MasterCraft Boat Holdings, Inc.

Good day and thank you for standing by. Welcome to the Q2 2023 Mastercraft Boat Holdings Incorporated 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 an answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. 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, CEO. Please go ahead.

Thank you, Operator, and welcome, everyone. Thank you for joining us today as we discuss Matchcraft's second quarter performance for fiscal 2023. As a reminder, today's call is being webcast live and will also be archived on our website for future listening. With me on this morning'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, and 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 8, 2023. The company assumes no obligation to update any statements, including forward-looking statements. Statements that are not historical facts or forward-looking statements and subject to a safe harbor disclaimer in today's press release. Additionally, on this conference call, we will discuss non-GAAP measures that include or exclude special or items not indicative of our ongoing operations. For each non-GAAP measure, we also provide the most directly comparable GAAP measure, our fiscal 2023 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's a slide that summarizes our financial results in the investor section of our website. As a reminder, unless otherwise noted, the following commentary is made on a continuing operations basis. With that, I'll turn the call over to Fred.

Thank you, Tim, and good morning, everyone. Net sales, diluted adjusted earnings per share, and adjusted EBITDA were all the highest for any second quarter in the company's history, and it is our ninth consecutive year-over-year record-setting quarter. When compared to the second quarter of fiscal 2022, net sales were higher by more than 10%, adjusted EBITDA grew by nearly 10%, and adjusted net income per share grew by nearly 19%. During the quarter, strong operating results and diligent working capital management allowed us to generate the most cash flow from operations and free cash flow in a company's history. This exceptional operational and financial performance was enabled by our strategic focus on the consumer and through investments in people and operations. During the quarter, we continue to make progress in building much-needed dealer inventory ahead of the summer selling season. As of the end of the second quarter, dealer inventories are approximately 55% higher than the second quarter of fiscal year 2022 and about 20% lower than the second quarter of fiscal year 2019. We believe that the business process and dealer network improvements we have implemented over the past few years will allow us to maintain more levels of dealer inventory than was typical in the past. Early boat show results, recent retail sales data, and industry commentary suggest a return to historical seasonal demand patterns. For historical context, approximately 70% of the annual powerboat retail sales occurred during the five-month period from March to July. To date, both dealer and consumer demand remain resilient, and dealer inventory and production plants position our dealers to capitalize on the boat show and summer selling seasons. Early boat show results are up for Mastercraft and Crest versus both last year and 2019 levels. As a result of the reversion to historical seasonality, we expect to have a clear picture on retail demand as we progress through the third and fourth quarters. We continue to closely monitor economic conditions and evaluate the potential impact on our business. Since last year, there have been no significant changes in our view of macroeconomic or other demand indicators. and the associated implications for the upcoming summer selling season. We remain prudently conservative in our approach to wholesale production for fiscal 2023, and we have developed plans for a range of potential retail demand scenarios. Given the high degree of macroeconomic uncertainty and the historical cyclicality of our industry, we are committed to running the business in a manner that prioritizes strong performance throughout the business cycle. Guided by this philosophy, our intent is to maximize our fiscal 2023 financial performance while maintaining healthy dealer inventories. Moving on to supply chain, the general environment, including cost inflation and delivery disruption, is improving, with certain pockets of lingering risk expected to continue for some time. Tight supplies and longer than normal lead times on certain components, including those with upstream exposure to Asia, continue to intermittently affect our production schedules. However, we do not expect supply chain disruption to be a constraint on our full year production. The tireless efforts of our world-class supply chain team have enabled us to both provide consistent production and capital efficient inventory control. This cautious optimism reflects a welcome change from the incredibly challenging supply chain environment in the past two years. Our strong operating performance has resulted in record cash flow, driven by record earnings and diligent working capital management. We've built a fortress balance sheet that provides us with abundant financial flexibility. We are well positioned to pursue our capital allocation priorities, first and foremost of which is investment in growth. We are laying the foundation for future growth by making targeted investments and initiatives that will take advantage of the strong underlying secular industry trends. Let me now briefly review some of the latest developments across our brand. Our Mastercraft brand performed exceptionally well by growing net sales to a second quarter record of nearly $109 million and expanding adjusted EBITDA margin by 80 basis points year over year. This tremendous result is due to the extraordinary efforts of the Mastercraft team and the continued success of Mastercraft's operating model. Mastercraft's best-in-class powerful and clean engines and expanded entry and mid-price product offerings have been very well received. Mastercraft has gained share in six of the last seven months and remains the number one brand in the fastest-growing and the highest-margin category in the powerboat industry. At Crest, net sales were up by more than 23% year over year, continuing a trend of generating exceptional profitability. Crest achieved a gross margin of nearly 20% for the quarter. Since its acquisition in fiscal 2019, Crest has doubled net sales and expanded gross margin by 340 basis points. Crest has and will continue to add points of distribution to its dealer network, fulfilling a key element of its growth strategy. On the innovation front, Crest's new all-electric pontoon boat, the current and newly redesigned Classic Series, have both been very well received by dealers and boat show participants. Crest's sales and earnings growth demonstrates the success of the Crest acquisition and highlights our value-enhancing growth strategy. At Aviera, net sales were up by more than 75% compared to the prior period, driven by a 48% increase in units and higher prices. According to the most recent All States Reporting SSI market share data, as of the rolling 12-month period ended September 30, 2022, Aviera increased its market share by 280 basis points in the 30 to 43-foot premium day boat category. Aviera continues to outpace all competitors, further solidifying the brand's position as the preeminent luxury day boat. looking ahead aviera will soon begin to launch innovative new models these introductions will represent the next phase in aviera's product evolution and will position the brand for continued revenue and earnings growth we'll now turn the call over to tim we'll provide more detailed analysis of our financial results tim thanks fred we delivered another excellent quarter financial performance focusing on the top line that sells for the quarter for 159.2 million

an increase of $14.8 million or 10.2%. The net sales increase reflects higher prices, partially offset by slightly lower unit sales volume and higher dealer incentives. Incentives increased primarily due to greater floor plan financing costs driven by higher interest rates and recovering dealer inventory levels. When compared to the historically low amount in the prior year, discounting was also higher as we anticipate a return to more historical patterns of consumer demand and seasonality. For the quarter, our gross margin was 24%, a decrease of 120 basis points when compared to the prior year period. Lower margins were primarily a result of higher costs from inflationary pressures, changes in mix, higher dealer incentives, and increased warranty costs, partially offset by higher prices and improved production efficiencies. Operating expenses were $11.8 million for the quarter, or 140 basis points lower as percentage of net sales compared to the prior year. Turning to the bottom line, adjusted income for the quarter increased 11% to $21.3 million or $1.20 for diluted share. Computed use in the company's estimated annual effective tax rate, 23%. This compares to an adjusted net income of $19.2 million or $1.01 for diluted share in the prior year period. Adjusted EBITDA increased nearly 10% to $29.8 million for the quarter, compared to $27.2 million in the prior year period. Adjusted EBITDA margin was 18.7%, down 10 basis points from 18.8% in the prior year period. Our balance sheet remains incredibly strong as we ended the quarter with nearly $190 million of total liquidity, including nearly $90 million of cash in short-term investments and $100 million of availability under our revolving credit facility. We also ended the quarter with zero net debt. Strong earnings and favorable working capital management has translated to record cash flow from operations and free cash flow. Year-to-date, we have generated a record $79.9 million of cash flow from continuing operations. We're nearly 200% higher than the prior year period. Year-to-date free cash flow from continuing operations was a record, $67.8 million, or more than 210% higher than the prior year period. Our balance sheet positions us exceptionally well, 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, strong balance sheet, and our positive long-term outlook, We believe our stock represents an outstanding value at recent prices. During the quarter, we spent approximately $4.8 million to repurchase nearly 225,000 shares of our comp stock. To date, we have spent nearly 70% of our $50 million program authorized in June of 2021. Cumulative activity under our share repurchase program provided an 8% benefit to our Q2 adjusted earnings per share. We expect to continue to opportunistically return cash to shareholders through the program while prioritizing financial flexibility and high return investments in the business that generate growth and long-term shareholder value. Looking forward, we are raising our guidance for the full year based on our strong performance and incremental retail demand visibility. We will continue to monitor the strength of retail demand and adjust our production plans as appropriate to maintain healthy dealer inventories. Our guidance continues to reflect the potential for a range of retail demand scenarios as we approach the all-important summer selling season. The full year fiscal 2023 consolidated net sales is now expected to be between $620 million and $640 million, with adjusted EBITDA between $111 million and $118 million. and adjusted earnings per share of between $4.40 per share and $4.66. We continue to expect capital expenditures to be approximately $30 million for the full year. For the third quarter fiscal 2023, consolidated net sales are expected to be approximately $158 million, an adjusted EBITDA of approximately $26 million, and adjusted earnings per share of approximately $1.04. Despite the dynamic business environment and macroeconomic uncertainty, we are confident in delivering strong financial results for our shareholders. I'll now turn the call back to Fred for closing remarks.

Thanks, Tim. Our business has performed extremely well through the first half of fiscal 2023, delivering record financial results which have exceeded expectations. Our diligent approach to business planning and our best-in-class operating model have allowed us to operate efficiently and have provided us with the confidence and agility to respond to a range of potential retail demand scenarios. A robust portfolio of innovative products, healthy dealer inventory levels, and our flexible production capabilities position us to capitalize on the boat show and summer selling seasons. Despite significant macroeconomic uncertainty, we remain on track to achieve the second best year of financial performance in the company's history. We look forward to delivering strong results by prioritizing resilience throughout the business cycle while maintaining a key emphasis on the pursuit of long-term growth opportunities and thereby generating exceptional shareholder returns. Operator, you may now open your line for questions.

Certainly, but I'd like to note a correction. Tim Oxley, CFO, was our beginning host today. In addition, if you would like to ask a question, please press star 11 on your telephone. And our first question will come from Joe Altabello of Raymond James.

Thanks. Hey, guys. Good morning. So a couple questions on the guidance. I guess first, if you look at the top line, you beat the sales guidance that you gave us three months ago by about $9 million, raised a full year by $22 million, at least at the midpoint. Is that on a better demand outlook? And maybe help us out. Is that coming from more units or more pricing?

I think, you know, when you think about the retail demand environment, I don't think that our overall view of industry retail has changed, but obviously we've got an additional 3 months of visibility in terms of how our brands have performed at retail. We're continuing to take market share. So I think that is a factor in how we have adjusted our guidance to reflect our confidence in our ability to deliver retail against a challenging environment. With that said, we obviously still have an eye out to that March through July period, which accounts for 70% of retail. So we still, you know, are being very prudent and cautious with our production plan and our guidance gives us the flexibility to modulate our retail, I'm sorry, our production to make sure that we are achieving the turns and healthy inventory levels that we've committed to providing both our dealers and our brands.

And also, you're still looking for a sales decline in your categories this year of, call it, 15% to 20%. Is that correct?

That's correct. We're still kind of, from an industry standpoint for our fiscal year, we still expect retail to be down in that mid-teens level. Okay.

And then on EBITDA, the beat was a little bit better than the guide. So maybe tell us where the incremental margin pressures are coming from in the second half.

Sure. The floor plan financing costs are kind of number one as interest rates continue to grow, as we are successful in restocking the dealers. That's a big one. Another important one is mix. As George mentioned, we try to build what's retailing, and we've introduced some new NXT models that have been very successful in the marketplace. So we're mixing down to some of our more models as a result. Got it. Great. Thank you, guys.

Thanks, Joe.

One moment.

And our next question will come from Craig Kennison of RW Baird. Your line is open.

the promotional environment and, you know, maybe what the trends you're seeing across your three main brands.

Hey, Craig, you kind of broke up there for a minute. I caught the last piece of that. Would you mind repeating the question?

Sure. Sorry about that. My question is on the promotional environment. Would you please comment on trends across your three brands? Yeah, sure.

So, um, you know, given what we are seeing is kind of a return to more retail seasonality with that. We've also seen a return of higher levels of discounts. Certainly higher than we've seen the last past couple years. Um, and so, you know, that that's pretty consistent across our brands. Uh, probably not as much as, uh, uh given where that brand is positioned but certainly with our crest pontoon product and the the price points that we have there uh we are you know seeing higher levels of promotional activity and then also in the skiway category we have seen a return of promotions um with that you know we we try to be you know good partners with our dealers so we're really working with them to help how do we help them drive retail and so that's a combination of not just us providing Um, promotional activity or support for our dealers, but, you know, helping our dealers get more aggressive with pricing and that so far they've been very receptive to that. And I think that's very much our approach to how we want to work with dealers and be very dealer centric as much as we are consumer center.

Craig, I'd like to add that while the promotional environment is higher than the last couple years, it's not backed up to a historical level. So we're comparing to a period where it was kind of an all-time low.

Yeah, that's very helpful. Thank you both. And then just on the floor plan issue, a lot of dealers, you know, are struggling with the fact that there's interest costs now on all of their inventory. Just wondering what the pushback has been among dealers to take on inventory and whether maybe you have the infrastructure in place to be more demand driven and operate with less inventory in the channel and keep that floor plan expense down.

Yeah, so I'll answer the latter part first. You know, we absolutely have the flexibility and we believe that we can operate our businesses and take market share and get the dealers the product they need while maintaining lower levels of inventory in the channel versus historical levels. We think the dealers very much view that similarly as we do. And so that's very much built into our financial plan and how we manage the business every day. We're tracking retail activity every day, every week. And so we're making sure that our production is getting inventory into the markets and the dealers where it's retailing. And as I mentioned previously, you know, we're very much focused on how do we help our dealers retail product, not just pushing them wholesale inventory. In terms of the floor plan financing, I mean, every OEM's programs are different, but with our free flooring, the flooring support that we provide, right now we're not getting any pushback from our dealers in terms of taking product. And so we feel very confident that our programs are structured in a way that really allows the dealer to minimize the stocking risk. throughout the selling season and allows us and positions us to be able to get the inventory to the dealers to maximize on our retail opportunities.

Just to follow up on that, how long does the free flooring last for dealers, and how does that flow through the income statement? Is that a contra revenue, or is there a cost?

Correct. It is contra revenue, and Every boat has at least six months of free flooring, and if it's bought early in the season, say July, it'll get up to nine months, so between six and nine months. There's also a cash alternative, which is taken advantage of primarily in Q4 of our fiscal year.

Great. Thank you.

And our next question will come from Drew Crum of Stiefel. Your line is open, Drew.

Okay, thanks. Hey, guys, good morning. Maybe just sticking with the brand commentary and specifically on Mastercraft, maybe a little more detail on the unit sales performance down 12% year on year and a quarter and any commentary in terms of what you're seeing at retail in terms of consumer demand. And then separately on Aviera, can you talk about how the brand is tracking relative to some of the financial targets you had set out for the fiscal year?

I think from a unit perspective at Mastercraft Group, we have gone back to a more level-loaded production schedule throughout the year. That's a big part of the efficiencies that we get in manufacturing. So I think some of the year-over-year comparisons are challenging, especially when you compare to last year. And some of our production was more dictated by supply chain and product availability than, you know, what we would consider more of a normal manufacturing cadence. So, you know, this year reflects a more level-loaded production versus what we expect to shift throughout the year. And that's going to influence the year-over-year comparisons. But nothing we would note there from a negative perspective, nothing from a retail perspective that's driving that more so than just manufacturing efficiencies. And then the second part of your question, Aviar.

I'll take that one. Aviar is on track. You know, this year we expect them to at least break even, and that's a significant improvement from the past year and a stair step toward where we see that brand in the future. So, you know, there may be variation month to month, but certainly quarter to quarter and overall for the year. we see steady opportunity to continue to improve the margin and profitability.

And it's a significant improvement over the prior year.

Got it. Okay, very helpful. And then maybe one for Tim. Tim, you talked about some record cash flow metrics. Any notable call-outs in the quarter and, you know, what should we expect in the second half of the year for cash flow?

I think you're going to continue to see some improvements in the working capital. Partly it's a result of supply chain, you know, greater supply chain reliability, if you will. But it's not going to be as much as you saw in Q2. But it's just going to be a continuing theme for us so we generate strong cash flow, and that's going to continue in the second half. Got it. Thanks, guys.

One moment. Our next question comes from Eric Wold of B. Raleigh Securities. Your line is open.

Thank you. Good morning. A couple questions kind of follow up on what's been asked so far, I guess. You made the comment that you're kind of watching inventories and kind of expect to be a little more efficient with inventories and possibly lower inventory levels. I think you said you're about 20% below Is this the right level here, or what do you think the right kind of percentage decline or lower level from 19 is the right level going forward to be efficient in the dealerships?

Can I maybe respond to your question slightly differently, but hopefully tell you how we think about it, how we look at it? We estimate what we think retail demand is going to be. We back into what we think is appropriate level of inventory based on turnover and based on model by model mix. And that's the way we drive what we think is the right level now. We certainly can compare to 19 or 20 or any other period, but that's not the way we set our goals. We set our goals based on looking forward and our expectation of retail sales and overall, you know, industry trends and segment trends. So in that regard, we're getting very close to where we want to be at Mastercraft and probably in very good shape at the Crest brand. So... The other thing I think that's important to consider is we've expanded distribution significantly, and those additional points of distribution take additional inventory to support across the brands. So when you merge that all together, the key is that we expect to turn inventory at our dealers at a much higher rate than we have in the past.

Got it. That's helpful. I guess this last question. You mentioned some of the pressure on margins is mixed as you've introduced some lower price NXT models based on where you're seeing demand. Maybe talk a little bit about what other kind of demand drivers you're seeing in terms of where consumers are shifting their purchasing. Are they going towards lower models overall? Are they going to you know, less options. I guess maybe kind of get a sense of is that the only indication of where you're seeing maybe some pressure on spending or are there others as well?

Yeah, what I would say, we're not seeing a real change in the consumer habits in terms of options and whatnot. I think part of it is in our NXT portfolio. We previously had 3 models. And within the last 12 months, we've added 2 incremental models. So part of it is just. As we level load our production and try to make sure that we're getting those new models into the marketplace. into the consumers that are demanding that new product, that is partly driving the mix towards some of the higher percentage of NXT production relative to prior years. But, you know, we're seeing pretty good, you know, very strong ordering patterns throughout the portfolio, both at our premium X line all the way through our midline and NXT models. So, and the consumers continue to option up the boats and put different features on. That being said, we are seeing a higher percentage of stock boats. You know, the dealers are ordering more boats that are going into stock inventory versus the last couple years, we had a high percentage of retail sold boats being ordered where the customers were ordering the boats, speccing them out to their particular needs. And when you have a higher percentage of retail sold boats, you tend to see more options, more, you know, higher margin type of options selected versus a stock boat. So, it's really less about what we're seeing from the consumer and more about just the mix of retail sold to consumer retail ordered, which is consistent with kind of past seasonal type of patterns.

Eric, I just want to say too, sometimes you, you have a segment mix going on with Crest versus Mastercraft that can impact margins, as well as, again, just a reminder, in the model mix, we refreshed the NXT and the XT product offering, and so those have been doing very, refreshed and expanded, so those have been doing very well. And then in some other cases, too, in the COVID era, we were able to constrain, if you will, the mix of models based on our ability to, you know, manage throughput. And now we're much more responding to true retail demand. So there's some reversion there and some models there that we've constrained in the past that, you know, there's pent-up demand for.

Got it. Helpful, both of you. Thank you.

One moment. And our next question comes from Michael Swartz of Truist.

Your line is open.

Hey, guys. Good morning. Just maybe a quick question on I think you've mentioned that NXT is kind of margin diluted in the back half of the year. But I think if we go back a couple of years, the commentary was there was no real difference between kind of the premium Mastercraft and the NXT segment. you know, sub-brand, if you want to call it that. So I guess, has something changed in that margin relationship between the two, or is this totally a commentary just around kind of content or attachment rates?

It's really content. The NXT models don't have the same level of Of options available to them. So, when those are ordered, because we have very healthy margins on the, on the options, they tend to have on a, on a baseball basis. It's comparable. But when you add the options in, that's when the margin erosion comes. Comes about it's not, it's not terrible, but it's less and.

Mike, I would just comment, you know, we have competitors that are being very aggressive in terms of pricing, and so it's very important for us to make sure we content these models so they can compete with that pressure.

Okay, that's helpful, and that kind of leads into the next question. I think, Fred, you had made comments just on maybe what you've seen at some of the early boat shows, and I think you've said you're you're up both year over year and versus 2019 levels. But just a clarification on that, is that in units or is that in dollars? And then maybe just clarify a little bit on some of the discounts or incentives or rebates that are being offered at some of these shows. Is there any way to quantify maybe the level of discounting this year versus 2019? Well, the first comment is,

With the phone shows, that's with regard to units. That's the way we track those. We track it with a two-week window after the end of the show. So we're giving you the results from those shows that we've had, you know, the shows have taken place and we've had a couple of weeks after to finish up closing leads. So that was one part of your question. And the second part, George?

Yeah, in terms of promotional activity, I think, as Tim mentioned earlier, while we're certainly seeing higher promotional activity this year versus the last 2 years compared to 19, we're not seeing, we're not back to 19 level promotional activity. If you recall, we ended 19 with heavy inventory, which resulted in heavy promotions. And I would say, you know, as a whole, we're probably not back to that level, but I think certainly our expectation is that the competition will get more aggressive as we get into the retail selling season, depending on what happens in the macro economic environment and Our guidance and our plan provides us the flexibility to appropriately adjust our level of discounting to make sure that we are appropriately taking share where we expect to. But I would say it's still lower than where it was in 2019.

Sure. If I had to put a number on it, I mean, Q2, the combination of retail rebates as well as additional floor plan costs probably would be a headwind of about 150 basis points if I were to... Draw out a number.

Okay. And I assume that's a year-over-year comparison.

That is correct.

Okay. And then just final question for me, just more of a house, maybe a housekeeping question. In the second quarter, I think there was a pretty big drop in OPEX dollars. Was there something timing related in that, or was this kind of the new run rate that we should be thinking about going forward?

The estimate of capital expenditures for the year hasn't changed. No, no, no.

I'm sorry. Not CapEx. Operating expenses. So SG&A and sales and marketing.

There is some seasonality there, Mike. You know, obviously, we've got a return to boat shows, so you're going to see some higher operating, especially on the sales and marketing side in the second half of our year as we kind of go back to boat shows, travel expenses, supporting the boat shows. Those types of expenses are going to be more back-end loaded or second half of the year loaded as an example. So, I would expect to see higher levels of operating expense in the second half of the year versus the first half. Okay, perfect. Thank you.

And I'm showing no further questions. This concludes today's conference call. Thank you for participating. You may now disconnect. The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 11. Hello. Thank you. Thank you. Thank you. Good day and thank you for standing by. Welcome to the Q2 2023 Mastercraft Boat Holdings Incorporated 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 an answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. 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, CEO. Please go ahead.

Thank you, operator, and welcome, everyone. Thank you for joining us today as we discuss Matchcraft's second quarter performance for fiscal 2023. As a reminder, today's call is being webcast live and will also be archived on our website for future listening. With me on this morning's call are Fred Brightbilt, 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, and 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 8, 2023. The company assumes no obligation to update any statements, including forward-looking statements. Statements that are not historical facts or forward-looking statements and subject to a safe harbor disclaimer in today's press release. Additionally, on this conference call, we will discuss non-GAAP measures that include or exclude special or not indicative of our ongoing operations. For each non-GAAP measure, we also provide the most directly comparable GAAP measure, our fiscal 2023 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's a slide deck summarizing our financial results in the investor section of our website. As a reminder, unless otherwise noted, the following commentary is made on a continuing operations basis. With that, I'll turn the call over to Fred.

Thank you, Tim, and good morning, everyone. Net sales, diluted adjusted earnings per share, and adjusted EBITDA were all the highest for any second quarter in the company's history, and it is our ninth consecutive year-over-year record-setting quarter. When compared to the second quarter of fiscal 2022, net sales were higher by more than 10%, adjusted EBITDA grew by nearly 10%, and adjusted net income per share grew by nearly 19%. During the quarter, strong operating results and diligent working capital management allowed us to generate the most cash flow from operations and free cash flow in a company's history. This exceptional operational and financial performance was enabled by our strategic focus on the consumer and through investments in people and operations. During the quarter, we continue to make progress in building much-needed dealer inventory ahead of the summer selling season. As of the end of the second quarter, dealer inventories are approximately 55% higher than the second quarter of fiscal year 2022 and about 20% lower than the second quarter of fiscal year 2019. We believe that the business process and dealer network improvements we have implemented over the past few years will allow us to maintain more levels of dealer inventory than was typical in the past. Early boat show results, recent retail sales data, and industry commentary suggest a return to historical seasonal demand patterns. For historical context, approximately 70% of the annual powerboat retail sales occurred during the five-month period from March to July. To date, both dealer and consumer demand remain resilient, and dealer inventory and production plants position our dealers to capitalize on the boat show and summer selling seasons. Early votes show results are up for Mastercraft and Crest versus both last year and 2019 levels. As a result of the reversion to historical seasonality, we expect to have a clear picture on retail demand as we progress through the third and fourth quarters. We continue to closely monitor economic conditions and evaluate the potential impact on our business. Since last year, there have been no significant changes in our view of macroeconomic or other demand indicators. and the associated implications for the upcoming summer selling season. We remain prudently conservative in our approach to wholesale production for fiscal 2023, and we have developed plans for a range of potential retail demand scenarios. Given the high degree of macroeconomic uncertainty and the historical cyclicality of our industry, we are committed to running the business in a manner that prioritizes strong performance throughout the business cycle. Guided by this philosophy, our intent is to maximize our fiscal 2023 financial performance while maintaining healthy dealer inventories. Moving on to supply chain, the general environment, including cost inflation and delivery disruption, is improving, with certain pockets of lingering risk expected to continue for some time. Tight supplies and longer than normal lead times on certain components, including those with upstream exposure to Asia, continue to intermittently affect our production schedules. However, we do not expect supply chain disruption to be a constraint on our full year production. The tireless efforts of our world-class supply chain team have enabled us to both provide consistent production and capital efficient inventory control. This cautious optimism reflects a welcome change from the incredibly challenging supply chain environment in the past two years. Our strong operating performance has resulted in record cash flow, driven by record earnings and diligent working capital management. We've built a fortress balance sheet that provides us with abundant financial flexibility. We are well positioned to pursue our capital allocation priorities, first and foremost of which is investment in growth. We are laying the foundation for future growth by making targeted investments in initiatives that will take advantage of the strong underlying secular industry trends. Let me now briefly review some of the latest developments across our brand. Our Mastercraft brand performed exceptionally well by growing net sales to a second quarter record of nearly $109 million and expanding adjusted EBITDA margin by 80 basis points year over year. This tremendous result is due to the extraordinary efforts of the Mastercraft team and the continued success of Mastercraft's operating model. Mastercraft's best-in-class powerful and clean engines and expanded entry and mid-price product offerings have been very well received. Mastercraft has gained share in six of the last seven months and remains the number one brand in the fastest-growing and the highest-margin category in the powerboat industry. At Crest, net sales were up by more than 23% year over year, continuing a trend of generating exceptional profitability. Crest achieved a gross margin of nearly 20% for the quarter. Since its acquisition in fiscal 2019, Crest has doubled net sales and expanded gross margin by 340 basis points. Crest has and will continue to add points of distribution to its dealer network, fulfilling a key element of its growth strategy. On the innovation front, Crest's new all-electric pontoon boat, the current and newly redesigned Classic Series, have both been very well received by dealers and boat show participants. Crest's sales and earnings growth demonstrates the success of the Crest acquisition and highlights our value-enhancing growth strategy. At Aviera, net sales were up by more than 75% compared to the prior period, driven by a 48% increase in units and higher prices. According to the most recent All-States Reporting SSI market share data, as of the rolling 12-month period ended September 30, 2022, Aviera increased its market share by 280 basis points in the 30 to 43-foot premium day boat category. Aviera continues to outpace all competitors, further solidifying the brand's position as the preeminent luxury day boat. Looking ahead, Aviera will soon begin to launch innovative new models. These introductions will represent the next phase in Aviera's product evolution and will position the brand for continued revenue and earnings growth. We'll now turn the call over to Tim. We'll provide a more detailed analysis of our financial results. Tim? Thanks, Fred.

We delivered another excellent quarter financial performance. Focusing on the top line, net sales for the quarter were $159.2 million. an increase of $14.8 million or 10.2%. The net sales increase reflects higher prices, partially offset by slightly lower unit sales volume and higher dealer incentives. Incentives increased primarily due to greater floor plan financing costs driven by higher interest rates and recovering dealer inventory levels. When compared to the historically low amount in the prior year, discounting was also higher as we anticipate a return to more historical patterns of consumer demand and seasonality. For the quarter, our gross margin was 24%, a decrease of 120 basis points when compared to the prior year period. Lower margins were primarily a result of higher costs from inflationary pressures, changes in mix, higher dealer incentives, and increased warranty costs, partially offset by higher prices and improved production efficiencies. Operating expenses were $11.8 million for the quarter, or 140 basis points lower as percentage of net sales compared to the prior year. Turning to the bottom line, adjusted income for the quarter increased 11% to $21.3 million or $1.20 for diluted share. Computed use in the company's estimated annual effective tax rate, 23%. This compares to an adjusted net income of $19.2 million or $1.01 for diluted share in the prior year period. Adjusted EBITDA increased nearly 10% to $29.8 million for the quarter, compared to $27.2 million in the prior year period. Adjusted EBITDA margin was 18.7%, down 10 basis points from 18.8% in the prior year period. Our balance sheet remains incredibly strong as we ended the quarter with nearly $190 million of total liquidity, including nearly $90 million of cash in short-term investments and $100 million of availability under our revolving credit facility. We also ended the quarter with zero net debt. Strong earnings and favorable working capital management has translated to record cash flow from operations and free cash flow. Year-to-date, we have generated a record $79.9 million of cash flow from continuing operations. We're nearly 200% higher than the prior year period. Year-to-date free cash flow from continuing operations was a record, $67.8 million, or more than 210% higher than the prior year period. Our balance sheet positions us exceptionally well, 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, strong balance sheet, and our positive long-term outlook, We believe our stock represents an outstanding value at recent prices. During the quarter, we spent approximately $4.8 million to repurchase nearly 225,000 shares of our comp stock. To date, we have spent nearly 70% of our $50 million program authorized in June of 2021. Cumulative activity under our share repurchase program provided an 8% benefit to our Q2 adjusted earnings per share. We expect to continue to opportunistically return cash to shareholders through the program while prioritizing financial flexibility and high return investments in the business that generate growth and long-term shareholder value. Looking forward, we are raising our guidance for the full year based on our strong performance and incremental retail demand visibility. We will continue to monitor the strength of retail demand and adjust our production plans as appropriate to maintain healthy dealer inventories. Our guidance continues to reflect the potential for a range of retail demand scenarios as we approach the all-important summer selling season. For full-year fiscal 2023, consolidated net sales is now expected to be between $620 million and $640 million, with adjusted EBITDA between $111 million and $118 million. and adjusted earnings per share of between $4.40 per share and $4.66. We continue to expect capital expenditures to be approximately $30 million for the full year. For the third quarter fiscal 2023, consolidated net sales are expected to be approximately $158 million and adjusted EBITDA of approximately $26 million and adjusted earnings per share of approximately $1.04. Despite the dynamic business environment and macroeconomic uncertainty, we are confident in delivering strong financial results for our shareholders. I'll now turn the call back to Fred for closing remarks.

Thanks, Tim. Our business has performed extremely well through the first half of fiscal 2023, delivering record financial results which have exceeded expectations. Our diligent approach to business planning and our best-in-class operating model have allowed us to operate efficiently and have provided us with the confidence and agility to respond to a range of potential retail demand scenarios. A robust portfolio of innovative products, healthy dealer inventory levels, and our flexible production capabilities position us to capitalize on the boat show and summer selling seasons. Despite significant macroeconomic uncertainty, we remain on track to achieve the second-best year of financial performance in the company's history. We look forward to delivering strong results by prioritizing resilience throughout the business cycle while maintaining a key emphasis on the pursuit of long-term growth opportunities and thereby generating exceptional shareholder returns. Operator, you may now open your line for questions.

Certainly, but I'd like to note a correction. Tim Oxley, CFO, was our beginning host today. In addition, if you would like to ask a question, please press star 11 on your telephone and And our first question will come from Joe Altabello of Raymond James.

Thanks. Hey, guys. Good morning. So a couple questions on the guidance. I guess first, if you look at the top line, you beat the sales guidance that you gave us three months ago by about $9 million, raised the full year by $22 million, at least at the midpoint. Is that on a better demand outlook and maybe help us out? Is that coming from more units or more pricing?

I think, you know, when you think about the retail demand environment, I don't think that our overall view of industry retail has changed, but obviously we've got an additional 3 months of visibility in terms of how our brands have performed at retail. We're continuing to take market share. So I think that is a factor in how we have adjusted our guidance to reflect our confidence in our ability to deliver retail against a challenging environment. With that said, we obviously still have an eye out to that March through July period, which accounts for 70% of retail. So we still are being very prudent and cautious with our production plan and our guidance gives us the flexibility to modulate our retail, I'm sorry, our production to make sure that we are achieving the turns and healthy inventory levels that we've committed to providing both our dealers and our brands.

And also, you're still looking for a sales decline in your categories this year of, call it, 15% to 20%. Is that correct?

That's correct. We're still kind of, from an industry standpoint for our fiscal year, we still expect retail to be down in that mid-teens level. Okay.

And then on EBITDA, the beat was a little bit better than the guide. So maybe tell us where the incremental margin pressures are coming from in the second half.

The floor plan financing costs are kind of number one as interest rates continue to grow as we are successful in restocking the dealers. That's a big one. Another important one is mix. As George mentioned, we try to build what's retailing, and we've introduced some new NXT models that have been very successful in the marketplace. So we're mixing down to some of our more models as a result. Got it. Great. Thank you, guys.

Thanks, Joe.

One moment.

And our next question will come from Craig Kennison of RW Baird. Your line is open.

the promotional environment and, you know, maybe what the trends you're seeing across your three main brands.

Hey, Craig, you kind of broke up there for a minute. I caught the last piece of that. Would you mind repeating the question?

Sure. Sorry about that. My question is on the promotional environment. Would you please comment on trends across your three brands?

Yeah, sure. So, um, you know, given what we are seeing is kind of a return to more retail seasonality with that. We've also seen a return of higher levels of discounts. Certainly higher than we've seen the last past couple years. Um, and so, you know, that that's pretty consistent across our brands. Uh, probably not as much as, uh, given where that brand is positioned, but certainly with our Crest pontoon product and the price points that we have there, we are seeing higher levels of promotional activity. And then also in the skiway category, we have seen a return of promotions. With that, we try to be good partners with our dealers. So we're really working with them to help, how do we help them drive retail? And so that's a combination of not just us providing Um, promotional activity or support for our dealers, but, you know, helping our dealers get more aggressive with pricing and that so far they've been very receptive to that. And I think that's very much our approach to how we want to work with dealers and be very dealer centric as much as we are consumer center.

Craig, I'd like to add that while the promotional environment is higher than the last couple years, it's not backed up to a historical level. So, we're comparing to a period where it was kind of an all-time low.

Yeah, that's very helpful. Thank you both. And then, just on the floor plan issue, a lot of dealers, you know, are struggling with the fact that there's interest costs now on all of their inventory. Just wondering what the pushback has been among dealers to take on inventory and whether maybe you have the infrastructure in place to be more demand driven and operate with less inventory in the channel and keep that floor plan expense down.

Yeah, so I'll answer the latter part first. You know, we absolutely have the flexibility and we believe that we can operate our businesses and take market share and get the dealers the product they need while maintaining lower levels of inventory in the channel versus historical levels. We think the dealers very much view that similarly as we do. And so that's very much built into our financial plan and how we manage the business every day. We're tracking retail activity every day, every week. And so we're making sure that our production is getting inventory into the markets and the dealers where it's retailing. And as I mentioned previously, you know, we're very much focused on how do we help our dealers retail product, not just pushing them wholesale inventory. In terms of the floor plan financing, I mean, every OEM's programs are different, but with our free flooring, the flooring support that we provide, right now we're not getting any pushback from our dealers in terms of taking product. And so we feel very confident that our programs are structured in a way that really allows the dealer to minimize the stocking risk. throughout the selling season and allows us and positions us to be able to get the inventory to the dealers to maximize on our retail opportunities.

Just to follow up on that, how long does the free flooring last for dealers and how does that flow through the income statement? Is that a contra revenue or is there a cost to pay?

Correct. It is contra revenue. And the Every boat has at least six months of free flooring, and if it's bought early in the season, say July, it'll get up to nine months, so between six and nine months. There's also a cash alternative, which is taken advantage of primarily in Q4 of our fiscal year.

Great. Thank you.

And our next question will come from Drew Crum of Stiefel. Your line is open, Drew.

Okay, thanks. Hey, guys, good morning. Maybe just sticking with the brand commentary and specifically on Mastercraft, maybe a little more detail on the unit sales performance down 12% year-on-year in the quarter and any commentary in terms of what you're seeing at retail in terms of consumer demand. And then separately on Aviera, can you talk about how the brand is tracking relative to some of the financial targets you had set out for the fiscal year?

I think from a unit perspective at Mastercraft Group, we have gone back to a more level-loaded production schedule throughout the year. That's a big part of the efficiencies that we get in manufacturing. So, I think some of the year-over-year comparisons are challenging, especially when you compare to last year. and some of our production was more dictated by supply chain and product availability than, you know, what we would consider more of a normal manufacturing cadence. So, you know, this year reflects a more level-loaded production versus what we expect to shift throughout the year, and that's going to influence the year-over-year comparisons. But nothing we would note there from a negative perspective, nothing from a retail perspective that's driving that more so than just manufacturing efficiencies.

um and then the second part of your question i'll take that one that obvious on track you know this year we expect them to uh to at least break even and that's a significant improvement from the past year and the stair step toward where we see that brand in the future so um you know there may be variation month to month but certainly quarter to quarter and overall for the year we see steady opportunity to continue to improve the margin and profitability.

And significant improvement over the prior years.

Got it. Okay, very helpful. And then maybe one for Tim. Tim, you talked about some record cash flow metrics. Any notable call-outs in the quarter? And, you know, what should we expect in the second half of the year for cash flow?

I think you're going to continue to see some improvements in the working capital. Partly it's a result of supply chain, you know, greater supply chain reliability, if you will. But it's not going to be as much as you saw in Q2. But it's just going to be a continuing theme for us so we generate strong cash flow, and that's going to continue in the second half. Got it. Thanks, guys.

One moment. Our next question comes from Eric Wold of B Raleigh Securities. Your line is open.

Thank you. Good morning. A couple questions kind of follow up on what's been asked so far, I guess. You made the comment that you're kind of watching inventories and kind of expecting to be a little more efficient with inventories and possibly lower inventory levels. I think you said you're about 20% below Is this the right level here, or what do you think the right kind of percentage decline or lower level from 19 is the right level going forward to be efficient in the dealerships?

Can I maybe respond to your question slightly differently, but hopefully tells you how we think about it, how we look at it? We estimate what we think retail demand is going to be. We back into what we think is appropriate level of inventory based on turnover and based on model by model mix. And that's the way we drive what we think is the right level now. We certainly can compare it to 19 or 20 or any other period, but that's not the way we set our goals. We set our goals based on looking forward and our expectation of retail sales and overall industry trends and segment trends. So in that regard, we're getting very close to where we want to be at Mastercraft and probably in very good shape at the Crest brand. So... The other thing I think that's important to consider is we've expanded distribution significantly, and those additional points of distribution take additional inventory to support across the brands. So when you merge that all together, the key is that we expect to turn inventory at our dealers at a much higher rate than we have in the past.

Got it. That's helpful. I guess this last question. You mentioned some of the pressure on margins is mixed as you've introduced some lower price NXT models based on where you're seeing demand. Maybe talk a little bit about what other kind of demand drivers you're seeing in terms of where consumers are shifting their purchasing. Are they going towards lower models overall? Are they going to you know, less options. I guess maybe kind of get a sense of, is that the only indication of where you're seeing maybe some pressure on spending, or are there others as well?

Go ahead, George.

Yeah, what I would say, we're not seeing a real change in the consumer habits in terms of options and whatnot. I think part of it is in our NXT portfolio, we previously had three models. And within the last 12 months, we've added two incremental models. So part of it is just as we level load our production and try to make sure that we're getting those new models into the marketplace, into the consumers that are demanding that new product. That is partly driving the mix towards some of the higher percentage of NXT production relative to prior years. But, you know, we're seeing pretty good, you know, very strong ordering patterns throughout the portfolio, both at our premium X line all the way through our midline and NXT models. And the consumers continue to option up the boats and put different features on. That being said, we are seeing a higher percentage of stock boats. The dealers are ordering more boats that are going into stock inventory versus the last couple years, we had a high percentage of retail sold boats being ordered where the customers were ordering the boats, speccing them out to their particular needs. And when you have a higher percentage of retail sold boats, you tend to see more options, more, you know, higher margin type of options selected versus a stock boat. So, it's really less about what we're seeing from the consumer and more about just the mix of retail sold to a consumer retail ordered, which is consistent with kind of past seasonal type of patterns.

Eric, I just want to say too, sometimes you you have a segment mix going on with Crest versus Mastercraft that can impact margins, as well as, again, just a reminder, in the model mix, we refreshed the NXT and the XP product offering, and so those have been doing very, refreshed and expanded, so those have been doing very well. And then in some other cases, too, in the COVID era, we were able to constrain, if you will, the mix of models based on our ability to, you know, manage throughput. And now we're much more responding to true retail demand. So there's some reversion there and some models there that we've constrained in the past that, you know, there's pent-up demand for.

Got it. Helpful, both of you. Thank you.

One moment. And our next question comes from Michael Swartz of Truist.

Your line is open.

Hey, guys. Good morning. Just maybe a quick question on I think you've mentioned that NXT is kind of margin diluted in the back half of the year. But I think if we go back a couple of years, the commentary was there was no real difference between kind of the premium Mastercraft and the NXT series. Yeah, sub-brand, if you want to call it that. So, I guess, has something changed in that margin relationship between the two, or is this totally a commentary just around kind of content or attachment rates?

It's really content. The NXT models don't have the same level Of options available to them, so when those are ordered, because we have very healthy margins on the on the options, they tend to have on a, on a baseball basis. It's comparable. But when you add the options in, that's when the margin erosion comes. comes about. It's not terrible, but it's less.

And Mike, I would just comment, you know, we have competitors that are being very aggressive in terms of pricing. And so it's very important for us to make sure we content these models so they can compete with that pressure.

Okay, that's helpful. And that kind of leads into the next question. I think, Fred, you had made comments just on maybe what you've seen at some of the early boat shows. And I think you've said you're you're up both year-over-year and versus 2019 levels. But just a clarification on that. Is that in units or is that in dollars? And then maybe just clarify a little bit on some of the discounts or incentives or rebates that are being offered at some of these shows. Is there any way to quantify maybe the level of discounting this year versus 2019? Well, the first comment is...

With the phone shows, that's with regarding units. That's the way we track those. We track it with a two-week window after the end of the show. So we're giving you the results from those shows that we've had, you know, the shows have taken place and we've had a couple of weeks after to finish up closing leads. So that was one part of your question. And the second part, George?

Yeah, in terms of promotional activity, I think, as Tim mentioned earlier, while we're certainly seeing higher promotional activity this year versus the last 2 years compared to 19, we're not seeing, we're not back to 19 level promotional activity. If you recall, we ended 19 with heavy inventory, which resulted in heavy promotions. And I would say, you know, as a whole, we're probably not back to that level, but I think certainly our expectation is that the competition will get more aggressive as we get into the retail selling season, depending on what happens in the macro economic environment and Our guidance and our plan provides us the flexibility to appropriately adjust our level of discounting to make sure that we are appropriately taking share where we expect to. But I would say it's still lower than where it was in 2019.

Sure. If I had to put a number on it, I mean, Q2, the combination of retail rebates as well as additional floor plan costs probably would be a headwind of about 150 basis points if I were to... Draw out a number.

Okay. And I assume that's a year-over-year comparison.

That is correct.

Okay. And then just final question for me, just more of a house, maybe a housekeeping question. In the second quarter, I think there was a pretty big drop in OPEX dollars. Was there something timing related in that, or was this kind of the new run rate that we should be thinking about going forward?

The estimate of capital expenditures for the year hasn't changed. No, no, no.

I'm sorry. Not CapEx operating expenses. So SG&A and sales and marketing.

There is some seasonality there, Mike. You know, obviously, we've got a return to boat shows, so you're going to see some higher operating, especially on the sales and marketing side in the second half of our year as we kind of go back to boat shows, travel expenses, supporting the boat shows. Those types of expenses are going to be more back-end loaded or second half of the year loaded as an example. So, I would expect to see higher levels of operating expense in the second half of the year versus the first half. Okay, perfect. Thank you.

And I'm showing no further questions. This concludes today's conference call. Thank you for participating. You may now disconnect.