Q2 2021 Mastercraft Boat Holdings Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the second quarter 2021, Master Craft Boat Holdings, Inc. 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 answer session to ask a question. During the session you will need to press star one on your telephone please.
Be advised for today's conference is being recorded.
Require any further assistance. Please press Star then zero 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 master craft second quarter performance for fiscal 'twenty 'twenty one is.
As a reminder, today's call is being webcast live and will also be archived on our website for future listening.
Joining me on todays call are Fred Brightbill, Chief Executive Officer, and Chairman and Georgetown and Barker, our Chief revenue Officer.
Fred will begin with an overview of our progress on our strategic priorities and review our operational highlights from the quarter I will then discuss our financial performance for the second quarter, how we see 2021 shaping up 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 10 2021.
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 todays press release.
Additionally, on this conference call, we will discuss non-GAAP measures that include or exclude special items not indicative of our ongoing operations reached non-GAAP measure. We also provide the most directly comparable GAAP measure in our fiscal 'twenty 'twenty, one second quarter earnings release, which includes a reconciliation of these non-GAAP measures.
Our GAAP results wed also like to remind listeners that there's a slide deck summarizing our financial results in the investors section of our website with that I'll turn the call over to Fred.
Thank you Tim and good morning, everyone. I appreciate you joining us today. This continues to be a very dynamic and challenging time, and we sincerely hope you and your families have remained healthy and safe.
I also want to thank our employees, who have been instrumental in our ability to deliver such a successful quarter.
We've talked about it before but it bears repeating our culture and employees are key drivers of our strong performance in this dynamic environment.
Their health and safety remain our top priority and we are committed to maintaining rigorous health and safety standards and closely monitoring all our production facilities jumping.
Jumping into our results for the quarter Master craft boat Holdings delivered record second quarter financial results exceeding the guidance, we provided last quarter. Our performance this quarter. The most profitable second quarter in Master Crafts history demonstrates continued momentum on implementing and executing our consumer centric strategic plan.
And the robust retail demand, we're experiencing across all our brands.
The results are a testament to the continued execution of our value enhancing growth strategy as.
As a reminder, our strategy is centered on four key pillars designed to achieve one overarching objective to drive sustainable accelerated growth.
During the quarter, we continued to execute against each of these four pillars consumer experience digital marketing operational excellence and human capital development.
First we continued our investments in expanding and top grading our product development and engineering team. These.
These investments will be an important component of our market share and financial growth plan.
Our relentless focus on learning more about our consumers growing needs and expectations has allowed us to further refine our product development process as we continue to build our product development and engineering team over the remainder of the year.
Second we continued to activate our consumer driven digital marketing strategy across our organization to increase brand awareness create a community of interest expand our target market improved lead generation and ultimately drive sales and market share gains.
Most recently, we launched several immersive digital experiences for consumers to learn about our brands and a 360 degree digital environment.
We launched the master craft experienced in January and followed that up with the launch of the crest and I VR experiences earlier this month.
Nordic Star experience is in the final stages of development and will be deployed to consumers within a matter of days.
These unique digital showrooms allow consumers to immerse themselves in each of our brands in a way they would typically do in a traditional in person boat show.
Flexibility to research our brands and the safety of their homes, while connecting consumers with our dealers in a safe socially distance manner is truly unique.
Since launching these digital experiences we've seen a dramatic increase in traffic to our digital properties and new leads.
Which we believe validates the creative approach we have taken to ensure consumers needs are addressed during this dynamic time.
We will continue to invest in digital solutions that bring awareness and new consumers to our brands and this investment will increasingly drive market share gains.
Third we sustained the acceleration of operational excellence programs across all our manufacturing facilities to drive throughput improvements and enhance quality.
Across our all our brands, we expertly managed supply chain issues related to the COVID-19, pandemic and labor constraints, while executing an aggressive production ramp up at.
At each of our facilities. We are now running at record production rates and we will continue to increase production throughout the year to meet the robust retail demand despite the.
Inefficiencies realized during a production ramp up the dynamic supply chain environment, and increasing labor costs. The company delivered gross margins of 24, 7% in the second quarter up 340 basis points versus the prior year.
And not start turnaround continued to gain momentum not ex start increased throughput to meet retail demand with wholesale unit shipments for the quarter up 5% year over year, and gross margins up more than 200 points basis points year over year.
While theres still work to do we are confident in the long run prospects, although not ex star brand.
And fourth we remain focused on strengthening our human capital framework to attract develop and retain a highly skilled and specialized workforce. We continue to successfully meet our skilled labor recruiting needs at all our facilities.
We have seen some labor.
Excuse me, we have seen some labor rate inflation due to the tight labor market, but as evidenced by our growing.
Gross margin performance, we've been able to mitigate most of this increase through our superior material cost management and overhead absorption as volumes increase.
Looking more closely at the quarter, we are encouraged by the momentum we're seeing all round.
The for strategic growth priorities, and we'll continue to proactively adapt our strategy to the business environment.
As of today across our brands our wholesale production plans remain fully committed.
In addition, the percentage of our order book that is already retail sold is at record levels and growing dealer.
Dealer inventories remain at historically low levels and consistent with our message last quarter. We believe it will be fiscal 2022 before dealer inventories reach optimal levels.
Combined with the current supply and demand.
Demand dynamic in the industry. This provides us with wholesale growth visibility greater than at anytime in the recent past.
As we continue to execute on our consumer focused strategic plan, we are well positioned to outperform relative to our competition and generate tremendous value for shareholders.
Against this backdrop promotional activity has remained relatively benign although we are seeing greater promotional activity as we entered the boat show season.
As I previously discussed we have deployed non traditional boat show alternatives and are seeing some very early wins.
We believe the higher quality and leading market share position of our brands are relatively mature and sophisticated dealer network and our digital marketing capabilities to provide us a competitive advantage.
Let me now briefly review some of the latest developments across our brands.
At <unk>, our retail performance continues to exceed expectations. Our order book is completely sold out for the remainder of the year as marine Max and its customers continue to appreciate the Arris progressive style elevated control modern comfort and quality details, which are unmatched in the luxury day boat segment.
As you will recall.
Given this extraordinary performance, we purchase a dedicated IV euro facility in Merritt Island, Florida to accelerate <unk> next phase of growth.
We remain on track to have IV or a fully transitioned out of mastercraftsman or Tennessee facility to the new Merritt Island facility within our fiscal third quarter.
We expect wholesale volumes to increase sequentially throughout the remainder of the fiscal year and into fiscal 2022.
While the increase in overhead due to the new Merritt Island facility will have a dilutive near term impact on margins and profitability. We believe the additional capacity will set the brand up for many years of future growth in sales and profit.
In addition, moving navi ore out of the Master credit facility frees up much needed capacity for Mastercard.
At crest, we experienced continued strength in retail performance during the fiscal second quarter.
This underscores the attractiveness of the crest brand the value it delivers it in a payable price point and the easy to use and new boater friendly nature of the pontoon segment.
Crest, most recent model redesign the ultra luxury Savannah model has been extremely well received.
And it is already sold out for the 2021 model year.
With our investment in product development and engineering additional model refreshes and launches are in development for model year 2022 and beyond.
Press, the exceptional execution of its operating and strategic priorities delivered another outstanding quarter financially with wholesale unit volume was up nearly 37% and gross margin increase of more than 800 basis points year over year, we are well on our way to achieving our goal of delivering gross.
<unk> in the low 20% range.
Similarly in Nordic Star.
We experienced continued retail momentum in the second fiscal quarter.
As previously stated not extended improved production throughput sequentially in the quarter and improved its gross margin by more than 200 basis points year over year.
Our turnaround plan remains on track with initiatives in place to further ramp up production improve overall quality and enhance the product offering.
Our expectation remains that it will take until next year to see the full benefits of these efforts, but we are confident that non star is on track to deliver meaningful and sustainable profitability improvement over time.
Yes.
At Master craft, the retail performance during the fiscal quarter was phenomenal.
During the current fiscal third quarter, we are running at record production rates at the Master credit facility as we continue to aggressively ramp up production to provide dealers with critical inventory ahead of the upcoming boating season <unk>.
Importantly, we will continue to emphasize quality to further differentiate master craft from the competition.
Our wholesale order books are sold out through the remainder of the year and we have already begun to take orders for model year 2022 to provide dealers with the inventory visibility needed to continue selling boats.
Combined with the incremental dealership changes, we highlighted last quarter mastered craft is primed to take market share heading into the heavy summer selling season.
On a financial basis, excluding the impact of Bob Europe. The Master craft brand saw increased net sales on wholesale unit and ASP growth.
Additionally, the brand achieved exceptional fiscal second quarter gross margin levels, driven by consumers continuing to add features and options to their orders.
We expect to continue to ramp up production throughout the year, which will result in some labor inefficiencies in the short term, but allow us to better meet the wholesale demand from our dealers as they look to stock up heading into the summer selling season.
Importantly, our progress on business fundamentals are setting us up for an outstanding fiscal year 2021, we remain committed to building on this progress through investments to further strengthen our competitive position.
All of our categories and deliver long term shareholder value guided by our strategic priorities.
Looking at how far we've come over the past six months gives us the confidence that we will continue to deliver superior growth in sales and profit.
I will now turn the call over to Tim who will provide more color on our financial results.
Looking at the topline 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.
Favorable mix of higher priced at a higher content models and lower dealer incentives is free.
Ed 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 20.
$21 1 million for the prior year period. This increase was principally driven by a favorable mix of higher price and higher content models, our sales volumes and lower dealer incentives.
This favorability was partially offset by higher compensation costs and costs associated with the transition of <unk> 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 park.
We offset by higher labor cost.
Operating expenses were $12 3 million for the second quarter, an increase of $1 5 million or 14, 1% compared to the prior year period, principally driven by higher general and administrative expenses, resulting from higher incentive compensation costs and additional investments related to product development.
This increase was partially offset by lower selling and marketing costs, primarily due to the timing of anticipated expenses, which has been delayed by the COVID-19 pandemic until later in the fiscal year.
Turning to the bottom line adjusted net income increased to $14 3 million for 75 per diluted share computed using the company's estimated annual effective tax rate of approximately 23%.
This represents an increase of 74, 4% compared to adjusted net income of $8 2 million or <unk> 43 per diluted share in the prior year period adjusted.
Adjusted EBITDA was $21 3 million for the second quarter compared to $13 6 million in the prior year period.
Adjusted EBITDA margin was 17, 9% up 430 basis points from 13, 6% in the prior year period.
Turning to our liquidity and balance sheet as of January three we had $12 1 million of cash on our balance sheet with our revolving credit facility fully repaid we ended the quarter with more than $47 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 do ever to each segment over the course of the quarter. We are raising our guidance for fiscal 2021 importantly, our guidance assumes that we can operate our facilities.
Throughout the year without any COVID-19 related disruptions.
For the full fiscal 2021 consolidated net sales is expected to grow in the mid to high 30% range year over year.
With adjusted EBITDA margins in the low 15% range and adjusted earnings per share growth approaching 100% year over year.
For the third quarter consolidated consolidated net sales is expected to be up in the mid 30% range year over year.
With adjusted EBITDA margins approaching 15%.
And adjusted earnings per share growth approaching 60%.
Thanks, Greg commented in his prepared remarks. The addition of overhead with the new <unk> facility and production inefficiencies were experiencing as we aggressively ramp up production across all our facilities.
Combined with the investments, we're making for future growth.
Including new talent in our product development and engineering Department and investments in digital marketing will impact our adjusted EBITDA margins in the short term as we ramp up production and gain efficiencies in our new Avi airplane and see the benefits of these strategic investments later this year and beyond we expect to drive meaningful operating leverage to the bottom line.
I'll turn the call back over to Fred.
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 two quarters of fiscal 2021.
We continue to believe the increased retail momentum we've 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 master craft and a reasonably remained with us as.
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.
You May now open the lineup for questions.
Thank you ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key to prevent any background noise. We ask that you. Please place your line on mute once your question has been stable.
Our first question comes from the line of Joe After Bello with Raymond James Your line is open. Please go ahead.
Thanks, Hey, guys good morning.
Just kind of looking at the quarter Big picture It looks like sales were a little better.
And then we expected EBITDA margins were a lot better I guess the first question what surprised you. The most in the quarter how much of that came from things like lower dealer incentives, which might come back next year.
I think the.
The efficiencies of our ramp up.
<unk>, 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.
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 in the 2022 I still expect it.
Discounts to be less than they would've been.
Historically.
Got it that's helpful. Thanks, 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 are taking on at Merritt Island is it all of it.
I'd say, that's a big chunk of it and in addition, we have additional G&A and sales and marketing expenses that data timed into the second half we had some events that due to COVID-19 were pushed from first half into second half so youll see additional spend in.
In the second half.
More than normal and the continued investment in the digital marketing initiative.
Got it great. Thank you guys.
Thank you and our next question comes from the line of Eric Wold with B Riley Securities. Your line is open. Please go ahead.
Thank you. Good morning, guys. Good morning, a couple of questions I guess, one just trying to just think the.
Comments in terms of guidance.
Seeing.
Higher.
Contented models et cetera, higher price models.
With the kind of the sequential decline in Asps within the match scratch segment between where it was in Q4 Q1, where it is in Q2 is that as you can do with the <unk> introduction transition or is it truly just a mix shift in master growth.
Are you looking at.
Yes.
Eric It's a mix shift I mean, as we continue to ramp up production obviously.
We obviously are building to what our dealers need so in any given quarter, depending on where there is demand that will impact the model that we run through.
We offer 14 different models in the lineup today so.
In any quarter, you can see some variability there, but even on a if you just look at on a model basis, we are seeing higher asps across the lineup as consumers continue to.
To add more and more features to the each particular model, yes, keep keep in mind versus versus prior year Q2, we're up double digit.
Mr Kraft.
No definitely.
It's more of just what you were shipping out that quarter versus what youre seeing in the order book is coming in absolute very correct and remember Q2 Q2 is historically a stocking quarter, that's where dealers are taking votes that they intend to stock in their lineup. While we are seeing a higher percentage of consumer retail sold shipments there is still that certainly plays into.
Just from a from a quarter standpoint.
Okay and then.
You talked about.
It's likely going to be until fiscal 'twenty, two until dealer inventories reach optimal levels.
How are you thinking about expanding the dealer network and the net environment.
Is there an opportunity to take share or do you need to take care of your existing dealers for us, but 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 mashed grafts are much more mature dealer network and it's essentially been top grading there much more than expanding.
And if you look, particularly at crest as they've continued to vary effect efficiently ramp up that allows us to more aggressively go after dealer expansion.
Net dealer network is not as mature as master craft, so theres tremendous white space. So we will continue to do that and as the turnaround plan continues to develop at net not a star that will continue to increase production. So.
As Fred said first priority will be to meet the demands of our existing dealers. But then you are already thinking ahead to what do we think future capacity and demand will be and therefore, how do we how do we grow the network to ensure that we're growing the brands as efficiently as possible.
Perfect. Thank you guys.
Thank you and our next question comes from the line of Craig Kennison with Baird. Your line is open. Please go ahead.
Hey, good morning, Thanks for taking my question as well.
Fred you mentioned that there was some discounting creeping into the environment, which I guess is a little surprising given that you sold out maybe just add a little color to whats going on there. Please.
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 low.
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.
You know I.
I think it's just prudent for us to expect that there may be.
Some brands that resort to price.
Okay. Thank you and then you've.
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 as you are basically at capacity for most of your production and so those of US looking at your revenue trends Shouldnt expect.
Much upside because you just don't have the ability to produce those units is that is that fair I think thats 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 <unk> from the <unk> facility to its own dedicated facility 140000 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 reach.
And figure the plant in <unk>, Tennessee day added leased another 20% capacity to master craft and Master craft is still ramping up today, even without debt capacity. So no. We have a very long runway ahead of us at every one of our brands and have plans to not only.
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 will continue to have that so no I would categorically disagree that there is any constraint based on our ability to produce.
Longer term.
Yes, my mistake I'm much understood 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-19 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.
Downs.
No not yet at all I mean, we continue to Dodge and have to manipulate around supply chain issues every day.
They are not systemic they pop up and we deal with them and another one pops up so.
<unk>.
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.
Alright, Thank you Fred welcome.
Thank you and our next question comes from the line of Mike Swartz with true Securities. Your line is open. Please go ahead.
Yeah.
Hey, guys good morning.
Our friend, Tim just wanted to dig a little bit interest from the gross margin color you provided in your in your commentary and thanks for that if im doing the math correct. It looks like the Master craft segment gross margins were up from our 200 300 basis points year over year I'm. Just wondering one is that correct and then two are there any of the <unk>.
Avi are a cost or inefficiencies included in that number.
As you as you know Mike Avi area as part of the Master craft segment for now so there is some headwind associated with having all.
<unk> included in that segment so.
When we when we list the match craft segment includes the Avi are result.
So there was some headwind in the quarter. Okay. That's helpful. And then I think Fred you mentioned that master craft just production volumes in the third quarter are.
Remember if you said all time highs, but maybe how should we think about the production volumes for the next couple of quarters any other supply chain issues, but as we look back to maybe fiscal year 19. I think you were doing between 800 900 units per quarter is that the right way to think about it at least over the next quarter or two.
I would think about our volume sequentially continue to increase as we progress through the remainder of the year and net.
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.
Alright, thank you.
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 all disconnect everyone have a great day.
Okay.
Okay.
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