Good day, and thank you for standing by, and welcome to the Q3 2021 MasterCraft Boat Holdings, Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question and answer session. I will now hand today’s conference over your speaker, Tim Oxley, CFO.

Please go ahead..

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

Thank you, Tim. Good morning, everyone. And thank you for joining us today. Building upon the record quarterly performances we delivered in our first and second quarters, the fiscal third quarter was the most profitable quarter in the company’s history.

This record-setting performance was driven by year-over-year and sequential unit increases in each of our segments, which resulted in the most wholesale units ever sold by the company in a quarter. To produce at these levels, given the challenging environment is a clear demonstration of our disciplined execution and operational excellence.

We’ve been able to scale and accelerate production, while expertly managing our supply chain to deliver for our dealers and consumers in this robust demand environment. The credit goes to the more than 1,400 employees that continued to execute against our key strategic priorities and the strength of our brands.

Our results are also a testament to the continued execution of our value-enhancing growth strategy. As a reminder, our strategy is centered on four key pillars designed to achieve one overarching objective to drive sustainable accelerated growth. .

Thanks, Fred. Looking at the top-line, net sales for the second sic quarter were $147.9 million, an increase of $45.3 million or 44.2%, compared to $102.6 million for the COVID-19 impacted prior year period.

The increase was primarily a result of achieving the highest wholesale unit volume in the history of the company and lower dealer incentives as retail demand has remained robust. As Fred mentioned, this was the most profitable quarter in the company’s history.

Gross profit increased $16 million to $37.2 million, compared to $21.3 million for the prior year period, principally driven by higher sales volumes, lower dealer incentives and higher prices.

This favorability was partially offset by the impact of model mix, higher compensation cost and costs associated with the transition of Aviara to our new Merritt Island facility. Our gross margin was 25.2% for the third quarter, an increase of 450 basis points, compared to the prior year period.

The increase was primarily attributable to lower dealer incentives, favorable overhead absorption, driven by the higher sales volume, and higher prices, partially offset by cost associated with transition of Aviara to our new Merritt Island facility and higher labor cost.

Operating expenses were $14.7 million for the third quarter, an increase of $53.8 million or 78.6%, a decrease of $53.8 million or 78.6% compared to the prior year period, primarily driven by the recognition of $56.4 million of goodwill and other intangible asset impairment charges in the prior year period and lower selling and marketing costs, primarily due to the impacts of the COVID-19 pandemic.

This decrease was partially offset by higher general and administrative expenses resulting from a higher incentive compensation cost, an additional investment related to product development and information technology.

Turning to the bottom line, adjusted net income increased to $19.1 million or $1.01 per diluted share, computed using the company’s estimated annual effective tax rate of approximately 23%. This represents an increase of 122%, compared to adjusted net income of $8.6 million or $0.46 per diluted share in the prior year period.

Adjusted EBITDA was $27.5 million for the third quarter, compared to $14 million in the prior year period. Adjusted EBITDA margin was 18.6%, up 500 basis points from 13.6% in the prior year period. Turning to our liquidity and balance sheet.

As of April 4th, we had $29 million of cash on our balance sheet, with our revolving credit facility fully repaid, we ended the quarter with $64 million in liquidity.

Due to the continuation of strong retail demand trends, historically low dealer inventory, the strength of our order book across our brands and the increasing production rates, we delivered in each segment over the course of the quarter, we are raising our guidance for fiscal 2021.

Importantly, our guidance assumes continued inefficiencies in our production as we navigate through supply chain disruptions. For the full fiscal 2021, consolidated net sales is expected to approach 40% year-over-year, with adjusted EBITDA margin approaching 17% and adjusted earnings per share growth up in the high 120% year-over-year.

I will now turn the call back to Fred..

Thanks, Tim. To reiterate my earlier comments, we are pleased by the progress we made during the first three quarters of fiscal 2021 to accelerate production, efficiently manage our supply chain to meet increased consumer demand and to generate record earnings in each of our first three 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 our brands will prosper and lead to meaningful long-term growth for the company. We remain laser-focused on our mission to deliver the best experience for our consumers.

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 and dynamic business environment near-term, we remain committed to long-term value creation for our shareholders and all stakeholders.

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

And your first question is from the line of Craig Kennison with Baird. .

Hey, good morning and thanks for taking my questions. Congratulations to everybody. A question on capacity. I think in this quarter, you produced collectively, almost 2100 boats. Should we think of that as your current runrate capacity? And then, as we put that into the context of your need for inventory in the channel.

Is that a good expectation for the quarterly runrate kind of next year?.

Hey Craig, this is Fred. I would say, first and foremost, the current runrates are not capacity limited. It’s been primarily limited by supply chain and we continue to ramp up and have plans to continue to ramp up through this quarter and into next year. So, that production number is going to continue to increase quarter-by-quarter.

And we do expect easing in the supply chain conditions as we move through the summer and into next year. With regard to expectations of future years, I can only say once again, our plan is to continue to increase quarter-over-quarter. .

That’s great. And then, just, I guess, with respect to retail, you mentioned a lot of units are pre-sold we are about to lap a difficult – I am sorry, very difficult comparisons, right? So, last year it was incredibly strong with the pandemic.

What gives you confidence that this retail is more sustainable than just sort of a one-time outdoor trend?.

Well, Craig, it’s my view that the COVID experience was life-changing for a lot of people. It’s not something that they are just going to put behind them and go back to behave in exactly the same way they did before. So we have this wonderful opportunity to attract people to boating and to the boating lifestyle.

We think we’ve taken advantage of that and we’ll continue to. But I think, I will see a regression to the norm in terms of historical behavior. I don’t think we will revert to the exact behaviors that existed pre-COVID. In other words, people like working remote. They’ve realized that they have the opportunity to do that.

Some businesses are encouraging that. They’ll continue to buy property in areas that they prefer to live. That happens to all, so often be areas where they can enjoy the outdoors and enjoy the boating lifestyle or at proximity to water. Those investments are not the kinds of things that are turned on and off quickly.

We’ve seen significant increases in retail prices. On the Waterfront property and the property in rural areas relative to urban areas. So, once again, I think there are variety of reasons. And let’s not forget, COVID-19 is one version of a virus. Look back at our sales to think that that’s the last one that’s ever going to show up.

So, people, I think are going to appreciate safe outdoor, family-oriented and enjoyable experiences and that’s what we provide. .

That’s great. Okay. Thanks, Fred. .

You are welcome. .

Your next question is from the line of Eric Wold with B. Riley. .

Thank you. Good morning guys. .

Good morning. .

Couple questions, again.

I guess, one, if you did not need to shutdown the production any days for the resin shortfall, where are you seeing the greatest supply chain headwinds right now that that are less navigatable, so to speak? And can you estimate, kind of what impact those may had on shipments or margins in the quarter and the guidance?.

Well, first of all, it’ like vacuum mold. It’s a different supplier every day or every week and they are constantly adjusting production schedule to accommodate that and it involves more production out of the optimal sequence of production. So, it’s not just one area.

As I said, I pick resin as an example but, there are countless other items and different contributing factors, right, everything from the recovery from the ice storms in the south, again, Old Texas, the power outages to container shortages in shipments from overseas.

So, we are battling all of those and so far our team has done a phenomenal job of negotiating that. But it’s tight and it’s delicate.

With regard to the impact on production, I mean, it certainly has created significant inefficiencies but the most important thing for us is been to ramp up and continue production and service the demand that we see out there. So, if I had to guess, I would say, it could be on the order of a boat a day kind of thing. .

Got it. And then, when you noted that Aviara was sold out for the year, was that the current fiscal year, the calendar year, next fiscal year? Just trying to gauge that demand.

And then, now that you gotten the first boat out of that facility start to finish, what do you think now in terms of how quickly that production can ramp out of the Merritt Island facility in the next twelve months?.

Well, we are optimistic because, we expect it to ramp up dramatically, okay, in summary. And in terms of our production there, we were still finishing up in the beginning of this quarter construction projects to tailored facility. So there were still disruption and work around is going on there that significantly inhibited that ability.

Having said that, this quarter is one where we’ll see significant progress and that will roll into continue that acceleration through next year. Having said that, just to create the right context, while we say we’re sold out and we refer to what is this year. We have a commitment from MarineMax to take everything we can produce for the next year.

So we are totally aligned with them and the burden is on us to continue to accelerate that production to meet demand. .

Perfect. Thanks, Fred. .

You are welcome. .

Your next question is from the line of Joe Altobello with Raymond James. .

Hey guys, good morning. .

Good morning, Joe. .

So, revenue in the quarter obviously better than you expected, much better than you expected and I would imagine that’s largely a function of you being able to ramp up production, any material change in retail demand or ASPs for example.

What was better than you expected on the manufacturing front? Were supply chain constraints actually less than you feared in the quarter?.

Yes, Joe. This is Tim. Absolutely, we’ve been able to navigate the supply chain disruptions without having to shutdown our facility and so, that was a pleasant surprise for us, because of how challenging that environment is. .

Okay. .

So, Joe, just tie it all together, in terms of excess production with demand, retail demand has exceeded our expectations. So, we started building some inventory in the fall and over the last couple of months, we were been able to build any further pipeline with our dealers, as much as we were ramping up. .

Okay.

There was a little bit of better capacity and little bit of better retail, it sounds like?.

Yes. .

This quarter. Okay. And secondly, on EBITDA, you are guiding for, I guess, you guidance implies a sequential margin decline from Q3 to Q4. That’s fairly unusual for your business.

Why are we going to see that margin pressure in Q4 when you outperformed so significantly in Q3 on the margin side?.

One of the big things in Q4 going on is the uncertainty about the supply chain. So, we are trying to be little conservative with that regard. Hopefully, we will be able to avoid any significant impacts, but this is probably going to be the toughest quarter with regard to supply chain challenges. .

Got it. Okay. Thank you guys. .

Your next question is from the line of Brett Andress with KeyBanc Capital Markets. .

Good morning, guys. .

Good morning. .

Any color that – excuse me – any color you have on how many of your production slots are retail sold either in the fourth quarter or into 2022? I know you said record levels.

But just do you have any numbers around that?.

Let me just be clear on that. We have demand on everything that we can build and it’s going flow through. There is not going to be carryover inventory at the dealer level. So, whether it’s 85%, whether it’s 95%, it’s not going to have an impact I think in any way shape or form on what we produce or the health of our dealers.

We have commitments again next year. This is the time of the year that we get those commitments from our dealers and they are rolling in above our estimates, above our internal targets. So, once again, we just continue to be faced with the situation where we need to ramp production up as fast and as high as we possibly can. .

Got it. Understood. Okay. And then, we mentioned it, I think a few times on the call, but is there any way to quantify, maybe what you are seeing at retail so far in April and May? And then, as we get through May and into June with channel inventories.

So, just how are you thinking about your ability to satisfy really the peak seasonal demand this year?.

Yes. Hey, Brett, it’s George. So, obviously, the quarter, retail was just phenomenal across all four brands. We saw that continue into April just fantastically. May and June is where we are starting to see with some tougher comps here over the next several weeks.

And so, we do expect, we obviously are hopeful, but given how much inventory we’ve been able to get into the field, that fact that we’ve been able to increase production.

We are confident and we do have record levels of retail already sold slots that we will be able to meet that customer demand, while still having tremendous opportunity from a channels sales opportunity going forward in 2022. So, we feel very good, relative to the competition, our ability to have enough inventory to meet demand. .

Got it. Alright. Thanks guys. .

And your next question is from the line of Mike Swartz with Truist Securities. .

Hey guys. Good morning. .

Good morning, Mike..

Good morning. .

Fred, maybe just wanted to continue, I think you were saying you are confident in the MasterCraft business gaining market share for this summer month.

Maybe just provide a little color context what exactly gives you that confidence?.

I would – I think we are ramping up at a faster rate than historical market shares would indicate. So, that’s what gives me confidence that we’ll ultimately be gaining share. In addition to the significant changes that were made during this past year, so, with regard to dealer upgrades and expansion. .

Yes, Mike and as we look at some of the digital marketing initiatives we’ve implemented and lead generation, it’s just off the charts t be quite frank.

So, the activity that our dealers are seeing and the price points is a fact that we have a high degree of confidence that relative to the segments, particularly in MasterCraft, we’ve been able to get more inventory out to the field relative to the competition that we feel comfortable that inventory will be there.

And then, therefore, that will translate to market share gains. We also – as Fred alluded to on the call, we’ve got tremendous model year changeover with new innovations, new products that we think are absolutely going to really drive demand for the MasterCraft product in particular.

We also have some new products and innovations coming at the other brands as well. But, as we think about MasterCraft, we think that will be a tremendous, tremendous market share mover for us over the summer and will also lead to increased demand going forward. .

Okay, great. And then, just maybe looking at some of the investments you are making in the business that you are calling out product development and engineering teams as part of that.

Just, I guess, what have you identified with bringing these new teams on and maybe the biggest opportunities or areas you may not have been as competitive in the past and just in terms of your product line?.

I don’t think there is an area that we haven’t been competitive in. We have continued to improve across the product offerings. So, it’s not targeted at any one specific area.

And it’s continuous improvement process and I feel once you have the opportunity to reshape what we are offering through model year 2022, you’ll have a much better sense of the breadth of those improvements.

And once again, then we are making commitments in terms of investments, not only for model year 2023, beyond 2022, but for future years beyond that. And unfortunately from a competitive disclosure standpoint, I don’t want to get into detail about what those specific innovations are. .

Mike, the way that I think about it as well is, expecting particular product development, it’s a bandwidth issue, right? As we continue to grow, and we’ve got tremendous organic growth opportunities with Aviara and NauticStar and Crest from a product standpoint.

It’s about making sure that we’ve got the resources in-house to be able to drive those initiatives, drive that product development innovation and make sure that we are not sacrificing the potential at any one brand, because of lack of resources.

So, it’s just as much as we continue to grow and we see opportunity from a product side is making sure we’ve got the team that can execute on it. .

And I would just add in final, Mike, our innovations and improvements are totally driven by what we believe is the impact on the consumer and their appreciation and that best experience goal. It’s not driven for innovation, for innovation sake.

It’s a process we’ve developed here to make sure that we have a loud and clear voice with the customer that we are responding to. .

Okay, great. Thanks, guys. .

You are welcome. .

And at this time, there are no further questions. We’ll turn it back over to the panel for any further presentation or closing remarks. .

We have none to make. I appreciate it and thank you, everyone for joining us and have great day. .

Thank you. This conclude today’s conference call. You may now disconnect. .