MasterCraft Boat Holdings, Inc.

The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1. Good day, and thank you for standing by. Welcome to the MasterCraft Boat Holdings Fiscal Fourth Quarter and Full Year 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you need to press star 1-1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Tim Oxley, CFO. Please go ahead.

Thank you, Operator, and welcome, everyone. Thank you for joining us today as we discuss Mastercraft's fiscal fourth quarter and full year performance for 2022. As a reminder, today's call is being webcast live and will also be archived on our website for future listening. Joining me on today's call are Fred Brightbill, Chief Executive Officer and Chairman, and George Steinbarger, our Chief Revenue Officer. Fred will begin with a review of our operational highlights from the fourth quarter and full year. I will then discuss our financial performance. 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, September 8, 2022. The company assumes no obligation to update any statements, including forward-looking statements. Statements that are not historical facts are forward-looking statements and subject to the safe harbor disclaimer in today's press release. Additionally, on this conference call, we will discuss non-GAAP measures that include or exclude special or items not indicative of our ongoing operations. For each non-GAAP measure, we also provide the most directly comparable GAAP measure in our fiscal 2022 fourth 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 GAAP results in the investor section of our website. but that'll turn it all over to Fred.

Thank you for joining us today. Our business has executed extremely well against our strategic and operational priorities during fiscal 2022 in a very challenging and dynamic environment. We delivered record-setting performances for each quarter, which culminated in record net sales and earnings for the full year and for the second consecutive year. We grew our net sales by nearly 35% and our diluted adjusted earnings per share by more than 37% year-over-year, all on an organic basis. We far exceeded expectations in the fourth quarter by delivering net sales growth of nearly 40% and diluted adjusted earnings per share growth of more than 80%. This represents the seventh consecutive record-setting quarter and the sixth consecutive quarter of year-over-year net sales growth of more than 25%. as we leveraged our flexible operating model to capitalize on the strong consumer demand for our products. This exceptional performance was enabled by a year-over-year unit increase of more than 14% for the full year, resulting in the most wholesale units ever sold by the company. To be able to increase throughput and produce record units in a challenging supply chain environment clearly demonstrates our disciplined execution, operational excellence, and the strength of our team and our market-leading brands. The credit for this performance goes to our more than 1,700 employees who continue to execute our key strategic priorities in the face of adversity. Although we achieved another record year, our growth in net sales and earnings were constrained due to supply chain disruptions and labor challenges associated with COVID. These headwinds limited our unit shipments and created significant production inefficiencies during the year. They also resulted in additional costs not typically experienced in a normal production environment. Constrained production and higher production costs, combined with higher than expected inflation during the year, created significant margin headwinds. Guided by our consumer-centric strategy, we prioritized availability and quality over cost to meet the strong retail demand that we were experiencing. At the same time, our businesses definitely reacted to these cost pressures with strategic pricing and operational cost mitigation actions, which allowed us allowed our margins to recover, resulting in a record fourth quarter. The constrained production environment and robust consumer demand for our products resulted in dealer inventories near historic lows throughout the year. Low dealer inventory during the year constrained retail sales across the industry, including at our brands. Surveys of our dealers continue to reflect that inventory for our brands are too low, while no dealers in the surveys described inventories for any of our brands is too high. Our strategic focus on operational excellence enabled us to ramp up production throughout the year and to begin to replenish our pipelines. Nevertheless, our dealer inventories remain well below pre-COVID levels. At the end of fiscal 2022, our dealer inventories were more than 50% lower than they were at the end of fiscal 2019. Our fiscal 2023 production plan is fully supported by dealer commitments across all our brands. Although we believe product availability limited retail sales in fiscal 2022, we remain optimistic about the long-term resilience of our consumer. As consumer preferences continue to evolve, we expect that structural changes in where and how people choose to live, work, and spend their free time have generated strong consumer demand for the boating lifestyle that will persist over the long run, despite near-term retail volatility driven by macroeconomic headwinds. 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 enabling market share gains. In an uncertain macroeconomic environment, these investments position us to overdrive retail versus our competitors based on the quality of our premium brands and products and not just rely on price. Before moving on to a deeper dive into the performance of our brands, I wanted to touch on the announcement we issued earlier today relating to the sale of the NauticStar business. As we had announced on August 9th, we conducted a strategic review of the business, and as part of that review, considered a wide range of available alternatives to maximize shareholder value. Guided by our strategic framework, it became clear that exiting this business would allow us to concentrate on our best performing, highest potential businesses. This decision will enable us to focus on our Mastercraft, Crest, and Aviera brands and ensure that we are directing resources to the areas that will generate the greatest value for our shareholders. We believe that the strength and breadth of our resulting brand offerings and the investments we are making in product development, marketing, production, and operational excellence have positioned the company better than ever in our recent history. We will continue to make progress toward our overarching objective, of driving sustainable, accelerated growth by being the most consumer-focused recreational boat manufacturer. We remain determined to execute against each of our four strategic priorities, consumer experience, customer acquisition, operational excellence, and human capital development. Let me now briefly review some of the latest developments across our brands. Our Mastercraft brand performed extremely well during the year by producing the most units in the company's history and growing net sales to a record $466 million, despite part shortages that impacted production volume and margins. 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 increased production sequentially each quarter of the fiscal year and ended the year by producing at record levels during the fourth quarter. The ability to aggressively ramp up production during this time of limited product availability while maintaining our focus on quality was key to growing market share. As acknowledgment of the success of our strategic focus on the consumer and quality, during fiscal 2022, Mastercraft received the National Marine Manufacturers Association Customer Satisfaction Index Award for the 11th consecutive year. According to the most recent All-States Reporting SSI market share data, as of the rolling 12-month period ended March 31, 2022, Mastercraft increased market share over each of its closest three competitive brands by between 80 and 240 basis points. Mastercraft remains the number one brand in the fastest growing and highest margin category in the powerboat industry. For model year 2022, Mastercraft unveiled one of the most remarkable model year changes in its history. including the launch of four exciting new boats, the new Surfstar surf system, our new HydroLock power technology, and a myriad of other innovative and consumer-centric styling and convenience features, all of which have been incredibly well-received by our dealers and consumers. Mastercraft has followed up on that success with an equally impressive model year 2023 launch by recently announcing the all-new XT22T, the completely redesigned XT20, and a variety of new features that improve comfort, ergonomics, and technology across the product portfolio. In addition, Mastercraft plans to launch two more models during the year. With the launch of four new 2023 models, Mastercraft's most attainable and versatile product offerings will be completely refreshed and expanded. While we are continuing to see strong demand for our larger models, the full breadth of the lineup provides consumers a wide range of appealing price points. With new technology features and telematic sensors in each 2023 model, Mastercraft boats are now smarter than ever. With our standard onboard telematics, we have the ability to stay connected remotely to the boat. Using the all-new Mastercraft Connect app, boaters can monitor their boat's health, view and share critical data with their crew members, and alert their local dealer for service needs. Also new for 2023 is an optional flip-down swim step, which allows easy entry in and out of the water and can be operated easily by single hands. Mastercraft's exclusive partnership with Ilmore Marine has enabled boaters to experience the most efficient, high-performance towboat engines available. For 2023, our consumers are now able to upgrade to the new Ilmore Supercharged 6.2-liter engine. With 630 horsepower and 665 pound-feet of torque, The all-new supercharged 6.2 liter is the world's most powerful towboat engine and the cleanest engine over 500 horsepower. This new propulsion option allows even our largest Mastercraft boat, the X26, to accelerate and handle like a sports car, create a truly exhilarating experience on the water. Mastercraft's continued release of new products and features highlights the unrelenting emphasis on the consumer experience, innovation, and performance, which differentiates Mastercraft from the competition. Now on to Crest, which delivered another record-setting performance for the second consecutive year by shipping the most units of any year in the brand's history. Crest also set a record for net sales, which increased by more than 37% year over year, primarily driven by a nearly 28% increase in units, while achieving a gross margin of more than 20%. Since being acquired, Crest has grown net sales by 44% and has more than doubled adjusted EBITDA and has expanded adjusted EBITDA margin by nearly 500 basis points. Crest's ability to consistently drive growth and generate strong earnings demonstrates the success of the Crest acquisition and highlights our value-enhancing growth strategy. Consistent with our emphasis on quality, Crest has received the MMA's Customer Satisfaction Index Award every year since we acquired the brand. According to the most recent All States Reporting SSI and market share data, as of the rolling 12-month period ended March 31, 2022, Crest increased market share by 60 basis points. We are building upon Crest's strong foundation of quality, operational excellence, and profitability by accelerating innovation as we continue to execute on our growth strategy for the brand. For model year 2023, Crest recently announced the complete redesign of its signature line of pontoon boats. These models provide all-new attractive exterior designs and consumer-centric features while maintaining Crest's reputation for durability and safety. Crest also announced the 2023 Crest Current, an all-new, all-electric pontoon boat that is eco-friendly, innovative, low-maintenance, and comfortable. The Current is a direct reflection of Crest's constant efforts to push the boundaries of innovation to deliver a superior boating experience to our consumers. At Aviera, net sales were up 178% for fiscal 2022, driven by a 138% increase in units. Although the increase in overhead due to the Marin Island facility had a dilutive impact on Aviera's margins and profitability during 2022, we expect Aviera's production to continue to increase and margins and profitability to expand and achieve profitability in 2023. Since the first year of production in fiscal 2020, Aviera has grown net sales at a compounded annual rate of more than 90% in order to satisfy the exceptionally strong demand for this aspirational brand. For fiscal 2023, we expect Aviera's net sales to grow to at least $50 million. Furthermore, the introduction of new models in the near future will position the brand for continued revenue and margin growth. We anticipate our capacity at the Aviara facility will support at least $100 million in annual revenue over time. According to the most recent All-States Reporting SSI market share data, as of the rolling 12-month period ended March 31, 2022, Aviara increased its market share by 270 basis points in the 30 to 43-foot premium day boat segment. Since the introduction of the brand only a few short years ago, Aviara's retail sell-through rate has far exceeded our expectations, positioning the brand as the preeminent luxury day boat. Aviara ended fiscal 2022 with virtually no dealer inventory available for sale, resulting in an extremely lean pipeline going into fiscal 2023. Next week, we plan to publish our company's inaugural sustainability report, which communicates our commitment to environmental sustainability and promotes the health and safety of our employees and being good stewards for all our stakeholders. We recognize the importance of social and environmental responsibility and global sustainability, and we are committed to making the best products in the best way possible. In alignment with our strategic priorities and the foundations in place to ensure we hold ourselves to high standards in all aspects of our business, We look forward to making boating better and maintaining our company's position at the forefront of the marine industry. 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, it sales for the full year were a record $707.9 million, an increase of $182.1 million, or 34.6%, compared to $525.8 million for the prior year period. This increase was primarily due to higher wholesale unit volume, higher prices, favorable model mix, and higher options and content sales. Our gross margin was 22.9% for the year, a decrease of 180 basis points compared to the prior year. Lower margins were primarily the result of operational challenges at NauticStar, supply chain disruptions that limited production, and inflationary pressures that drove input costs higher. Price increases phased in over the course of the fiscal year partially offset these higher costs, and our gross margin increased each quarter sequentially from our fiscal first quarter. Operating expenses were $84.5 million for the year, an increase of $30.5 million compared to the prior year. This increase was predominantly due to a $23.8 million non-cash impairment related to the NauticStar business. General administrative expense increased as a result of continued investments in information technology and product development. Additionally, third-party consulting fees were recognized at the NauticStars segment as part of our operational improvement initiative. Selling and marketing expense increased due to prior year expenses being impacted by the COVID-19 pandemic. Although we strategically increased spend in targeted areas of our business, SG&A as a percentage of net sales was the lowest for any year since becoming a public company as we continue to prudently manage cost. Turning to the bottom line, adjusted net income for the year increased to a record $84.6 million, or $4.54 per diluted share, computed using the company's estimated annual effective tax rate of 23%. This compares to adjusted net income of $62.8 million, or $3.31 per diluted share in the prior year. Adjusted EBITDA was a record 121.1 million for the year, compared to 92.8 million for the prior year. Adjusted EBITDA margins were higher year-over-year for each of our segments except NauticSTAR. The dilutive impact on margins from NauticSTAR were approximately 330 basis points for the full year. As a result, our consolidated adjusted EBITDA margin was 17.1%, for the full year, down from 17.6 percent for the prior year. As for the fourth quarter results, net sales, profitability, and earnings all benefited from strong average unit selling prices in our delivery of the highest wholesale unit volume for any quarter in the history of the company. Net sales were a record 217.6 million, an increase of 62.1 million, or 39.9 percent compared to the prior year. In addition to higher prices, net sales were driven up by an 18.8% increase in unit volume, favorable model mix, and higher options and content sales. Gross profit for the quarter was a record $55 million, and a gross margin was 25.3%, a year-over-year increase of 130 basis points, and a sequential increase from the third quarter of 280 basis points. Gross margin improved year over year principally due to pricing actions which were fully phased in for the fourth quarter and which offset higher materials and overhead costs. The dilutive impact on gross margin from NauticStar was approximately 370 basis points for the fourth quarter. Adjusted income increased to $32.1 million for the quarter, or $1.77 per diluted share, computed using the company's estimated effective tax rate of 23%. This compares to adjusted net income of $18.5 million or $0.98 per diluted share in the prior year period. Turning to our balance sheet, we ended the quarter with more than $134 million of total liquidity, including $34.2 million of cash and $100 million of availability under our revolving credit facility. Working capital has increased by 23.9 million during the year. This was primarily driven by our raw material and work-in-process inventories due to increased production and increased safety stock to mitigate supply chain disruption. During the year, we reduced our outstanding debt by nearly 37 million, and we ended the year with net leverage of 0.2 times adjusted EBITDA on a trailing 12-month basis. Our balance sheet positions us exceptionally well and provides us with ample financial flexibility to ensure sound operations through the business cycle and the ability to grow aggressively in alignment with retail demand. Given our recent operating performance, financial results, and the wholesale visibility we currently have, we believe our stock represents an outstanding value at recent prices. Because of this view, we spent approximately $25.5 million to purchase to repurchase more than 975,000 shares of common stock during the year. This represents more than 50% 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. Beginning with our fiscal first quarter of 2023, we report the financial results of the Nautic Star business as discontinued operations, separate from the results of our continued operations. As such, the following outlook represents expectations for continuing operations only. Coming off a period of incredibly strong retail demand, industry-wide retail sales has recently shown signs of slowing, and the likelihood for a general weakening of the economy appears to be increasing. As we have signaled in the past, we are committed to maintaining our pipelines at healthy levels, which means our wholesale unit sales will be determined by the strength of retail demand. Given this, we believe it prudent to plan for a range of potential retail demand outcomes for fiscal 2023. Due to the uncertainty of the macroeconomic environment, we will provide fiscal 2023 guidance using ranges. The lower end of the range reflects Our anticipated results should retail demand trends worsen over the course of the fiscal year. The upper end of the range reflects our expected results based on a more optimistic view of the retail decline. For full year fiscal 2023, consolidated net sales is expected to be between $580 million and $615 million, with adjusted EBITDA between $105 million and $115 million. and adjusted earnings per share between $3.89 and $4.31. We expect capital expenditures to be approximately $30 million for the full year. For the first quarter of fiscal 2023, consolidated net sales is expected to be approximately $165 million with adjusted EBITDA of approximately $33.5 million and adjusted earnings per share of approximately $1.30. dynamic business environment, we are confident in delivering strong financial results for our shareholders. I'll now turn the call back to Fred.

Thanks, Tim. For the second consecutive year, we achieved record-setting results, introduced an array of new and innovative products across our brands, produced industry-leading organic sales growth, and gained market share, all while navigating arguably one of the most challenging business environments in recent history. These results would not have been possible without the hard work and dedication of our team, who continue to execute against our strategic priorities. During fiscal 2022, our focus was largely on product availability and quality to meet the strong retail demand that we were experiencing. An important focus for fiscal 2023 will be on building the highest quality products possible for our consumers and delivering on our commitment to operational excellence. We are dedicated to ensuring our dealer pipelines remain healthy to avoid being over inventory. The potential for a weakening economy caused us to approach our wholesale production plan for fiscal 2023 with a prudent level of conservatism. Even so, if our business performs to the lower end of our guidance range, we will deliver the second best year in the history of our company in terms of both revenue and earnings. Furthermore, As we clearly demonstrated during the past two years, our flexible business model will allow us to maximize our wholesale performance and to generate outstanding financial results should retail demand outpace our expectations. We've been judicious with our pricing strategy for fiscal 2023 as we seek to match expected cost inflation with price increases to avoid a mid-year price increase and the associated confusion and disruption for our dealer partners and consumers. However, Should retail demand continue to slow, the guidance we have provided reflects flexibility to ensure that we can defend our market share while maintaining strong profitability. Our capital allocation strategy is consistently prioritized balance sheet resiliency and growth while looking for prudent opportunities to return capital to shareholders. In addition to the organic growth potential of our businesses, opportunistic acquisitions will continue to be a part of our growth strategy. As Tim mentioned, Our financial position is incredibly sound. Our cash balance, future free cash flow, and access to low-cost debt financing provide us with the financial flexibility to grow as opportunities arise. Our consumer-centric business model is proving to be resilient through a range of business cycles, and we continue to be confident in the future prospects for the company. As we manage through a dynamic business environment near-term, we remain committed to long-term value creation for our shareholders and all stakeholders by focusing on sustainable, profitable growth. 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.

Thank you. As a reminder, to ask a question, press star 11 on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from Joe Altabello with Raymond James. Your line is open.

Thanks. Hey, guys. Good morning. I just want to start on the commentary regarding retail sales showing signs of slowing. Maybe a little more color there. When did you start seeing that? Is that the industry broadly or your categories in particular? Maybe just a little more color would be helpful.

Yeah. Hey, Joe. Good morning. It's George. Yeah, I think, you know, we're obviously, you know, I think where we started to see some slowing is in that fiscal fourth quarter where we started to see, I think, early in the year, retail was certainly constrained due to lack of inventory. But I think more in that fourth quarter, we started to see and hear from dealers and consumers. you know, due to some of the economic indicators that we started to see a slowdown. So, you know, that's real. And we're seeing it pretty broadly across the industry. I think that's reflected in the SSI data that's come out more recently. So I don't think it's specific to our segments. I think broadly we're seeing that. And certainly that went into the thinking around how we thought about the next 12 months related to our guidance.

Hey, Joe, you know, the interesting thing from my perspective was in the fourth quarter, it was as we were scrambling to provide dealers with inventory, you know, to have enough for the selling season. It was more like, hey, instead of five leads, you know, I have two leads and I can still sell every boat that I'm receiving. That was kind of the attitude, but clearly it was coming off the peak level of excitement. In the first quarter this year, from my perspective, dealer attitudes are still incredibly positive so this is not a reaction to dealer sentiment which I think is still very very positive it's more our look at the macroeconomic context we're in some of what we've seen at retail certainly in terms of slowing demand for the industry but just projecting out and saying look you know in the near term Are conditions likely to get better or are they likely to continue to be tough? We continue to have significant rate increases by the Fed. We're looking at quantitative tightening. We're looking at recessions in Europe. You know, it's not a scenario that makes us want to get out over our skis. So that's kind of the context. But let's face it, if the headwinds pass and we see acceleration in the second half of the year, we'll respond.

No, it's helpful. And I guess just to follow up on that, Fred, I mean, if you think about, you know, where we were three to six months ago talking about, you know, a pipeline fill opportunity, I think on your last call you mentioned that you didn't expect inventories to normalize until fiscal 24. This commentary sort of flies in the face of that a little bit. So help us understand, you know, where we are from a pipeline fill opportunity and why that doesn't seem to be the case you know, beyond Q1, it sounds like?

Well, it's very simply that at the rate we're producing at, we're able to refill the pipeline relative to that slowing retail demand that we've been seeing recently. So, you know, once again, we have more aggressive targets for inventory turnover at our dealers, but the change from then till now is based on the change in retail outlook. So we're able to refill the pipeline, restock the pipeline. I expect us to be in an optimal position prior to the next selling season.

Okay.

Thanks, guys. Thank you. One moment. Our next question comes from Craig Kennison with Baird. Your line is open.

Hey, good morning. Thanks for taking my questions as well. Just to follow up on what Joe asked about current consumer trends, I'm curious if you have a feel for what has caused maybe demand to slow down and whether you think it's the interest rate environment, it's inflation, and just the cost of a boat today. Is it confidence? I know it's a lot of factors, but I'm wondering if you could identify the ones that you think are the most prominent.

I'll take a cut and let the other guys jump in. To me, first and foremost, it's confidence. It's kind of sentiment. And for the reasons I stated in the response to Joe's question, I think people are getting more concerned about the economic outlook, and they're seeing the results reflected in the stock market, which is down substantially this year. So I don't think for most of our consumers, it's a question of whether they have enough money to be able to buy the boat or be able to make the purchase. It's one of those situations where I think they're just stepping back and being more cautious right now. So I don't think overall in the long term we're going to miss demand. I think it's going to be more of a postponement of demand. They need to feel like, in my mind, to reaccelerate like the economic headwinds have bottomed out and we're on the other side of this. And I don't think that's the current set. As you know, as every week and month goes by, the outlook tends to be more negative in terms of likelihood of economic slowdown.

That's great. Thank you. And then are you able to put sort of a numerical range on the retail forecast that is embedded in your financial guidance?

Yeah, Craig, I think about it in, you know, our guidance kind of assumes that retail on a consolidated basis with our brands is down in the mid-teens to low 20% range this year.

That's volume?

That's based on units, correct.

Thank you. And then just from a, I guess from an ASP standpoint, I mean, we've had significant inflation. I'm just curious, you know, when you consider mix inflation, maybe getting control over inflation, how should we think about ASP trends in each of your brands?

Yeah, Joe, I'm sorry, Craig, this is Tim. Yeah, for Mastercraft, we think that we're going to be up in the mid-single-digit range. Crest is probably going to be in the low-teens range, and Aave are up in the 20% range, you know, considering mix and pricing and all those considerations.

Great.

Thank you. You're welcome.

Thank you. And I'm showing no other questions in the queue. I'd like to turn the call back to management for any closing remarks.

We're good. Have a great day. Thank you for participating.

This concludes today's conference call. Thank you for participating. You may now disconnect. The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1.