Mastercraft Boat Holdings Inc

NASDAQ:MCFT

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, and thank you for standing by. Welcome to the Fiscal First Quarter 2024 MasterCraft Boat Holdings Earnings Conference Call.

[Operator Instructions]

Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Bobby Potter, Vice President of Strategy and Investor Relations. Please go ahead, Bobby.

[Bobby Potter, executive]

Thank you, operator, and welcome, everyone. Thank you for joining us today as we discuss MasterCraft's first quarter performance for fiscal 2024.

As a reminder, today's call is being webcast live and will also be archived on our website for future listening. With me on this morning's call are Fred Brightbill, Chief Executive Officer and Chairman; and Tim Oxley, Chief Financial Officer.

Fred will begin with a review of our operational highlights from the first quarter. Tim will then discuss our financial performance for the quarter. Then Fred will provide some closing remarks before we open the call for Q&A.

Before we begin, we would like to remind participants that the information contained in this call is current only as of today, November 8, 2023. 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 today's press release, which includes a reconciliation of these non-GAAP measures to our GAAP results. There is also a slide deck summarizing our financial results in the Investors section of our website.

As a reminder, unless otherwise noted, the following commentary is made on a continuing operations basis. With that, I will turn the call over to Fred.

[Frederick Brightbill, executive]

Thank you, Bobby, and good morning, everyone. Our business performed well during the first quarter as we delivered better-than-expected results despite continuing macroeconomic and demand uncertainty. With the summer selling season now complete, we're focused on rebalancing dealer inventories with anticipated retail demand to ensure the health of our dealer network.

We are maintaining a disciplined approach to capital allocation as we prioritize balance sheet resilience and the return of cash to shareholders through our share repurchase program. Macroeconomic factors, including interest rates, which could remain elevated for some time, are adversely impacting the demand for recreational boats and other luxury consumer goods. The potential for a broader economic downturn during fiscal 2024 could worsen this headwind for the industry.

In addition, political and geopolitical risks are creating uncertainties that weigh on consumer confidence. Given the dynamic macroeconomic and geopolitical backdrop, which is limiting retail demand visibility, we are prepared to respond to a range of potential retail demand scenarios. Our dealer inventory levels declined modestly during the quarter. Dealers are cautious to add inventory as they focus on destocking prior year models ahead of the 2024 boat show and summer selling seasons.

Because of the uncertainty and the impact of elevated interest rates on consumer demand and floor plan financing costs, this disciplined approach to inventory management will benefit the long-term health of our dealer partners and our business.

While dealer inventories are currently higher than we consider optimal, we expect levels to improve by the end of the fiscal year.

Moving on to supply chain. We do not expect inventory availability to be a constraint on our fiscal year 2024 production. Our experienced supply chain team worked diligently with supplier partners to alleviate constraints and support production and are now focused on cost reduction.

Given the uncertain environment, our strong balance sheet is a significant advantage, which provides us with abundant financial flexibility. Despite the cyclical headwinds facing the industry, we are well positioned to pursue our capital allocation priorities, including investment in long-term growth.

We continue to prudently invest in targeted initiatives that will take advantage of the industry's positive underlying secular trends. These investments will support long-term growth and value creation through product line expansion, relentless innovation and an unyielding focus on the consumer. With our financial position secure and our current strategic growth initiatives fully funded, we expect to continue to allocate most of our free cash flow for the year to our EPS accretive share repurchase program.

We recently published our second annual sustainability report, which highlighted our progress on promoting social and environmental responsibility. During fiscal 2023, we expanded our waste recycling program by nearly doubling the amount of reported waste recycled or reused.

The MasterCraft brand surpassed $4 million without a lost time incident, and we implemented employee engagement initiatives to reinforce our commitment to human capital. Our company's success is due to the dedication of our employees and the loyalty of our customers, and we know we must continue to deliver superior value to ensure our long-term success.

We look forward to making boating better and maintaining our company's position at the forefront of the marine industry.

In addition, we recently partnered with St. Jude Children's Research Hospital on the Surf to Safe Lives campaign. Our goal through this partnership is to make a meaningful difference in the lives of families across the country. We are proud to announce that the campaign was very successful and in addition to individual employee contributions, the company donated $75,000 to St. Jude. We look forward to continuing to support their mission to understand, treat and defeat childhood cancer and other life-threatening diseases.

Let me now briefly review some of the latest developments across our brands. At our MasterCraft brand, net sales were $75.8 million for the quarter, down 33% from the record prior year period. The decrease in net sales was in line with our expectations given the planned production decrease to rebalance dealer inventories to lower retail demand. MasterCraft recently announced the Icon package, an all-new package for our entry-level NXT series.

The aggressive features of the Icon package broaden the NXT's consumer base by appealing to those seeking to make a bolder statement. Features include all-black Z6 tower, SeaDek flooring, along with exclusive underwater impact pit and tower-mounted lighting. The Icon package complements MasterCraft's extensive model year 2024 lineup, which includes the most models available from any brand in the ski/wake category. In addition, MasterCraft continues to set the pace by offering the most wave adjustability, exceptional handcrafted quality and unmatched comfort.

At Crest, net sales were $18.5 million for the quarter, down 58% from the prior year period as expected. Elevated interest rates have severely impacted the pontoon category in the near term, although we remain optimistic about the long-term secular growth trends. Crest will soon be announcing an all-new line of products to expand its addressable market. We look forward to providing more information on this exciting initiative later this year.

At Aviara, net sales were $9.9 million for the quarter, down 23% compared to the prior year period. During the quarter, Aviara was focused on the introduction of the all-new AV28 which has been incredibly well received by our dealer partners. More than just a single model, the AV28 platform consists of 4 distinct model variants, an impressive Surf variant, a sterndrive, a twin outboard and a single outboard. Aviara began shipping this model during the quarter, and we expect the AV28 production to continue to ramp up for the remainder of the year. Aviara also expanded its distribution network by adding 5 new domestic and international points of distribution during the quarter.

I will now turn the call over to Tim, who'll provide a more detailed discussion of our financial results. Tim?

[Timothy Oxley, executive]

Thanks, Fred. Focusing on the topline, net sales for the quarter were $104.2 million, a decrease of $65.3 million or 39% from the record prior year period. This decrease was primarily due to lower unit volumes and increased dealer incentives, partially offset by increased prices.

Dealer incentives include higher or plan financing costs as a result of increased dealer inventories and interest rates, and other retail incentives due to the extremely competitive environment.

For the quarter, our gross margin was 21%, a decrease of 610 basis points when compared to the prior year period. Lower margins were mainly due to deleveraging on lower production volumes, increased dealer incentives and higher input costs, partially offset by price increases. Operating expenses were $13.3 million for the quarter, down nearly $500,000 from the prior year.

Turning to the bottom line. Adjusted net income for the year decreased to $8.1 million or $0.47 per diluted share, computed using a revised lower estimated annual effective tax rate of 22% due to continuing investments that yield R&D tax credits.

This compares to adjusted net income of $25.7 million or $1.43 for the prior year period, computed using a tax rate of 23%. Adjusted EBITDA decreased to $12.2 million for the quarter compared to $35.9 million in the prior year period.

Adjusted EBITDA margin was 11.7%, down 950 basis points from 21.2% in the prior year period. Our balance sheet remains incredibly strong as we ended the year with nearly $190 million of total liquidity, including $90 million of cash and short-term investments, and $100 million of availability under our revolving credit facility. We ended the quarter with no net debt as cash and short-term investments exceeded our outstanding debt balance.

Our balance sheet positions us exceptionally well and provides us with ample financial flexibility to ensure sound operations through the business cycle, and the ability to fund strategic growth initiatives. During the quarter, we spent nearly $6 million to repurchase 241,000 shares of our common stock. Since initiating our share repurchase program in June of 2021, we have spent nearly $54 million to repurchase nearly 2.1 million shares. These cumulative repurchases provided a 12% benefit to our fiscal first quarter adjusted net income per share.

We expect to continue to return cash to shareholders while prioritizing financial flexibility and high return investments in a business that generate growth and long-term shareholder value. Given the continued economic uncertainty, our outlook for full year fiscal 2024 remains unchanged.

As a reminder, consolidated net sales is expected to be between $390 million and $420 million, with adjusted EBITDA between $42 million and $52 million, and adjusted earnings per share between $1.46 per share and $1.88. We continue to expect capital expenditures to be approximately $22 million for the full year.

For the second quarter of fiscal 2024, consolidated net sales is expected to be approximately $96 million with adjusted EBITDA of approximately $7 million, and adjusted earnings per share were approximately $0.22. Although our guidance reflects a significant decline in earnings from fiscal 2023, we expect to generate positive free cash flow, which is a testament to our flexible, highly variable cost structure and proactive cost control efforts.

I'll now turn the call back to Fred for his closing remarks.

[Frederick Brightbill, executive]

Thank you, Tim. As we focus on rebalancing dealer inventories, our business performed well during the first quarter by delivering better-than-expected results. A strong balance sheet provides us with the financial flexibility and affords us the opportunity to pursue our strategic growth initiatives. We continue to exercise a disciplined capital allocation.

Over the past 24 months, we've returned more than $54 million of excess cash to our shareholders through our share repurchase program. As we move beyond inventory rebalancing, we are confident in our ability to leverage our portfolio of strong brands, deliver on our commitments, pursue long-term growth opportunities and generate exceptional shareholder returns.

Operator, you may now open the line for questions.

[Operator]

[Operator Instructions]

Our first question comes from the line of Joe Altobello from Raymond James.

[Joseph Altobello, analyst]

I guess, first question on dealer inventories. You mentioned that they're above optimal at this point. If you could quantify that for us, where does inventory stand in terms of weeks on hand today versus where you might have been in 2019? And are there any particular brands that are well above your target at this point?

[Frederick Brightbill, executive]

The inventory is marginally different. And I would say, the heaviest inventory is in the pontoon category, which was the most severely impacted from a demand standpoint. But once again, given the programs we have in place and our expectation to work that down over the remainder of the year, we feel reasonably comfortable. It's not where we'd like to be ideally.

But it's far from a crisis situation. It's just something that we need to manage our way through as we have in previous cycles.

[Timothy Oxley, executive]

Joe, this is Tim. I'd like to add. We mentioned that we had showed a modest decrease in our dealer inventory coming from the end of the year. And that's a pretty rare occurrence. I look back at the pre-COVID years, it only happened one time in the 12 years that I was looking at. So we're making some progress in correcting our dealer inventory.

[Joseph Altobello, analyst]

And I apologize, you mentioned this earlier and I missed it. But in terms of timing, is it your understanding that you expect to undership demand throughout fiscal '24 or into the spring?

[Timothy Oxley, executive]

It may vary by quarter, but certainly, I think our easiest comp is for the fourth quarter.

So we expect the inventory to be properly balanced by the end of our fiscal year. It may not make progress -- I mean what happens in Q2 is so immaterial that we don't even pay that much attention to the percentages in Q2. Really, it comes down to as it does in most years, to start of the selling season in April through June.

[Operator]

Our next question comes from the line of Craig Kennison from Baird.

[Bobby Potter, executive]

So this is Bobby. Craig, if you're talking, we don't hear you.

[Operator]

[Operator Instructions]

Our next question comes from the line of Eric Wold from B. Riley Securities.

[Eric Wold, analyst]

A couple of questions. I guess, can you talk about the significantly higher average prices per boat you saw within the MasterCraft segment boat sequentially and year-over-year, I guess? How much of that was the model year price increases for the start of the year versus kind of voluntary upticks and kind of mix or feature set? And how sustainable do you think these prices are in the macro compare environment we're in? And are you seeing any desire to kind of low to moderate?

[Timothy Oxley, executive]

Yes. This is Tim, Eric. So what we're seeing is a little bit of a shift toward the XT and X part of our lineup. The interest rate increases are most impactful in our NXTs. So those are voluntary. Our price increase was pretty moderate this year, less than 4% for MasterCraft. So we're entering into a period where we have the large price increases of the past are not going to be used going forward.

[Eric Wold, analyst]

Got it. Okay. And then on the Aviara, with the launch of the AV28 line and obviously, production or shipments year-over-year were down somewhat a result of that. Is the AV28 disrupting or kind of displacing production of other models? Is it more just kind of a -- the focus kind of got disrupted a little bit in the quarter? How long until you think quarterly production shipments kind of return to what we've seen over the past couple of quarters? Or have you actually seen any decline in demand for Aviara either at retail or with your dealer partners?

[Frederick Brightbill, executive]

The transition to ramp up the 28 was definitely disruptive in production. It requires relayout on the plant and a very different focus in terms of the cycle times of those products. So it's a significant impact in this first half of the year as we ramp it up. We really expect to hit our pace in the second half of the year in terms of the 28 production. There's tremendous demand for that. It's been extremely well received, and we're phasing back on the legacy products at this point in time to really get the 28 going.

So that's the overall situation that I would expect to see in the near term and rolling through the year. I couldn't be more optimistic about the demand for the 28 and it's just a matter of us. We're really making sure that we ramp up carefully and do it well.

[Eric Wold, analyst]

And I apologize if I may, just a quick follow-up on that. If there is more of a shift towards the 28 versus the legacy product, what does that do to average prices going forward?

[Frederick Brightbill, executive]

Yes. Absolutely. It will drive those ASPs down for Aviara. We're talking more in the range of -- I think something on the order of [ $170,000 to $180,000 ] ASP for 28.

[Timothy Oxley, executive]

Yes, Eric. So for FY '24, we expect Aviara ASPs to be down mid single -- sorry, mid-20% range for the year.

[Operator]

Our next question comes from the line of Craig Kennison from Baird.

[Operator Instructions]

But go ahead, Bobby.

[Bobby Potter, executive]

No, I was just going to say if, Craig, if you're talking, we still can't hear you, so.

[Operator]

Craig, so sorry about that. I know you did rejoin using the call-me feature. Management, how would you like me to proceed?

[Bobby Potter, executive]

Let's queue up the next question, if there are others.

[Operator]

Okay. Perfect. I am showing no more questions at this time. So if you all are ready, I'm ready to conclude today's conference.

[Bobby Potter, executive]

Yes, thank you.

[Operator]

Perfect. So thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.