Q3 2021 Mastercraft Boat Holdings Inc Earnings Call
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Good day, and thank you for standing by and the welcome to the Q3 2021 Master craft Adult Holdings incorporated earnings Conference call.
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On today's conference over to you on Speaker, Tim Oxley CFO. Please go ahead.
Thank you operator and welcome everyone. Thank you for joining us today as we discuss mass crafts third quarter performance for fiscal 2021.
As a reminder, today's call is being webcast live also be archived on our website for future listening.
Joining me on todays call are Fred Brightbill, Chief Executive Officer, and Chairman and George Steinberg of our Chief revenue Officer.
Greg 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 third quarter and how we see 2021, finishing up and 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 on this call is current only as of today May 12 2021 the.
Company assumes no obligation to update any statements, including forward looking statements statements that are not historical facts are forward looking statements.
Subject to safe Harbor disclaimer in todays press release.
Additionally, on this conference call, we will discuss non-GAAP measures the 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 on our fiscal 2021 third 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.
Thank you Tim good morning, everyone.
And thank you for joining us today.
Building upon the record quarterly performance as we delivered on 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 on a quarter to.
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 1400 employees the continued to execute against our key strategic priorities and the strength of our brands are.
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.
During the quarter, we continued to execute against each of these three pillars consumer experience digital marketing operational excellence and human capital development.
First we continued our investments in expanding our product development and engineering team.
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 and accelerate innovation.
At Master craft brand, we recently revealed to our dealers the upcoming model year changes for 2022, including new models of innovations, which were enthusiastically received.
With this additional investment in our product development and engineering team. We are similarly, well positioned to accelerate new model development and innovations for all our brands, which will begin this summer.
Second we continue to activate the consumer driven digital marketing strategy across our organization to increase brand awareness create a community of interest expand our target market improve lead generation and ultimately drive sales and market share gains.
Last quarter, we launched several of immersive digital experiences for our consumers to learn about our brands kind of 360 degree digital environment.
These unique digital showrooms allowed consumers to immerse themselves in each of our brands and way they would typically do of traditional in person boat shows.
The results, we have seen of consumer site traffic web site engagement and lead generation have been dramatic.
This quarter. We also continued our investment in digital marketing by expanding many of the capabilities currently being deployed at master craft and IV Ara to crest, the Nordic Star.
By leveraging the infrastructure and process already in place of mass script, we've been able to generate increased brand awareness website traffic and lead generation across the Nordic Star.
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 all our brands, we expertly manage the relocation of our RV or of brand and the supply chain issues to aggressively ramp up production, resulting in the highest wholesale units sold in any quarter of the company's history.
For example, we did not have to shut down any of our facilities.
The result of the resin shortage that has impacted the boating industry.
Our outstanding supply chain team have done a tremendous job of minimizing the disruptions to our operations at each of our facilities. We are running at record production rates and will continue to increase production to meet the robust retail demand.
Despite the inefficiencies realized during the production ramp of the dynamic supply chain environment and increased labor costs. The company delivered gross margins of 25, 2% in the third quarter up 450 basis points versus the prior year.
The not start turnaround continues to gain momentum not.
A lot of star continues to increase throughput to meet retail demand with wholesale unit shipments for the quarter up 36, 1% year over year and up 20% sequentially compared to the second quarter.
Gross margins were up more than 200 basis points year over year and up more than 250 basis points sequentially compared to the second quarter.
We remain confident in the long term prospects of the do not start brand and we will continue to dedicate the necessary resources and investments to bring non <unk> operational excellence on financial results in line with our internal expectations.
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, having grown our workforce by more than 500 hourly on 50 salaried personnel from the start of this fiscal year 15.
<unk>, 50% of our salary growth has been devoted to product development.
We have seen some labor inflation due to the increased in tight labor market conditions, but as evidenced by our growing gross margin performance.
We have been able to mitigate most of this increase through overhead absorption as volumes increase and.
And superior material cost management.
Looking more closely at the quarter. We're encouraged by the momentum we are seeing all round around all four of our strategic growth priorities and we will continue to proactively adapt our strategy to the business environment.
As of today across our brands our wholesale production plan remains fully committed and addition of the percentage of our order book that is already retail sold is at record levels and growing.
Dealer inventories remain at historically low levels and consistent with our message last quarter. We believe it will be into calendar 2023 before dealer inventories reach optimal levels.
Combined with the current supply and demand dynamic in our industry. This provides us with an unprecedented wholesale growth visibility.
We continue to execute on our consumer focused strategic plan.
And we are well positioned to outperform relative to our competition and generate tremendous value for our shareholders.
Let me now briefly review some of the latest developments across our brands.
At <unk>, we successfully completed the relocation of all our manufacturing activities to the Merritt Island, Florida facility.
As of the third quarter, the new RBR of facility is fully self supported for the production standpoint.
We recently celebrated the shipment of the first RBR of AB 32 model produced in the new facility from start to finish which is just the first of many more to come.
<unk> retail performance continues to exceed expectations and our order book is completely sold out for the remainder of the year.
Marine Max and its customers continue to appreciate of years Progressive style elevated control modern comfort and quality details, which are unmatched in the luxury day boat segment.
While the increase on overhead due to the Merritt Island facility has a dilutive near term impact on margins and profitability. The additional capacity will set the brand up for many years of future growth in sales and profit.
In addition, moving RBR from the Master craft facility has freed up much needed capacity for master craft, which we are busy putting the good use.
At crest, we experienced continued strength in retail performance during the fiscal third quarter underscoring the attractiveness of the crest brand the value. It delivers had an attainable price point and the easy to use and new boater friendly nature of the pontoon segment.
Since we acquired crest in October of 2018, our focus has been on expanding production throughput to meet the increasing demand for the brand and to drive incremental margin expansion.
In the third quarter crest continues the exceptional execution of its operating and strategic priorities delivering another outstanding quarter financially.
Chris wholesale unit volumes set a quarterly record and were up nearly 59% year over year.
Importantly, wholesale volume was also up more than 27% sequentially compared to the second quarter.
Gross margins increased more than 800 basis points year over year.
This marks the second consecutive quarter in which crest achieved gross margins in excess of our 20% target putting us well on our way to achieving consistent gross margins in the low 20% range.
Similarly at non XR, we experienced continued retail momentum in our fiscal third quarter. As previously stated not extort improved wholesale throughput sequentially in the quarter and improved its gross margins by more than 200 basis points year over year. Our turnaround plan is gaining momentum with initiatives in place to further ramp up production.
Improve overall quality and enhance the product offering.
Our expectation remains that we will take until next year to see the full benefits of these efforts, but we are confident that non <unk> is on track to deliver meaningful and sustainable profitability over time.
At Master craft retail performance in the fiscal quarter continued its torrid pace for.
For the fiscal third quarter Master craft set of net sales in unit shipment record.
During the current fiscal fourth quarter, we are running at record production rates at the Master credit facility as we aggressively ramp up.
To get dealers critical inventory ahead of the boating season importantly.
Importantly, we will continue to emphasize quality to further differentiate master craft from the competition.
Our wholesale order book is sold out through the remainder of the year and dealer commitments for model year 2022 have already exceeded our aggressive expectations combined.
Combined with the incremental dealership changes, we highlighted last quarter Master craft is primed to take market share heading into the heavy summer selling season.
On the financial basis, excluding the impact of Bob Europe Mass script ran saw increased net sales on wholesale unit and ASP growth.
Additionally, the brand achieved exceptional fiscal third quarter gross margin levels, driven by consumers continuing to add features and options to their orders.
As we integrate the prior of year of manufacturing footprint into Master craft production, we expect to continue to ramp up production throughout the year, allowing us to meet to better meet the wholesale demand from our dealers as they look to capitalize on the summer selling season and continued robust retail demand from consumers.
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 grow our categories and deliver long term shareholder value guided by our strategic priorities.
Looking at how far we've come over the past nine months gives us 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 Tim. Thanks, Brad looking at the topline net sales for the second quarter were $147 9 million and the increase of $45 3 million or <unk> 44, 2% compared to $102 6 million for the COVID-19 impacted prior year.
<unk>.
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 costs and costs associated with the transition of all the ore to our new paradigm of 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 costs associated with the transition of <unk> 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 <unk> 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 periods, 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.
<unk> from higher incentive compensation costs, and additional investment related to product development and the 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 100 to one 2% compared to adjusted net income of <unk>.
$8 6 million for <unk> 46 per diluted share in the prior year period.
Adjusted EBITDA was $27 5 billion 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 as of April 4th we had $29 million of cash on our balance sheet.
With our result for our revolving credit facility fully repaid we entered the quarter was $64 million on 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 the adjusted EBITDA margin of approaching 17% and adjusted earnings per share growth up in the high 120% range year over year.
I will now turn the call back for it.
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 on our belief that this is our differentiator on what brings people of master craft and the reason they remain with us as.
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.
Thank you as the.
A reminder, if you would like to ask an audio question. Please press star followed by the number one on the telephone keypad. Once again that is star one to ask the question.
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.
Question on capacity I think in this quarter you produced collectively almost 2100 boats.
Should we think of that as your.
Current run rate capacity, and then as we put that in the context of yours.
Need for inventory in the channel is that of good expectation for the quarterly run rate kind of next year.
Hey, Craig the spread.
I would say first and foremost of the current run rates are not capacity.
The 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 that production number is going to continue to increase quarter by quarter.
And we do expect an 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 on a pre salt.
We're about the lap of difficult I'm, sorry, very difficult comparisons right. So last year was incredibly strong with the <unk>.
With the pandemic what gives you confidence that this retail is more sustainable than just sort of a one time outdoor.
The trend.
Well Craig.
It's my view that.
The COVID-19 experience was life changing for a lot of people, it's not something that theyre, 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 into the boating lifestyle. We think we've taken advantage of that and we will continue to but I think we 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-19 in other words.
People like working remote.
Realize that they have the opportunity to do that some businesses are encouraging that.
Continue to buy property in in areas that they prefer to lift on that happens to also often be areas, where they can enjoy the outdoors and enjoy the boating lifestyle or have proximity for 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.
The in property in rural areas relative to the urban areas. So once again I think there are a variety of reasons.
And let's not forget co.
COVID-19 is one version of the virus looks like it ourselves 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 Hey, Thanks, Fred Youre on.
Okay.
Our next question is from the line of Eric Wold with B Riley.
Thank you. Good morning, guys. Good morning couple of questions I guess one.
If you do not need to shut down the production any days for the for the resin. The shortfall you where are you seeing the greatest.
The supply chain headwinds.
Right now that are less navigator will sort of speak and can you estimate kind of what impact does that with the may have had on on shipments or margins in the quarter and the guidance.
Well first of all of its like whack, a mole, it's a different supplier everyday or every week and they are constantly adjusting the production schedules to accommodate that.
It involves more production out of.
The optimal sequence of production.
No.
It's not just one area as I said I picked resident as an example, but.
There are countless other items in different contributing factors right everything from the.
The recovery from the ice storms in the south.
Texas the <unk>.
Power outages, two container shortages and shipments from overseas. So we're battling all of those and so far our team has done a phenomenal job of negotiating that.
It's tight and its delicate with regard to the impact on production.
I mean.
It certainly has created significant inefficiencies.
But the most important thing for us has been to ramp up and continued production and service the demand that we see out there so.
No.
If I had the guess I'd say it could be on the order of about a day kind of thing.
Got it and then.
When you noted that on VR 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 guys on 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 out of the.
Maryann on interest only in the next 12 months.
We're optimistic because.
We expect to ramp up dramatically, okay in summary, and.
In terms of our production there.
We were still finishing up at the beginning of this quarter construction projects to tailor. The facility. So there is still disruption on workarounds going on there the significantly inhibited that ability having said that this quarter is one where we will see significant progress and that will roll into continue that acceleration through next.
At year.
Being said that just to create the right context, while we say we're sold out and we refer to it is this year, we have a commitment from for our marine Max to take everything we can produce for the next year. So we are totally aligned with them.
On the burden is on us to continue to accelerate that production to meet demand.
Perfect. Thanks Youre.
Youre welcome.
Your next question is from the line of Joe <unk> with Raymond James.
Hey, guys. Good morning, good morning, Joe.
For 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 and any material change in retail demand or array of peas for example.
Better than you expected on the manufacturing front, where supply chain constraints actually left the nuclear in the quarter.
Yes, Joe this is Tim.
Absolutely, we've been able to navigate the supply chain disruptions without having to shut down our facility and so that that was that was a pleasant surprise for us because of how challenging that environment is.
Okay. The Joe just to tie it all together in terms of not just production with demand.
Retail demand has exceeded our expectations.
We started building some inventory in the in the fall and over the last couple of months, we haven't been able to build any further pipeline.
With our dealers is.
As much as we're ramping up.
Okay. So it was a little bit better capacity on a little bit of better retail quarter.
Okay.
Secondly on on EBITDA.
You're guiding for I guess, you've got your guidance implies a sequential margin decline from Q3 the Q4.
It's fairly unusual for your business.
Why are we going to see that margin pressure in Q4, when 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're trying to be.
A 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 Brent <unk> with Keybanc capital markets.
Hey, good morning, guys good morning.
Any color that excuse me any color you have on how many of your.
Production slots are.
Our retail sold either in the fourth quarter into.
2022, I know you said record levels, but.
Adjusted 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 to flow through there is not going to be carryover of 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.
<unk> or the health of our dealers.
<unk>.
We have commitments again next year. This is the time of the year that would get those commitments from our dealers and they are rolling in and above our estimates above our internal targets. So once again, we just continue to.
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 that I think a few times on the call, but is there any way to quantify maybe what youre seeing at retail so far in April of ne and then as we get through May and in the June with channel inventories. So low just how are you thinking about your ability to.
Satisfy really the peak seasonal demand.
This year.
Yeah, Hey, Brad of storage.
No.
Obviously the quarter of retail was just phenomenal across all four brands. We saw that continue into April just fantastically.
May and June is where we're starting to see some tougher comps here over the next several weeks.
So we do expect.
We obviously are hopeful but given how much inventory, we've been able to get into the field. The fact that we've been able to increase production, we're confident and we do have record levels of retail already sold slots.
We will be able to meet that customer demand, while still having tremendous opportunity from a channel 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.
Once again to asking out of your question. Please press Star one and your next question is from the line of Mike Swartz with true security.
Hey, guys good morning.
Right.
Yes, Fred maybe just wanted to continue I think you were you were saying.
You're confident in.
The master craft business, gaining market share through the summer months, maybe just provide a little color context, what exactly gives you that confidence.
Yes.
I would.
The.
I think we're ramping up at a faster rate than historical market shares would indicate so that's what gives me confidence that we will ultimately be gained share. In addition to the significant changes that were made during this past year or so with regard to dealer upgrades and.
<unk>.
Yes, Mike.
As we look at some of the digital marketing initiatives, we've implemented in lead generation.
It's just off the charts to be quite Frank so the activity that our dealers are seeing.
And to Fred's point. The fact that we have we are of high degree of confidence that relative to the segment.
Particularly of Master craft, we've been able to get more inventory out to the field relative to the competition that we feel comfortable that 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 master craft product. In particular, we also have some new product and innovation is coming at the other brands as well, but as we think about master graft, we think that'll 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 youre, making in the business at the <unk>, you've called out of product development and engineering teams as part of that.
Just I guess, what have you identified with bringing these new teams on is maybe the biggest opportunities.
Areas, you may not have been as competitive and 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 and we have continued to improve across the product offerings. So its not targeted at any one specific area.
And it's a continuous improvement process and I feel once you have the opportunity to appreciate what we're offering for model year 2022, Youll have a much better sense of the breadth of those improvements.
And once again, we're making commitments in terms of investments not only for model year 'twenty three beyond 'twenty, two but for future years beyond that.
Unfortunately from a competitive disclosure standpoint, I don't want to get into detail about what the specific innovations or yes, Mike the way that I'd think about it as well as in particular product development at the bandwidth issue right as we continue to grow and we've got tremendous organic growth opportunities with avianca and not exciting.
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 of that we're 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 that can execute on it.
And I would just add final Mike our innovations and improvements are totally driven by what we believe is the impact on the consumer and their appreciation and debt.
Best experience goal, it's not driven for innovation for innovation sake.
The process, we've developed here to make sure that we have a loud and clear voice of the customer that we're responding to.
Okay, great. Thanks, guys Youre welcome.
And at this time there are no further questions, we'll turn it back over to the panel for any part of the presentation or closing remarks.
We have non to make I appreciate it and thank you everyone for joining us.
And on a great day.
Thank you. This concludes today's conference call you may now disconnect.
And the team.
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