Good day, and welcome to the Second Quarter 2022 MasterCraft Boat Holdings Inc. 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. As a reminder, this call is being recorded. I would now like to turn the call over to Tim Oxley, CFO.

You may begin..

Thank you, operator and welcome everyone. Thank you for joining us today as we discuss MasterCraft's second quarter performance for fiscal 2022. As a reminder, today's call is being webcast live and will also be archived on our website for future listening.

Joining me on today's call are Fred Brightbill, Chief Executive Officer and Chairman; and George Steinbarger, our Chief Revenue Officer. Fred will begin with a review of our operational highlights from the second quarter. I will then discuss our financial performance for the quarter.

Then I will 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 3, 2022. The company assumes no obligation to update any statements, including forward-looking statements.

Statements that are not historical facts are forward-looking statements and subject to the safe harbor disclaimer in today's press release. Additionally, on this conference call, we will discuss non-GAAP measures that include or exclude special or items not indicative of our ongoing operations.

For each non-GAAP measure, we also provide the most directly comparable GAAP measure in our fiscal 2022 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 is a slide deck summarizing our financial results in the Investors section of our website. With that, I'll turn the call over to Fred..

consumer experience, digital marketing, operational excellence and human capital development. Let me now briefly review some of the latest developments across our brands. Our MasterCraft brand performed exceptionally well during the quarter, and grew net sales to a second quarter record of $106.8 million.

This tremendous result is due to the extraordinary efforts of the MasterCraft team and the continued success of MasterCraft's best-in-class operating model which we leverage to mitigate supply chain disruption and increased year-over-year shipments by nearly 15%.

The ability to ramp up production faster than our largest competitors combined with our uncompromising quality standards is the key to taking market share today and in the long run.

According to the most recent, all states reporting SSI market share data as of the rolling 12-month period ended September 30th, 2021 MasterCraft increased market share over each of its closest three competitive brands by between 80 and 300 basis points.

This performance solidifies MasterCraft as the number one brand in the fastest growing and highest margin category in the powerboat industry. And while the official rolling 12-month December data is not out yet, preliminary results reflect further market share gains versus our closest three competitive brands.

For model year 2022 MasterCraft, unveiled one of the most aggressive model year changes in its history. The model changeover included three new boats and a myriad of new consumer-focused performance, styling and convenience features. The new lineup has been incredibly well received by our dealers and consumers alike.

We followed that -- up on that success by launching another all-new MasterCraft model the XT22, during the second quarter, which is already sold out for the remainder of the year. We will continue to emphasize quality and consumer experience, to further differentiate MasterCraft from the competition.

MasterCraft's retail sales were up significantly during the quarter when compared to the second quarter of fiscal 2021 and all model year 2022 production slots are sold out. Now on to Crest, which continued to execute its operating and strategic priorities by delivering another record-setting performance for the fourth consecutive quarter.

Crest shipped the most units of any second quarter in the company's history. Crest also set a second quarter record for net sales, which increased by an impressive 41% year-over-year, primarily driven by a 20% increase in units.

Even more impressive given the disruptive business environment was that Crest once again achieved a gross margin of more than 20%. Crest's ability to drive top line growth and generate strong margins in this environment, demonstrates the value of its business and the strength of its operating team.

In addition Crest retail sales were up sharply during the quarter when compared to the second quarter of fiscal 2021. At Aviara, we continue to ramp up production at the Merritt Island facility to meet exceptionally strong consumer demand.

Aviara's ramp-up gained momentum during the quarter, as net sales were up 143% driven by a 109% increase in units. While the increase in overhead due to the Merritt Island facility will continue to have a dilutive effect near-term impact on Aviara's margins and profitability.

We anticipate the excess capacity at the facility will support at least $100 million of annual revenue over time. We expect Aviara's production, to steadily increase and margins to improve over the course of the year.

Furthermore, the introduction of new models beginning in fiscal 2023, will position the brand for accelerated revenue and margin growth. Aviara's retail performance is exceeding our expectations with nearly all units produced since the brand's inception already having sold at retail.

At NauticStar supply chain disruption most notably engine shortages and labor constraints heavily impacted second quarter production ramp-up plans and limited shipments. We continue to execute our turnaround plan, with initiatives underway to further increase production and quality and enhance the product offering.

We look forward to achieving better results for this business as the supply chain and labor environment begin to normalize. Overall, despite the many challenges, we had a strong first half of fiscal 2022.

We achieved industry-leading organic growth took meaningful market share with our MasterCraft brand advanced our Aviara ramp-up and once again recorded strong results at Crest. We expect we could build on that success, during the remainder of the year.

We are committed to making investments to further strengthen our competitive position, grow our brands and deliver shareholder value guided by our long-term focus and strategic priorities. I will now turn the call over to Tim, who will provide more color on our financial results.

Tim?.

Thanks, Fred. Looking at the top line net sales for the second quarter were a record $159.5 million, an increase of $40.8 million or 34.4% compared to $108.7 million for the prior year period. This increase was a result of higher wholesale unit volume, favorable model mix and price increases.

As Fred mentioned, this was the most profitable second quarter in the company's history. Gross profit for the second quarter increased $5.9 million to $35.2 million compared to $29.3 million for the prior year period, principally driven by higher sales volume price increases and favorable model mix.

This favorability was partially offset by higher material and labor costs, driven by inflationary pressures and production inefficiencies from supply chain disruption. Our gross margin was 22.1% for the second quarter, a decrease of 260 basis points compared to the prior year period.

The decrease was primarily attributable to higher material and labor costs and incremental overhead costs from the new Aviara plant, acquired in the second quarter of fiscal 2021. Price increases partially offset these higher costs for the quarter.

Although lower on a year-over-year basis, our gross margin increased by 120 basis points sequentially from our first quarter. As Fred indicated, we expect the combined effect of our model year and mid-cycle price increases to mitigate the expected cost inflation for the remainder of the year.

Although, we saw some small benefit from these increases during the second quarter, the impact will be phased in during the second half with the full benefit being fully realized in the fourth quarter. Operating expenses were $14.6 million for the quarter, an increase of $2.3 million or 18.8% compared to the prior year period.

General and administrative expense increased as a result of increased variable compensation costs and investments in information technology. Selling and marketing expense increased due to timing of prior year expenses being impacted by the COVID-19 pandemic resulting in lower cost for the prior year quarter.

However, SG&A as a percentage of net sales was the lowest for a second quarter since becoming a public company as we prudently manage costs.

Turning to the bottom line, adjusted net income for the second quarter increased to a second quarter record of $17.2 million or $0.91 per diluted share, computed using the company's estimated annual effective tax rate of approximately 23%. This compares to an adjusted net income of $14.3 million or $0.75 per diluted share in the prior year period.

Adjusted EBITDA was a record $25 million for the second quarter compared to $21.3 million for the prior year period. Adjusted EBITDA margin was 15.7%, down 220 basis points from 17.9% in the prior year period due to supply chain disruption and inflationary pressures that drove material and labor costs higher. Turning to our balance sheet.

We ended the quarter with nearly $98 million of total liquidity, including $13.6 million of cash and more than $84 million of availability under our revolving credit facility. Working capital has increased nearly $24 million during the first half of our fiscal year.

This was primarily driven by higher inventories due to increased production and increased safety stock to mitigate supply chain disruption. We have also built a backlog of nearly completed boats, which are awaiting the last few components necessary to ship the units.

Fiscal year-to-date, we reduced our outstanding debt by more than $19 million and we ended the quarter with a net leverage of 0.6 times adjusted EBITDA. In late June 2021, the Board authorized our $50 million share repurchase program.

Given our recent operating performance financial results and the unprecedented wholesale visibility we currently have, we believe our stock represents an incredible value at recent prices. Because of this, we have spent approximately $11.4 million to repurchase nearly 415,000 shares of our common stock during the first half of fiscal 2022.

This represents more than 20% of the authorized program. We expect to continue to opportunistically return cash to shareholders through the program while prioritizing high return investments in the business that create meaningful shareholder value.

Looking forward, we are once again raising our guidance for the full year on the strength of our operating performance continuing strong retail demand and unprecedented wholesale visibility.

While we believe our team can continue to expertly navigate the challenging environment, we are expecting the supply chain in our second half to remain constrained. This will impact the cadence of our second half deleverage to be more Q4 weighted.

More specifically, due to an acute Tier 2 electronic supplier issue, shipments at our MasterCraft brand will be deferred into our fiscal Q4 period as they catch up on delivering a key component.

Despite this revenue deferral and the associated profitability headwind, we are confident the team can execute against our strategic and operating priorities to deliver another record year in net sales and profitability for our shareholders. For the full year of fiscal 2022, consolidated net sales growth is now expected to be up in the 25% range.

Despite the manufacturing inefficiencies we continue to experience due to supply chain disruptions, we continue to expect our adjusted EBITDA margins to be in the 18% range. We now expect adjusted earnings per share growth to be up in the 32% range year-over-year.

This guidance reflects a further increase to our already expected record year of all-organic growth. Driven by growth-oriented projects we continue to expect capital expenditures to be in the $25 million range for the full year.

For the third quarter of fiscal 2022, consolidated net sales growth is expected to be up in the 12% range driven by the previously mentioned revenue deferral. These units will be substantially completed in Q3, but not shipped until Q4.

Adjusted EBITDA margins will be in the 17% range and adjusted earnings per share growth up in the 4% range year-over-year. Our guidance assumes minimal improvements in the supply chain environment for the remainder of our fiscal year. As such we do not expect to fully realize the benefit of our unconstrained capacity during fiscal 2022.

We remain laser-focused on mitigating the supply chain headwinds and delivering to shareholders another record year of organic sales growth and margin expansion. With that I'll turn the call back to Fred..

Thanks, Tim. We are pleased by our record-setting pace for fiscal 2022. Despite the severe levels of disruption faced by the industry, we definitely manage the supply chain to increase production year-over-year at each of our brands. This exceptional execution resulted in industry-leading organic growth and market share gains.

We expect demand from consumers seeking the boating lifestyle to endure and to lead to continued strong growth for our company. As we've managed 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’, dealer and vendor partners and people. Operator, you may now open the line for questions..

We have a question from Kevin Condon with Baird. Your line is open..

Hi. Good morning, everyone. I just wanted to ask a little bit about channel inventory and specifically your comment on taking until fiscal 2024 to get back to optimal levels. I mean some of the assumptions within that.

As we look at this year just given the supply constraints and the strong sustained retail demand do you expect making any progress like adding to dealer inventory in fiscal 2022? And with that as we look out into 2023 and 2024 is it really reliant on supply chain getting better to actually take up wholesale accounts to get inventory back into the channel, or is there a expectation for retail to flatten out or potentially back off a bit?.

Let me start by saying that I think we'll -- I anticipate we'll end the year in a little bit healthier overall inventory position than we did last year and the fiscal year. But it was really tight last year so that improvement is still going to be not nearly where we would like to be.

So I think we'll be in a little bit better shape for the second half of the summer selling season, but it is very dependent on the supply chain continuing to improve. While we expect modest improvement for this year we hope that pace just continues. And that's based on a variety of factors. Major suppliers are adding capacity.

They've been able to catch their breath in some cases. But that still does not preclude the occasional severe disruption like we're experiencing at the end of this quarter, which ends up being more of a timing phenomenon than it is an overall damper on demand and throughput because we're able to build ahead.

So I think we catch up a little bit this summer, but then it takes through next summer for us to really get back where we would like to be optimally. I don't know, if that answers all of the points that you were raising, but it's difficult to predict the supply chain. So we're -- our business plans are predicated on a tough slide for a while.

But in spite of that, we still think we can make substantial progress..

I'd like to add that, as we think about our dealers' optimal inventory level, we expect them to carry less inventory than they have traditionally. Said another way, we expect their inventory turns to be a bit higher than normal. So, that's what we're shooting for mitigates the risk for the dealers and ourselves..

Great. Thanks. And then if I could just a quick one on pre-sold units and price protection. If you're -- I think you had mentioned doing some of that on pre-sold orders.

Is there an approach there? Can you just elaborate on what goes into your strategy to price protect units on pre-sold?.

Yes. Hey Kevin, it's George.

So we have price protected some boats for the -- we still have a handful -- not more than a handful obviously, but we'll have some continuing price protection here into our third quarter, but we expect that to be fully flushed out through this third quarter which will allow us to realize the full benefits of our price increases in Q4.

And so, that has been communicated to dealers and consumers. And so we're managing through that and getting the last units out as quickly as we can to get that product to consumers' hands. But we expect the price increases to moderate here in our third quarter and be fully done with that by fourth quarter..

Kevin, the overall context there clearly is, we entered the year thinking we were going to be able to produce at higher levels and the supply chain has inhibited us from doing that. As a result, our plans with dealers in terms of delivery have been extended. So they've made commitments in their partners.

So, we share in that extension with them, even though it causes us some duress in the near term, it's the right thing to do..

Makes sense. Thanks for taking my questions and congrats on a strong quarter..

Thank you..

Thank you..

Our next question comes from Michael Swartz with Truist. Your line is open..

Hey guys, good morning. This is Lucas on for Mike. I just had a quick question on guidance. And so for fourth quarter, you would imply really strong EBITDA margins.

Can you give us a little bit more color as to your comfort with that, or any detail you could add?.

Yes. When we look at our margin guidance for the year, I'm more confident in that than I am in the timing between Q3 and Q4. As we mentioned with the supply chain disruption, there may be some timing differences between those quarters.

We recognize that we -- that the guidance we -- that we backed into in quarter four is very high, but it will shake out timing-wise between those quarters and more confident in the year than I am on the timing..

Sounds good. Thank you..

There are no further questions. Ladies and gentlemen, thank you for participating in today's program. You may now disconnect. Everyone have a great day..