Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter 2021 MasterCraft Boat Holdings, Inc. Earnings Conference Call. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to one of your speakers today, Mr. Tim Oxley, CFO. Sir, please go ahead..

Thank you, operator, and welcome, everyone. Thank you for joining us today as we discuss MasterCraft’s second quarter performance for fiscal 2021. As a reminder, today’s call is being webcast live and will also be archived on our website for future listening..

consumer experience, digital marketing, operational excellence and human capital development..

Thanks, Fred. Looking at the top line, net sales for the second quarter were $118.7 million, an increase of $19 million or 19.1% compared to $99.6 million for the prior year period. The increase was primarily due to higher sales volumes, a favorable mix of higher-priced and higher-contented models and lower dealer incentives.

As Fred mentioned, this was the most profitable second quarter in the company’s history. Gross profit increased $8.1 million to $29.3 million compared to $21.1 million for the prior year period. This increase was principally driven by a favorable mix of higher-priced and higher-contented models, higher sales volumes and lower dealer incentives.

This favorability was partially offset by higher compensation costs and costs associated with the transition of Aviara to our new Merritt Island facility. Our gross margin was 24.7% for the second quarter, an increase of 340 basis points compared to the prior year period.

The increase was primarily attributable to favorable overhead absorption, driven by higher sales volume, higher prices, lower dealer incentives and materials cost containment, partially offset by higher labor cost..

Thank you, Tim. To reiterate my earlier comments, we are pleased by the progress we have made during the quarter and the first half of fiscal 2021 to accelerate production, efficiently manage our supply chain to meet increased consumer demand across our brands and generate record earnings in each of the first 2 quarters of fiscal 2021.

We continue to believe the increased retail momentum we have experienced from consumers seeking the boating lifestyle and our brands will endure and lead to meaningful long-term growth for the company. We remain laser-focused on our mission to deliver the best consumer experience.

We are steadfast in our belief that this is our differentiator and what brings people to MasterCraft and the reason they remain with us. As we manage through an unprecedented dynamic business environment near term, we remain committed to long-term value creation for our shareholders and all stakeholders.

We will continue to be a purpose-driven business, committed to our consumers, our dealer and vendor partners and our people. Operator, you may now open the line up for questions..

Our first question comes from the line of Joe Altobello with Raymond James..

So just kind of looking at the quarter, big picture, it looks like sales are a little better than we expected. EBITDA margins were a lot better.

I guess, first question, what surprised you the most in the quarter? And how much of that came from things like lower dealer incentives, which might come back next year?.

I think the efficiencies of our ramp-up across our facilities was better than expected. It doesn’t mean that we’re not dealing with particular supplier issues on a day-to-day basis, but they delivered and exceeded our expectations..

I would say, Joe, to your second point, yes, I do expect some increase in incentives as time goes on. However, again, given the supply-demand dynamic and our expectation that the pipeline really won’t be replenished into 2022, I still expect it -- discounts to be less than they would have been historically..

Got it. That’s helpful, Fred. And just in terms of your guidance, it implies a significant deterioration in EBITDA margins in the second half, particularly in the fourth quarter.

How much of that is the overhead that you’re taking on at Merritt Island? Is it all of it?.

I’d say that’s a big chunk of it. In addition, we have additional G&A sales and marketing expenses that they have timed into the second half. We had some events that, due to COVID, were pushed from the first half into second half. So you’ll see additional spend in the second half more than normal..

And the continued investment in the digital marketing initiative..

And our next question comes from the line of Eric Wold with B. Riley Securities..

A couple of questions. I guess, one, just trying to sync the comments in terms of kind of seeing higher-contented models, et cetera, higher-priced models, with the kind of the sequential decline in ASPs within the MasterCraft segment between where it was in Q4, Q1 and where it is in Q2.

Has that anything to do with the Aviara production transition? Or is that purely just a mix shift in MasterCraft?.

Are you looking at it?.

Yes, Eric, it’s a mix shift. I mean, as we continue to ramp up production, obviously we’re -- we obviously are building to what our dealers need. So in any given quarter, depending on where there’s demand, that will impact the models that we run through. We offer 14 different models in the lineup today.

So we -- in any quarter, you can see some variability there. But even on a -- if you just look at it on a model basis, we are seeing higher ASPs across the lineup as consumers continue to add more and more features to each particular model..

Yes. Keep in mind, versus prior year Q2, we’re up double digit at MasterCraft..

No, definitely.

So it’s more of just what you were shipping out that quarter versus what you’re seeing in the order books coming in?.

Absolutely. You are correct. And remember, Q2 is historically a stocking quarter. That’s where dealers are taking boats that they intend to stock in their lineup. While we are seeing a higher percentage of consumer retail-sold shipments, there’s still -- that certainly plays into it just from a quarter standpoint..

Okay. And then you talked about -- it’s likely going to be until fiscal ‘22 until dealer inventories reach optimal levels.

How does it -- how are you thinking about expanding the dealer network in that environment? Is there an opportunity to take share? Or do you need to take care of your existing dealers first, what their inventory needs versus spreading it around to new dealers?.

Yes, we would take care of existing dealers first and, of course, it varies by brand. But some of our brands have plans to continue to expand their dealer network. MasterCraft is a much more mature dealer network, and it’s essentially been top-grading there much more than expanding..

Yes. And if you look,, particularly at Crest, as they’ve continued to very -- efficiently ramp up, that allows us to more aggressively go after dealer expansion. That dealer network is not as mature as MasterCraft, so there’s tremendous white space. So we’ll continue to do that.

And as the turnaround plan continues to develop at NauticStar, that will continue to increase production. So as Fred said, first priority will be to meet the demands of our existing dealers.

But then we’re already thinking ahead to what do we think future capacity and demand will be and, therefore, how do we grow the network to ensure that we’re growing the brands as efficiently as possible..

And our next question comes from the line of Craig Kennison with Baird..

Fred, you mentioned that there was some discounting creeping into the environment, which, I guess, is a little surprising given that you’re soldout.

Maybe just add a little color to what’s going on there, please?.

Well, if you listen to the Malibu call, they talked about the year-end program they ran just as an example. So we are utilizing minimal incentives, the lowest we’ve ever used. And I don’t expect -- we don’t have plans to add substantial incentive programs.

Having said that, we will react as necessary to the competitive environment, and I think it’s just prudent for us to expect that there may be some brands that resort to price..

Okay. And then you made several comments where several brands, or at least several models, are sold out through the fiscal year. Is there a way to frame the maximum capacity for each of your brands? It feels as though, no matter how good demand is, you are basically at capacity for most of your production.

And so those of us looking at your revenue trends, you shouldn’t expect much upside because you just don’t have the ability to produce those units.

Is that fair?.

I think that’s categorically untrue. We are continuing to ramp up throughout the year and plan to continue to ramp next year. So we are nowhere near capacity constrained. We have significant runway.

I mean think of moving Aviara from the Vonore facility to its own dedicated facility, 140,000 square foot, gives that tremendous runway and allows us the ability to grow that very dramatically. And then it frees up space here to allow us to reconfigure the plant in Vonore, Tennessee, to add at least another 20% capacity to MasterCraft.

And MasterCraft is still ramping up today even without that capacity, so no. We have a very long runway ahead of us at every one of our brands and have plans to not only continue to ramp today. And again, today, we’re balancing labor and supply chain constraints as well as the physical capacity of the plant.

But as we need capacity, those plans are underway and in place, and we’ll continue to have that. So no, I would categorically disagree that there’s any constraint based on our ability to produce longer term..

Yes. My mistake, I misunderstood what you meant by sold out. Just you had mentioned the supply chain as well. I imagine, really, the big risk there is just a COVID outbreak among your suppliers or within your own community.

Are you seeing any change in that behavior as the vaccine rolls out with just fewer work stoppages, spotty shutdowns?.

Actually, no, not yet at all. I mean we continue to dodge and have to manipulate around supply chain issues every day. They’re not systemic. They pop up, and we deal with them, and another one pops up. So unfortunately, I think it’s still going to be some time before that fully stabilizes.

But one would hope, as the vaccines get out there, not only in the United States, but around the world, the supply chain will stabilize. That’s my expectation as we go into next year..

And our next question comes from the line of Mike Swartz with Truist Securities..

Fred, Tim, just wanted to dig a little bit into some of the gross margin color you provided in your commentary, and thanks for that. If I’m doing the math correct, it looks like the MasterCraft segment gross margins were up somewhere 200, 300 basis points year-over-year.

I’m just wondering, one, is that correct? And then two, are there any of the associated Aviara costs or inefficiencies included in that number?.

As you know, Mike, Aviara is part of the MasterCraft segment for now. So there is some headwind associated with having Aviara included in that segment. So when we list the MasterCraft segment, it includes the Aviara results..

Right. So there was some headwind in the quarter. Okay. That’s helpful.

And then I think, Fred, you mentioned that MasterCraft, just production volumes in the third quarter are -- I can’t remember if you’ve said all-time highs, but maybe how should we think about the production volumes over the next couple of quarters? I know there’s some supply chain issues.

But as we look back to maybe fiscal year ‘19, I think you were doing between 800 and 900 units per quarter.

Is that the right way to think about it, at least over the next quarter or 2?.

I would think about our volume sequentially continuing to increase as we progress through the remainder of the year. And next year, I would hope to be able to enter the year and hold production much more stable, but we will continue to ramp up sequentially in the third quarter, and we’re already seeing that success and -- into the fourth quarter.

So we will continue to step-up in each one of these..

Thank you. And this does conclude today’s question-and-answer session as well as today’s conference call. Ladies and gentlemen, thank you for participating. You may now disconnect. Everyone, have a great day..