Thank you for standing by and welcome to the Third Quarter 2022, MasterCraft Boat Holdings, Inc. Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers presentation, there will be a question-and-answer session. . As a reminder, today's program may be recorded. And now I'd like to introduce your host for today's program, Tim Oxley, Chief Financial Officer. Please go ahead, sir.

Thank you, Operator; and welcome, everyone. Thank you for joining us today as we discuss MasterCraft's third 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 third 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, May 11th, 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 would 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 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.

Good morning, everyone. Thank you for joining us today. Our business performed extremely well during the third quarter as we delivered our highest net sales, gross profit, diluted adjusted earnings per share, and adjusted EBITDA for any quarter in the company's history. These results reflect a continuation of exceptional execution against our strategic and our operational priorities as we delivered a record-setting performance for the sixth consecutive quarter. The hard work and determination of our team in the phase of the challenging environment made this momentous achievement possible. Impressively, we grew net sales organically by more than 26% and we grew diluted adjusted earnings per share by nearly 20% year-over-year. This represents the fifth consecutive quarter of year-over-year net sales growth of more than 25%. Although we achieved another record quarter, our growth in net sales and earnings was once again constrained due to supply chain and COVID disruptions. Logistics challenges combined with shutdowns, labor shortages, and capacity constraints at our suppliers have caused widespread but largely intermittent component delays and scarcity across the industry. These disruptions combined with labor challenges associated with COVID limited our unit shipments and created significant production inefficiencies during the quarter. These challenges delay the conversion of work-in-process inventory to finished goods and resulted in additional costs not typically experienced in a normal production environment. Constrained production and higher production costs combined with higher-than-expected inflation in the quarter has created significant, but we believe temporary, margin headwinds. Driven by our consumer -centric strategy, we are prioritizing product availability and quality over cost to meet the continuing strong retail demand as we head into the summer boating season. The constrained production environment and the continuing robust demand for our products is keeping dealer inventories at historic lows for this time of the year. Low dealer inventory…

Thanks, Fred, looking at the top line, net sales for the third quarter were a record $186.7 million, an increase of $38.9 million or 26.3% compared to $147.9 million for the prior year period. This increase was due to higher prices, favorable model mix, higher option sales, and higher wholesale unit volume. As Fred mentioned, this was the most profitable quarter in the company's history. Gross profit for the quarter increased $4.8 million to $42 million compared to $37.2 million for the prior year period, principally driven by higher net sales. This favorability was partially offset by higher input costs, driven by inflationary pressures and production inefficiencies from supply chain disruption. Our gross margin was 22.5% for the quarter, a decrease of 270 basis points compared to the prior year period. Lower margins, particularly at NauticStar, were the result of supply chain disruptions and inflationary pressures that limited production and drove input costs higher. Price increases partially offset these higher costs for the quarter as our gross margin increased by 40 basis points sequentially from our second quarter. Operating expenses were $14.5 million for the quarter, a decrease of 100,000 or approximately 1% compared to the prior year period. SG&A, as a percentage of net sales, was, once again, the lowest for any quarter since becoming a public company as we continue to prudently manage cost. Turning to the bottom line, adjusted net income for the quarter increased to a record $22.4 million or $1.21 per diluted share computed using the company's estimated annual effective tax rate of approximately 23%. This compares to an adjusted net income of $19.1 million or $1.01 per diluted share in the prior year period. Adjusted EBITDA was a record $32.1 million for the third quarter compared to $27.5 million for the prior year period.…

Thanks, Tim. We are pleased by our record-setting pace for fiscal 2022. Despite severe levels of disruption faced by the industry, we definitely managed the supply chain to increase production year-over-year. This exceptional execution, once again, resulted in industry leading organic net sales growth and market share gains. We expect demand from consumers seeking the boating lifestyle to endow and lead to continued strong growth for our company. 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, dealer and vendor partners, and people. Operator, you may now open the line for questions.

Ladies and gentlemen, if you have a question at this time, . If your question has been answered and you'd like to move yourself from the queue, . Our first question comes from the line of Joe Altobello from Raymond James. Your question, please.

Thanks, guys. Good morning. First question, trying to understand the commentary this morning on supply chain, not a surprise. Your results in the quarter because if I look at my model and I look at key estimates and I look at the guidance, sales were well above EBITDA margin slightly above. So it sounds like supply chain issues weren't that big of a deal in the quarter, but perhaps got worse in April and maybe early May. So help me understand the commentary versus what you delivered this morning for 3Q?

While we met our guidance, the supply chain was disruptive and created inefficiencies. And so, while it's been intermittent, it's got a bit worse in the last month or so, and we continue to meet those challenges and we're very pleased that we delivered on the guidance. But make no mistake, supply chain was disruptive during the quarter.

Okay. But it did get a little bit worse. Any particular areas? I know you guys have talked about things like engines, and windshields, and computers screens in the past. Is it one specific area, or is it pretty widespread? And it sounds like it's largest at NauticStar, or am I misinterpreting that?

No, it's across the products, certainly affecting MasterCraft significantly as well as NauticStar. In NauticStar, it can be items like engines as well as other items, but at MasterCraft, it's been a whole range of different items, and they tend not to -- we tend to solve the problem and move on, but it creates a disruption during that period. So it's not any one item. It's been a variety of different items. And in MasterCraft's case though, it's not engine supply. It's more like screens, or windshields, or tanks, or a whole variety of items at different times.

Anything that has a chip in it is likely to have certainly inflationary pressures and is subject to disruption.

Okay. Just one last one for me. I guess, is it more on the manufacturing side from suppliers, or is it more in the logistics side in getting those components and parts to the facilities or both?

It's more on the manufacturer's side, but certainly, there have been logistics challenges. But again, those tend to be short-term intermittent disruptions. Of course, what's going on in China with the lockdowns and so on has a ripple effect through the supply chain. And so we have to work hard sometimes with our suppliers to help them source their components.

Yeah, on the logistics side, certainly, we've spend more on expedited freight than we have in the past. And that is one of the inefficiencies associated with the supply chain disruption.

Okay. Great. Thank you, guys.

Thanks, Joe.

Thank you. Our next question comes in the line of Craig Kennison from Baird. Your question, please.

Hey, good morning. Thanks for taking my questions as well. I guess I wanted to understand demand trends a little bit better. I think first of all, you said you were sold out of some brands. Which brands are you sold out of for this model year?

Sold out in all brands.

All brands. Okay. And do you -- at this point then, are you taking, I guess, pre -orders or are you putting deposit -- taking deposits down on future model years?

No, we have not yet released pricing on 2023 model year, so that will happen shortly at which point we will start booking those orders. Having said that, out of the orders that are booked, most of them are retail sold but not all of them. So some dealers still have the opportunity to convert what would've been a stock quarter to a consumer order and give delivery within this model year.

Sorry Craig, what were you saying?

No, go ahead.

I was gonna say, really our leading indicator of the demand is having discussions with our dealers on what they would like to buy for the upcoming fiscal year. And that demand is very strong and they are the closest to the action as far as the consumer demand. So very strong indications of demand for fiscal '23.

So that makes sense. From a consumer perspective, are all of those boats spoken for? Is that -- or are they ?

All of which boats? 2022?

Yes.

No. They're not all retail sold. So consumers still have the opportunity in some dealers to be able to convert what would've been a stock order to their specific order.

Got it. Okay.

And a disproportionate number of the boats are retail sold. I mean, that's so -- even though they're not all retail sold, it's higher than normal.

Makes sense. Okay. And then I guess I'm just reading the newspaper like everybody else and would love your perspective on the potential for a recession and how you prepare your business for what seems like an inevitable part of the business cycle.

Well, we think that our strategic pillars are a big part of that and if you think about the way we're spending our money now and making investments in dealer acquisition and building up our marketing and lead management capabilities in what we're doing to continue to build a brand. In the introduction of new models, we've been very aggressive there and the recent models, well, this year we're experiencing the results of having completed some introductions of fairly large models, we beefed up the smaller end of our product line and will continue to do so. So that positions us very well for a broad spectrum of price points as we head into the future. And remember, we have a quite variable cost structure underlying but in the near-term, make no mistake, we're making investments today and dealer training and in distribution, expansion and upgrading, that's going to position us very well. And there are still markets that we're relatively undeserving like international.

And Craig, I would add, as we stated in the prepared remarks, if you look at where our inventory -- our dealer inventories are relative to historical levels, I think we quoted somewhere right around 50% down from 2019 and 2020 levels. Our business as a whole has never been better positioned to withstand an economic downturn. So we still have the ability to produce at wholesale even with a significant decline in retail. So we'll obviously make sure that we don't ever go back to a situation where we've got too much inventory in the channel but because we have such an empty basket, it does insulate us and give us the ability to continue to deliver at wholesale.

Thanks, George. I guess, lastly, if you don't mind, just curious what you've seen in terms of recent demand trends like in April and May post-quarter? We've heard some noise about whether being a factor in some markets, but I'm curious if you've seen any evidence of a slowdown yet based on some of the economic headline.

We haven't. I mean, obviously, I think the weather has impacted the delivery of some boats that we have shipped, but what we're hearing from dealers is that we're not seeing any orders or commitments from consumers to no longer take delivery of the boats. So from our perspective, the demand continues to remain strong. The consumer still is very interested in the boating lifestyle. We talk about some of the structural reasons behind people where they are living and how they choose to work and spend time with their family. We think all of those things remain very strong and position us. We think our consumer tend to be healthier overall, but we've not seen any or heard any orders being canceled. If anything, the weather has just more delayed the delivery of the boat to the end consumer, but not impacting overall demand.

Craig, there was an interesting article last week in Wall Street Journal talking about the migration of people to rural areas, and in particular, that over 55 group, which obviously tends to be a very wealthy group, moving to specifically a boat-centric area. So they were targeting around the country the areas of high migration, and it plays right into our strengths.

Perfect. Thank you.

Welcome.

Thank you. Your next question comes from the line of Mike Swartz from Truist Securities. Your question, please.

Hey, guys, good morning. Just -- maybe first start off with just a point of clarification. I think Fred, maybe, in your remarks, you had indicated in the third quarter that EBITDA margins for all brands were up year-over-year except for NauticStar. Is that what I heard?

Yes.

Okay. So just a follow-up to that. The -- I guess, NauticStar's 10% of your consolidated revenue, but it would appear that I mean -- I guess the math would tell me that NauticStar actually lost money in the quarter. Is that a fair observation?

Yes, that's true.

Okay. And did things -- I guess as it pertains to NauticStar, did things progressively get worse through the quarter? And I know there's some supply issues in particularly related to engines, but just maybe diagnose what's happened there, and I know you have new leadership coming in, but maybe, what the strategic plan is there going forward?

Well, the fundamental focus is on improving the operation. It was a company we acquired that was sole proprietor kind of business, very thin and converting it to be a subsidiary of a public company was something that we frankly didn't do a good job of initially. We ramped up production and the systems that existed at the company essentially imploded on themselves. And so we have to rebuild all the fundamental operating systems from the ground up and that's what we've been doing there. Thought we had the right leader in there to be able to do it, turns out we didn't so we made that change. We now have our strongest process leadership function-by-function involved in doing that as well as some external resources. So it's a bootstrap ground up rebuilding the business activity and that's what we've been focused on during the quarter. And of course, sometimes when you undertake those activities because that change was made in the third quarter we're talking about, it doesn't always get better before you uncover some of the rocks and deal with those.

Right. And I absolutely appreciate that the supply chain and the operational environment has certainly gone against NauticStar as has every company. But when I look back that company was acquired, I think, it was about five years ago and I think revenue is basically flat versus where it was back then. I mean, is there a point in time where you begin to consider maybe strategic alternatives? Does it fit with the portfolio? Is it worth being part of a public company, etc.?

All alternatives are evaluated and considered by the management as well as by the Board.

Okay. Thank you. And just maybe another question quickly, just add some color or sense of just your -- I guess your pricing strategy going forward, and specifically as you move into Model Year '23, are you -- have you -- or I guess are you considering more kind of off-cycle or mid-cycle price increases? It sounds like something you went through in the March quarter, so maybe you talked about how you think about pricing over the next 12 months.

Yeah, hey, Mike. It's George. So our preference, strong preference -- and I think this goes for the dealers and the end consumer as well, is to not have to implement a mid-cycle price increase. So we're spending a lot of time and doing a lot of work with our internal team and our vendor partners to try to estimate what the inflation for all of our material and labor is going to be for this upcoming model year and try to bake that into our price increase here effective July 1st for all of our brands. So that -- we're going to do everything we can to avoid having to do anything mid-cycle. It creates a lot of disruption both internally, but obviously with the end consumer, and so we're very focused on delivering on that and doing the work now to make sure we get that nailed down as best as possible.

Okay. Great. Thank you.

Thank you. . Our next question comes from the line of Eric Wold from B. Riley. Your question, please.

Thank you. Good morning. A couple of questions, I guess. One is the follow-up on NauticStar. I know you've looked into everything there, you're trying to ramp that back up but just not on the engine side. Knowing that you made the switch or the configuration, if you'll accept, to your Mercury engines, how quickly can you push that through to maybe offset some of the Yamaha logistics? How accepting have consumers and dealers been to this and how likely will you be able to get into the order book of Brunswick to get what you need?

Well, they have made modifications for many of the products and many of the engine offerings. We never expected Mercury to be a dominant proportion of their engine but a strong secondary source. And Mercury was committed to increase that volume over time as they ramped up their capability. Having said all of that, Mercury just recently has become very constrained in terms of their production output. They've done a fantastic job of supporting Crest, a long-time customer, but as you can imagine, new customers that are growing are not necessarily on top of that food chain. So that has been a much more limited alternative to us more recently, again, due to the very recent extensions of issues that Mercury is having in getting some of their components from offshore. So having said that, back it up, it's primarily, again, with as it relates to not Yamaha problem.

Got it. As for a comment you made, you expected MasterCraft to be producing record levels in the fourth quarter, I guess, so I'm assuming that means by looking back historically, much better than it was in Q3. I guess what changed on the supply chain or your production ability between Q3 and Q4 for MasterCraft to make that happen. And when you say producing at record, does that also mean shipping at record or is there a risk that there could be just a further buildup of because of that.

Expect a record quarter hands down in whichever dimension you choose to measure it by. And so, it's been a stair step increase, not without scrambles and fighting and disruption, etc., but that's the way of life, something that we've come to accept. Having said that, we've seen enough marginal improvement that as the supply chain made some marginal improvements, we've been able to adapt to that and expand our volume. So, if you remember, it was fourth quarter last year when we got hit really hard by the supply chain disruptions. So the fourth quarter last year compared to this year is an easier comp, but sequentially, we expect very significant increase also from the third quarter. We're already seeing that, and it's something that we're absolutely committed to feel very confident about the fourth quarter.

Keep in mind --

Got it.

-- on our model year-to-date basis, Eric -- this is Tim. We're up almost 10% in unit volume at MasterCraft. So we've had nice increases sequentially quarter-to-quarter, and we're going to -- we're committed to overcoming the supply chain challenges to deliver on another record quarter of fiscal -- for our fourth quarter of the fiscal year.

Perfect. Thank you both.

You're welcome.

Thank you. This just conclude the question-and-answer session of today's program, as well as today's conference. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day.