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