MasterCraft Boat - Q2 2024
February 7, 2024
Transcript
Operator (participant)
Ladies and gentlemen, thank you for standing by. Welcome to Q2 2024 MasterCraft 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 one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would like now to turn the conference over to Bobby Potter, Vice President of Strategy and Investor Relations. Please go ahead.
Bobby Potter (VP of Strategy and Investor Relations)
Thank you, operator, and welcome everyone. Thank you for joining us today as we discuss MasterCraft's second quarter performance for fiscal 2024. As a reminder, today's call is being webcast live and will also be archived on our website for 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 second 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, February 7, 2024. 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 items or items not indicative of our ongoing operations. For each non-GAAP measure, we will provide the most directly comparable GAAP measure in today's press release. This 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.
Fred Brightbill (CEO and Chairman)
Thank you, Bobby, and good morning, everyone. Our business performed well during the second quarter as we delivered better-than-expected results despite continuing macroeconomic uncertainty and a highly competitive retail environment. Near term, we remain focused on rebalancing dealer inventories with anticipated demand to ensure the health of our dealer network. Despite near-term challenges, our portfolio of consumer-centric brands, a highly variable cost structure, and our strong balance sheet provide us with the confidence to continue to invest in long-term growth initiatives. In addition to maintaining a resilient balance sheet and investing for the future, our disciplined approach to capital allocation allows us the flexibility to re-return cash to shareholders through our share repurchase program. Views regarding the economic outlook are mixed and uncertain, which is limiting retail demand visibility.
Recently, we observed some relatively positive indications that favor cautious optimism, including the expectation for lower interest rates, improving consumer sentiment, and unexpectedly strong GDP growth. We continue to monitor retail results and assess the overall business and economic environment. We are confident that our flexible operating model will allow us to mitigate near-term risk and capitalize on the upside when we return to growth. Although inventories modestly increased during the quarter, seasonal increase was less than typical in pre-COVID periods. We prioritized pipeline rebalancing and dealer health as we entered fiscal 2024. Other industry participants are now signaling softening demand while pairing their expectations significantly in some cases. We believe the decisive action we took to rightsize our production plan from the start of fiscal 2024 has allowed us to transition to a more historical pattern of inventory build and destock.
Dealer inventory units normally increase to a relative peak during our fiscal third quarter before declining throughout the summer selling season. While dealer inventories remain higher than we consider optimal, we expect levels to improve by the end of the fiscal year. Excuse me, as other industry participants begin to react to lower demand, the retail environment has become increasingly competitive. Dealers continue to focus on destocking to manage inventory levels and reduce floor plan costs. The resulting increase in promotional activity is pressuring margins across the industry. Results from early boat shows are mixed, although many of the latest shows have exceeded expectations. We anticipate that retail activity will support our range of wholesale expectations. The environment is very competitive as inventory availability has improved, providing consumers with more choices. The good news is that there are buyers.
However, a general lack of urgency is contributing to increased promotional activity. Our dealer inventory levels and production plans position our dealers to capitalize on the remaining boat shows in the upcoming summer selling season. We expect to have a clearer picture of retail demand as we progress through our third and fourth quarters. Despite the cyclical headwinds facing the industry, we are well positioned to pursue our capital allocation priorities, including investment in long-term growth. We are prudently investing in targeted initiatives that will take advantage of the industry's positive underlying secular trends. I will briefly discuss one such initiative as I review the operational results of our brands.... 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.
Our balance sheet and capital allocation framework provides us with flexibility to adjust our stance from cautious to optimistic, depending on our view of the cycle. Given the currently suppressed marine environment and near-term uncertainty, we will remain opportunistic in our approach to growth through M&A. Let me now briefly review some of the latest developments across our brands. At our MasterCraft brand, net sales were $73 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 in response to lower retail demand. The MasterCraft team is actively supporting our dealer partners at boat shows occurring across the country and globally. MasterCraft performed particularly well at the Atlanta, Seattle, and Salt Lake City shows.
At Crest, net sales were $17 million for the quarter, down 54% from the prior year period, as expected, due to a pullback in production to align with retail demand. Early boat show results have been mixed, but encouraging, as consumer interest in pontoons has been better than anticipated. However, consumers lack a sense of urgency, and the sales cycle is taking longer than expected in the last few years. Crest performed particularly well at the Minneapolis show, the largest pontoon market in the U.S., along with the Chicago, Atlanta, and Detroit shows. On the strategic front, we will be launching a new pontoon brand for model year 2025 that will be built in our Crest facility. This new brand was conceived through our consumer-centric approach to strategic planning and will be focused on targeting an affluent customer with an elevated on-water and in-water experience.
We will be launching the brand to consumers in the spring and look forward to sharing more information on this exciting growth initiative with investors on our next earnings call. At Aviara, net sales were $10 million for the quarter, down 30% compared to the prior year period. During the quarter, Aviara was focused on the ramp-up of the all-new AV28, an impressive product platform consisting of four distinct model variants. We expect the AV28 production to continue to ramp up for the remainder of the year. Aviara has also expanded its distribution network by adding eight new domestic and international points of distribution fiscal year to date. Boat show results for Aviara have been mixed, but we were encouraged by the results at some shows, including New York and Seattle. We recently hired Mike O'Connell, a thirty-year industry veteran, to be president of Aviara.
Mike's senior leadership roles at several boat manufacturers gives him a wealth of experience and knowledge that he will leverage to improve Aviara's operational performance and execute its growth strategy. I will now turn the call over to Tim, who will provide a more detailed discussion of our financial results. Tim?
Tim Oxley (CFO)
Thanks, Fred. Focusing on the top line, net sales for the quarter were $99.5 million, a decrease of $59.7 million, or 38%, from the record prior year period. This decrease was primarily due to lower unit sales volume and an increase in dealer incentives, partially offset by higher prices and favorable mix. Dealer incentives include higher floor plan financing costs, as a result of increased dealer inventories and interest rates, and other incentives, as the retail environment remains very competitive. For the fourth quarter, our gross margin was 18.8%, a decrease of 520 basis points when compared to the prior year period. Lower margins were the result of lower cost absorption due to planned decreased production volume, higher dealer incentives, and higher costs related to material, labor, and overhead inflation, partially offset by higher prices.
Operating expenses were relatively consistent for the second quarter of fiscal 2024 compared to the prior year period. In pursuit of growth, growth initiatives, we continue to invest in product development and marketing. Turning to the bottom line, adjusted net income for the year decreased to $6.3 million, or $0.37 per diluted share, computed using an estimated annual effective tax rate of 22%. This compares to adjusted net income, $21.3 million, or $1.20 for the prior year period, computed using a tax rate of 23%. Adjusted EBITDA decreased to $9.8 million for the quarter, compared to $29.8 million in the prior year period. Adjusted EBITDA margin was 9.8%, down 890 basis points from 18.7% in the prior year period.
Our balance sheet remains incredibly strong as we ended the quarter with nearly $209 million of total liquidity, including nearly $109 million of cash and short-term investments and $100 million of availability under our revolving credit facility. We ended the quarter with no debt, as cash and short-term investments exceed our outstanding debt balance. Year to date, we have generated more than $19 million of cash flow from operations. 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 approximately $4.4 million to repurchase more than 214,000 shares of our common stock.
Since initiating our share repurchase program in June of 2021, we spent more than $58 million to repurchase over 2.3 million shares. These cumulative repurchases provided a 13% benefit for our fiscal second quarter, adjusted net income per share. We expect to continue to return cash to shareholders while prioritizing financial flexibility and high return investments in the business that generate growth and long-term shareholder value. Looking forward, we are narrowing our guidance range for the full year. Consolidated net sales is now expected to be between $400 million-$412 million, with adjusted EBITDA between $42 million-$47 million, and adjusted earnings per share between $1.53-$1.78. We also now expect capital expenditures to be approximately $20 million for the full year.
For the third quarter of fiscal 2024, consolidated net sales is expected to be approximately $92 million, with adjusted EBITDA of approximately $7 million and adjusted earnings per share of approximately $0.23. 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.
Fred Brightbill (CEO and Chairman)
Thanks, Tim. As we continued our focus on rebalancing dealer inventories, our business performed well during the second quarter by delivering better than expected results, despite the continuing economic uncertainty in a highly competitive retail environment. We continue to exercise a disciplined approach to capital allocation. Over the past two years, we've returned more than $58 million of excess cash to our shareholders through our share repurchase program. Our strong balance sheet provides us with financial flexibility and affords us the opportunity to pursue our strategic growth initiatives. The upcoming launch of our exciting new pontoon brand is an example of why we are confident in our ability to deliver long-term growth for our shareholders. As we move beyond inventory rebalancing, we are determined to leverage our strong and growing portfolio of 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 (participant)
Thank you. As a reminder to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. The first question comes from Joe Altobello with Raymond James. Your line is now open.
Joe Altobello (Managing Director and Senior Analyst, Leisure Products)
Thanks. Hey, guys. Good morning. So first question I wanted to ask about the guidance. It implies a sequential decline in sales and EBITDA from Q2 to Q3, which is unusual. Is that all due to heightened promotional activity, or are there other dynamics going on in the business?
Tim Oxley (CFO)
There are other dynamics, Joe. For instance, we were shut down for a full week of production due to snow here in Tennessee. Snow and ice storm affected production at Crest as well. The other thing we're doing is making sure we allow our dealers some breathing room to clear their decks for additional inventory in Q4.
Joe Altobello (Managing Director and Senior Analyst, Leisure Products)
Okay. That's helpful, Tim. And maybe in terms of, you know, units this year, I think the expectation, at least three months ago, was units would be down over 40%. Is that still the case? And if so, does that get field inventories to where you need them to be by fiscal year-end?
Tim Oxley (CFO)
That's what we're expecting, Joe.
Joe Altobello (Managing Director and Senior Analyst, Leisure Products)
Okay. It sounds like you guys will exit the fiscal year clean, if you will, from an inventory perspective.
Tim Oxley (CFO)
Absolutely, and keep in mind that all fourth quarter of our retail will determine exactly where we land.
Joe Altobello (Managing Director and Senior Analyst, Leisure Products)
Okay. Got it. Thank you.
Operator (participant)
One moment for our next question. The next question comes from Craig Kennison with Baird. Your line is now open.
Craig Kennison (Senior Research Analyst, Director of Research Operations)
Okay, good morning. Thanks for taking my questions. I wanted to start with just a question, Fred, on your perspective on the health of your dealer network. We know they're under a lot of strain with skinny margins and excess floor plan costs, but how would you characterize the health of your dealer network?
Fred Brightbill (CEO and Chairman)
I would characterize it overall as very good. That's not to say that there isn't an occasional issue here or there, but it's been very sporadic and isolated. Certainly, as you indicated, dealers are, in general, heavily inventoried, incurring additional costs, and they're selling at very tight margins, which is not a long-term sustainable situation. We don't expect them to be in that situation long term. We expect to get through this and be able to return to more normal conditions.
Tim Oxley (CFO)
Craig, I would add, we monitor the dealers' health. We're watching very closely. We have, you know, monthly meeting with the floor plan companies to make sure there are no early warning signs of duress, and we'll continue that through the season.
Craig Kennison (Senior Research Analyst, Director of Research Operations)
Is there a way to frame the number of units by which, you know, you exceed maybe target inventory levels in the channel?
Fred Brightbill (CEO and Chairman)
Well, the way we think about it, Craig, is again, where we're trying to end up at the end of the year, and this year we still expect to pull out somewhere between 600 and 800 units.
Tim Oxley (CFO)
... split fairly evenly between, you know, MasterCraft and Crest brands.
Craig Kennison (Senior Research Analyst, Director of Research Operations)
That's really helpful. And then, I guess one more question on the decision to add a pontoon brand within the Crest facility. Just, if you would, talk about any sort of capital requirements that entails, and what's the broader vision for having two brands instead of just one?
Fred Brightbill (CEO and Chairman)
First of all, minimal capital expense. Don't have the same tooling requirements in the pontoon business as you would in the fiberglass in terms of molds. No facility expansion directly related to that. A facility expansion was recently completed within the last year that provides the capability to be able to produce this product. So there was some investment made, but it has been made historically. As we look forward, don't expect any significant capital allocation to the new brand. With regard to the positioning, because of its premium, almost ultra-premium positioning, we felt it was appropriate to have a distinct brand and be able to target it to those consumers specifically.
It will touch on the upper end of the offering in terms of price points of the Crest brand, so there's some minor overlap, but in general, it's gonna be positioned differently than the Crest brand.
Craig Kennison (Senior Research Analyst, Director of Research Operations)
Great. Thank you.
Operator (participant)
One moment for the next question. The next question comes from Eric Wold with B. Riley Securities. Your line is open.
Eric Wold (Senior Analyst)
Thank you. Good morning, everybody. Two questions. I guess, one, just to follow up, I can't remember if it was Frederick or Tim that said this, but you talked about, the dealers seeing, you know, kind of extraordinary low margins right now in boat sales. If you take floor plan costs out of the equation to try to kind of get to an apples-to-apples basis with, you know, pre-pandemic levels, so take interest rates out, are the margins they're seeing lower than pre-pandemic because of high promotions, or is the extra pressure purely from the floor plan costs?
Fred Brightbill (CEO and Chairman)
I believe it's in addition to the floor plan costs, Eric. It's such a competitive market now that price competition has driven down their margins in addition to the floor plan costs.
Tim Oxley (CFO)
Right. And, you know, typically, the dealers book the floor plan costs in their G&A, so it doesn't affect their margin. So it's, you know, it's very competitive out there. And their margin on current product is significantly different than the margin on noncurrents. And that's always been the case, but they have more noncurrents than is typical. So, you know, and typically for dealers, you'll see the noncurrent margins, you know, coming down and the current margins remaining pretty steady, and I think that's the case, but there are more noncurrents now than they've had in the past.
Eric Wold (Senior Analyst)
And do you expect that competitive environment to remain in place even after channel inventories get to more healthier levels? Is that kind of a different environment we're in now, or is it merely because of the higher inventories out there?
Fred Brightbill (CEO and Chairman)
I don't think it will remain at the same level of discounting, but we do expect it to revert to normal, aggressive competition. Mm-hmm. Hopefully, hopefully, I'm being clear on my answer. I think it's at a peak of competitiveness currently. I don't think it will revert anywhere near COVID situations, but I think it'll be much more like pre-COVID period.
Eric Wold (Senior Analyst)
Got it. And then just final question. I know it's early and I'm not necessarily looking for fiscal 2025 guidance, but I guess, you know, there's the hope that interest rates do come down to some degree, you know, over the next 12 months or so. I guess, you know, I guess, what are you hearing from dealers now in terms of any indications in terms of if they're looking to model 2025, what level of inventory they're willing to hold on their floors, given interest rates, the competitive environment, you know, macro uncertainty? If you look at that compared to what you may have seen pre-pandemic, I mean, how much lower do you think they're willing to hold inventory versus back then?
Fred Brightbill (CEO and Chairman)
I think the dealers, you know, the way we work with dealers is to project retail demand and balance their inventories accordingly. And so it's all gonna depend on, as we enter the year, what the annual business plan is and what our outlook is. And Eric, as you know, we're right now in a period of limited visibility in terms of what next year's really going to look like. So I can't opine on next year with any degree of certainty other than to say it's... We will know as we finish May and June, how we're set up for the following year and how we progress through the summer.
My personal opinion is, if we see interest rate reductions, that's going to boost consumer confidence and their level of activity, in addition to the other benefits that you described with regard to overall financing costs, et cetera. But, you know, will that happen, and to what extent will we see those? Will the initial rate reduction be a signal that encourages consumers to be more active, or will it take more significant reductions? And then how will those reductions play out in terms of short-term rates versus longer-term rates in retail financing for consumers.
Eric Wold (Senior Analyst)
Perfect. Thank you, guys.
Operator (participant)
Please stand by for the next question. The next question comes from Noah Zatzkin with KeyBanc. Your line is open.
Noah Zatzkin (VP of Equity Research Analyst, Leisure and Performance Brands)
Hi, thanks for taking my questions. I guess just first, not to beat inventory to death, and I know there's obviously a seasonal component to inventory up in the second quarter. But as you're thinking about it today, would you expect to make progress on inventory exiting the third quarter? Or is that kind of more of a fourth quarter push? And then relatedly, just in terms of the competitive environment, what, I guess, is anything changing, you know, via incentives or promo to help clean inventory looking forward relative to what kind of took place in the second quarter? Thanks.
Fred Brightbill (CEO and Chairman)
I think the third quarter will see increased competition, and that's kind of reflected in our outlook for the third quarter, in terms of discounting the margins, et cetera, competitiveness. With regard to inventory model, you know, it peaks seasonally in the third quarter and then is increasingly worked off. So, you know, it starts with boat shows and then builds, but as you well know, that fourth quarter is 45%-50% of retail demand, and that's really, you know, what you're trying to predict and forecast and be ready for, not underestimate, not overestimate. So, you see some, you know, some movement as sales accelerate in the third quarter, but really, it's the fourth quarter when you see the big movement.
Noah Zatzkin (VP of Equity Research Analyst, Leisure and Performance Brands)
Got it. That, that's helpful. And then just on the new pontoon brand, any additional color on positioning relative to Crest? And just maybe some thoughts around, kind of, why now, would be helpful. Thanks.
Fred Brightbill (CEO and Chairman)
Think of it as premium, super premium, if you will. Think of it as being, it's going to be a very stunning and unique style. We felt like it deserved a specific attention and positioning, given its uniqueness and given its differentiation. The Crest product line is very broad, as you know, covers a wide range of price points, and they still have, you know, luxury models, and those models will continue to be enhanced as we roll forward. But there will be, you know, a positioning and a styling differentiation between the two brands that's significant.
Noah Zatzkin (VP of Equity Research Analyst, Leisure and Performance Brands)
Thank you.
Operator (participant)
One moment for our next question. The next question comes from Michael Swartz with Truist Securities. Your line is open.
Michael Swartz (Director of Equity Research)
Hey, guys. Good morning. I think when you gave initial guidance for 2024 back in, I think it was late August, it was based upon a mid-teens decline in retail demand for the fiscal year. I think since then, the industry's been down something more in the range of low single digits. So maybe just give us an update on, you know, what's embedded into your guidance today and maybe how you're thinking about the year playing out. I know a lot's contingent on interest rates, but just, you know, as far as you have visibility today, how do you see the year playing out from a retail standpoint?
Tim Oxley (CFO)
Well, Mike, it's gonna vary certainly by brand segment of the market. But, you know, our view is a little more optimistic than it was, you know, at the start of the fiscal year. And we're just gonna really have to work hard, and dealers are gonna have to work hard for every retail sale.
Michael Swartz (Director of Equity Research)
Okay, thanks. And then maybe just to follow up on Aviara, we're gonna discuss that in a little bit, but some change in leadership sounds like there. Maybe give us a little bit of a backdrop on where we are from a profitability standpoint. I think years ago the view was that this brand would be, you know, from a profitability standpoint, in line with the corporate average. I guess, is that still the target today?
Tim Oxley (CFO)
Our target hasn't changed, and we believe with the new leader down there, that we expect this to be an inflection point between a new leader and getting the four variant model variants of the 28 up to speed. We expect both those things to be positive for things on a go-forward basis. I'd like to think that Q2 was kind of the low point, and we're gonna climb out of that. But in the long term, we do expect the margin, you know, opportunity there to be, you know, second only to MasterCraft within our portfolio.
Michael Swartz (Director of Equity Research)
Okay, great. Thank you.
Operator (participant)
I show no further questions, and this will conclude the question-and-answer session. Thank you for participating, and this concludes today's conference call. You may now disconnect. Have a great day.