MasterCraft Boat Holdings, Inc.
Q4 2021 Earnings Call Transcript

Published: 2 Sep 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter and Fiscal 2021 MasterCraft Boat Holdings, Inc. Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Tim Oxley, Chief Financial Officer. Please go ahead.

[Tim Oxley:]

Thank you, operator, and welcome, everyone. Thank you for joining us today as we discuss MasterCraft's fourth quarter and full-year fiscal 2021 performance. As a reminder, today’s call is being webcast live and will also be archived in 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 an overview of the progress on our strategic priorities and review our operational highlights from the quarter and full-year. I will then discuss our financial performance for the fourth quarter and full-year fiscal 2021. Then I’ll 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 the participants that the information contained in this call is current only as of today, September 2, 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 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 2021 fourth quarter and full-year fiscal 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 Investor section of our website. With that, I'll turn the call over to Fred.

[Fred Brightbill:]

Good morning, everyone. Thank you for joining us today. Our business executed extremely well against our strategic priorities during fiscal 2021 in a very challenging and dynamic environment. In fact, we delivered record setting performances for each quarter of fiscal 2021, which culminated in record net sales and earnings for the full-year. Despite the many challenges we faced, we grew our net sales by more than 44% and our diluted adjusted earnings per share by nearly 148% year-over-year. When compared to our previous record year, fiscal 2019 net sales were higher by nearly 13% and diluted earnings per share were up by more than 17% all on an organic basis. This exceptional performance was driven by year-over-year unit increases at each of our segments, including the most wholesale units ever sold by the company in the fourth quarter. To accelerate throughput and produce record level units in arguably the most challenging supply chain environment we have ever experienced in the boating industry is a clear demonstration of our disciplined execution, operational excellence and the strength of our team. We were able to deliver for our dealers and consumers in this robust demand environment. The credit for this performance goes to our more than 1,500 employees who continued to execute our key strategic priorities in the face of adversity and the strength of our market leading brands. Since refocusing ourselves on our value-enhancing growth strategy last year, we have made impressive progress in the pursuit of our overarching objective of driving sustainable accelerated growth by becoming the most consumer-focused boating company. During fiscal 2021, we continue to execute against each of the four pillars of our strategy

[Tim Oxley:]

Thanks, Fred. Looking at the topline, net sales for the full-year were a record $525.8 million, an increase of $162.7 million or 44.8%, compared to $363 million for the prior year. This increase was primarily a result of higher wholesale unit volume and lower dealer incentives as retail demand has remained robust. This favorability was partially offset by the impact of segment mix. For additional context regarding our exceptional performance this year, when compared to fiscal 2019, which was our previous record, net sales increased by $59.4 million or 12.7%. As Fred mentioned, this was the most profitable year in the company’s history. Gross profit for the full-year increased $54.6 million to $103 million compared to $75.4 million for the prior year period, principally driven by a higher sales volumes, lower dealer incentives and higher prices. This favorability was partially offset by higher material cost, cost associated with the transition of Aviara to our new Merritt Island facility and higher compensation cost. Our gross margin was 24.7% for the full-year, an increase of 390 basis points, compared to the prior year period. The increase was primarily attributable to lower dealer incentives, favorable overhead absorption, driven by the higher sales volume, and higher prices, partially offset by cost associated with transition of Aviara to our new Merritt Island facility and higher labor cost. Compared to fiscal 2019, our consolidated gross margin was up more than 40 basis points. Operating expenses were $54 million for the full-year, a decrease of $47.9 million or 47% compared to the prior year period. This decrease was primarily driven by goodwill and other intangible asset impairment charges of $56.4 million related to our NauticStar and Crest segments recorded in fiscal 2020. In addition, the company had lower selling and marketing costs in fiscal 2021 primarily due to the lack of in-person boat shows and the strength of organic retail demand. The decrease was partially offset by higher general and administrative expenses resulting from higher compensation costs and additional investments related to product development and information technology. Despite our continued investment in product development and other areas of SG&A, for the full-year, SG&A as a percentage of net sales was the lowest on record since we became a public company. Turning to the bottom line, adjusted net income for the full-year increased to a record $62.8 million or $3.31 per diluted share computed using the company's estimated annual effective tax rate for approximately 23%. This compares to an adjusted net income of $25.1 million or $1.34 per diluted share in the prior year period and $53 million or $2.82 per diluted share in fiscal 2019. Adjusted EBITDA was a record $92.8 million for the full-year compared to $44.3 million for the prior year period. Adjusted EBITDA margin was 17.6%, up 540 basis points from 12.2% in the prior year period. Compared to fiscal 2019, adjusted EBITDA was up nearly 17% and adjusted EBITDA margin was up more than 60 basis points. As for the fourth quarter results, net sales, profitability and earnings all benefited from the robust retail demand environment and our delivery of the highest wholesale unit volume for any fourth quarter in the history of the company. Net sales were a record $155.5 million and an increase of $51 million or 204% compared to the COVID impacted prior year period primarily as a result of record sales volume. Gross profit for the quarter was a record $37.2 million and our gross margin was 23.9%, an increase of 940 basis points. This gross margin improvement was principally driven by favorable overhead absorption from higher sales volume, lower warranty costs and lower dealer incentives and partially offset by higher material costs, costs associated with the new Merritt Island facility and higher labor cost. The higher material costs were primarily driven by inflation as well as supply chain and logistics disruptions. Adjusted net income increased to $18.6 million for the quarter or $0.98 per diluted share computed using the company's estimated annual effective tax rate of approximately 23%. This compares to an adjusted net loss of $1.8 million or $0.10 per diluted share in the prior year period. Turning to our balance sheet and liquidity. In June, we closed on a new $160 million credit facility. This credit facility, which replaced the company's previous credit facility will provide us with additional liquidity and a financial flexibility to continue to execute on our consumer-centric growth strategy and capital allocation objectives. Through the new facility, we increased our access to revolving credit from $35 million to $100 million. In addition, our strong operating performance and unprecedented wholesale demand visibility enabled us to push our effective interest rates lower, which we expect will yield interest savings over the term of the new facility. Driven by strong operating cash flow, we ended the year with $39.3 million of cash despite funding substantial growth-oriented projects during the year. When we add that cash to the $66 million of availability on our new revolving credit facility, we ended the year with over $105 million in total liquidity. Net leverage was 0.6x adjusted EBITDA at the end of the year. We also announced that our Board of Directors has authorized a new share repurchase program under which we may repurchase up to $50 million worth of outstanding common stock. The Board's authorization of this program reflects the confidence we have in our company, our growth strategy, our comprehensive portfolio brands and our ability to execute on what we believe to be a tremendous opportunity before us. We maintain a discipline and thoughtful approach to capital allocation through which we prioritize balance sheet resiliency and growth while looking for prudent opportunities to return capital to shareholders. We believe the company's recent share price represents a great value to investors and we look forward to being able to opportunistically utilize this program to create additional value for our shareholders. Our first opportunity to be in the market under this program will be later this month. For the full-year fiscal 2022, consolidated net sales growth is expected to be up in the high-teens percent range, with adjusted EBITDA margins flat year-over-year and adjusted earnings per share growth up in the high-teens percent range year-over-year. Driven by growth-oriented projects, we expect capital expenditures to be between $25 million and $30 million for the full-year. This guidance represents another record year and is all organic. For the first quarter of fiscal 2022, consolidated net sales growth is expected to be up in the mid-30% range with adjusted EBITDA margins in the low-14% range and adjusted earnings per share growth up in the low-20% range year-over-year. Importantly, we face significant ongoing risks from supply chain disruptions and the impact of COVID. We remain laser focused on mitigating these headwinds. I'll now turn the call back over to Fred.

[Fred Brightbill:]

Thanks, Tim. To summarize my earlier comments, we are pleased by the progress we made during fiscal 2021 to accelerate production, efficiently manage our supply chain to meet increased consumer demand across our brands and to maintain our uncompromising quality standards. This exceptional execution resulted in record organic growth in sales and earnings, and based on the June 2021 data has led to market share gains. We continue to believe the increased retail momentum we have experienced from consumers seeking the boating lifestyle and our brands will endure leading to continued 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.

[Operator:]

Thank you. Our first question comes from the line of Joe Altobello with Raymond James. Your line is now open.

[Joseph Altobello:]

Thanks. Hey, guys. Good morning.

[Fred Brightbill:]

Good morning, Joe.

[Joseph Altobello:]

The first question for you, Fred, the 2,500 unit dealer inventory deficit that you cited, does that assume dealer turns get back to pre-COVID levels? Or are you assuming turns remain elevated now that dealers have learned to operate at lower inventory levels?

[Fred Brightbill:]

That assumes that we improve our efficiency and operate with lower inventory levels at our dealers and higher turnover. Absolutely assumes a step-up in performance.

[Joseph Altobello:]

Got it. And then just secondly, in terms of the guidance, you're expecting about a 200 basis point decline in EBITDA margins in Q1 year-over-year. I think sequentially it's down about 300 basis points, help us understand what's dragging down margins in Q1, and I guess how much confidence you have in the balance of the year to kind of offset that deficit to get back to flat?

[Fred Brightbill:]

Sure. The headwinds we’re experiencing margin-wise starts with labor inefficiencies associated with the supply chain disruptions. We're putting parts on the boats out of sequence. We're working overtime because parts are coming in later than they expected. So that is a big driver to the decrease in margin we’re talking about. We also have a mix of profits coming from lower margin segments during the quarter. We have the effect of the Aviara overhead, which is incremental to compare to the quarter a year-ago. We've got a bit higher inflation than we originally anticipated when we established our budget. And keep in mind that those things were partially offset by overhead absorption and operating expense leverage.

[Joseph Altobello:]

Okay. Thank you, guys. Appreciate it.

[Operator:]

Thank you. Our next question comes from the line of Craig Kennison with Baird. Your line is now open.

[Craig Kennison:]

Hey, good morning. Thanks for taking my questions. Sounds like you've done a better job of getting supply into the channel, but you're still well below where you want to be with respect to inventory. So is there a way to think through how much retail you might be missing out on based on the level of demand versus what you've actually seen turn at retail?

[Fred Brightbill:]

One of the things – I'm going to turn this over to George after I make a brief comment. One of the things that's important now is we have consumers that are ordering and therefore, we have wholesale shipments that are immediately translating to retail sales as soon as they hit the dealer. As a result, the inventory isn't there on the floor, but we're still able to support that retail sales. So to some extent, we've seen a change in behavior well beyond what was past practice in terms of ordering ahead by consumers. George?

[George Steinbarger:]

Yes. Craig, I guess what I would add, it's difficult to pinpoint. But what we're seeing and what we're hearing from our dealers is that retail continues to be robust, consumers continue to be attracted to the boating lifestyle obviously with the resurgence, if you will of the COVID and the Delta variant, consumers are recognizing that things aren't going to go back to normal anytime soon. And so we've got many consumers that even if they don't have inventory on the ground today are putting in orders for boats that they're – they're already pre-buying boats today for next summers boating season. So I think we're not losing much. It's just delaying when the consumers get the boats. And we're hearing from dealers that a high percentage of the boats that they've already been allocated are pre-sold and so that's encouraging to us, and we think that momentum will continue.

[Craig Kennison:]

And George, just following up on that, with more pre-sold units, I assume they maybe more customized. Does that mean they're coming with higher level of features and therefore maybe a higher margin, higher ASP kind of boat in the pre-order book?

[George Steinbarger:]

Yes. That's absolutely right, Craig. We experienced that obviously last year with the high percentage of retail sold boats, and we expect that trend to continue in particular as we continue to come out with new innovations and features as Fred described on the call with our latest model year introductions, we think that will continue to drive additional ASP and margin growth.

[Craig Kennison:]

And then lastly, with respect to guidance, does the revenue guidance – is the cap on that your production capacity or is it some assumption about retail and inventory because it does seem like with such an urgent need for inventory and pretty strong demand that there's probably demand for more than what your revenue guidance implies?

[Fred Brightbill:]

First and foremost, it's absolutely not retail and demand. We believe we've got a two-year runway ahead of us where we'll be scrambling to satisfy that demand. Having said that, when you talk about capacity, it’s capacity constrained by the supply chain in the COVID pandemic that continues to linger and rear its head again in the Delta form. So we have probably 25%, 30% more capacity today than we are able to operate at based on the cap due to the supply chain. So supply chain is a short answer.

[Craig Kennison:]

Great. Thank you.

[Fred Brightbill:]

You are welcome.

[Operator:]

Thank you. There are no further questions. Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may now disconnect.