury engines. How quickly can you push that through to maybe offset some of the Yamaha logistics? How accepting have consumers and dealers been to this, and how likely, you know, will you be able to get into the order book of Brunswick to get, you know, what you would need?

Well, they have made modifications for many of the products and many of the engine offerings. We never expected Mercury to be a dominant proportion of their engine, but a strong secondary source. And Mercury was committed to increase that volume over time as they ramped up their capability. Having said all of that, Mercury just recently has become very constrained in terms of their production output. They've done a fantastic job of supporting Crest, a longtime customer, but as you can imagine, New customers that are growing are not necessarily on top of that food chain. So that has been a much more limited alternative to us more recently, again, due to the very recent extensions of issues that Mercury is having in getting some of their components from offshore. So having said that, back up, it's primarily, again, as it relates to NauticStar, a Yamaha problem.

Got it. And then Fred, I was wondering if you expected Mastercraft to be producing at record levels in the fourth quarter. I guess, you know, so I'm assuming that means, you know, by looking back historically, you know, much better than it was in Q3. I guess what changed around the supply chain or your production ability between Q3 and Q4 for Mastercraft to make that happen? And when you say producing at record, does that also mean shipping at record, or is there a risk that there could be a further buildup of WIP because of that?

expect a record quarter hands down in whichever dimension you choose to measure it by. And so it's been a stair-step increase, not without scrambles and fighting and disruption, et cetera, but that's a way of life, something that we've come to accept. Having said that, we've seen enough marginal improvement that as the supply chain made some marginal improvements, you know, we've been able to adapt to that and expand our volume. So if you remember, it was fourth quarter last year when we got hit really hard by the supply chain disruptions. So fourth quarter last year compared to this year is an easier comp. But sequentially, we expect very significant increase also from the third quarter. So, you know, we're already seeing that, and it's something that – we're absolutely committed to but feel very confident about the fourth quarter.

Keep in mind, on a model year-to-date basis, Eric, this is Tim, we're up almost 10% in unit volume at Mastercraft. So we've had nice increases sequentially quarter-to-quarter, and we're committed to overcoming the supply chain challenges to deliver on another record quarter for our fourth quarter fiscal year. Perfect.

Thank you both.

You're welcome.

Thank you. This does conclude the question and answer session of today's program as well as today's conference. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day.