MasterCraft Boat - Q3 2024

Executive Summary

• Q3 FY2024 results were ahead of internal guidance: net sales $95.7M (-42.6% YoY), gross margin 19.2% (-630 bps YoY), adjusted EBITDA $9.7M (10.1% margin), adjusted EPS $0.37. The company had guided to ~$92M net sales, ~$$7M adjusted EBITDA, and ~$0.23 adjusted EPS; thus a beat versus company guidance. Liquidity remained strong with ~$206M total, including ~$106M cash/short-term investments and $100M revolver availability.
• Full-year FY2024 guidance was lowered on reduced production and elevated competitive discounting: net sales to $360–$365M (from $400–$412M), adjusted EBITDA to $28–$30M (from $42–$47M), and adjusted EPS to $0.95–$1.05 (from $1.53–$1.78); capex cut to ~$17M (from ~$20M).
• Management highlighted dealer inventory rebalancing progress, but cautioned on competitor dealer distress driving heightened promotions and dealer caution; production will be reduced further to end FY with healthier inventory levels.
• Strategic update: launch of Balise luxury pontoon brand (production commenced, model year 2025 availability) using existing Crest capacity; Aviara ramp with 39 units shipped, the most in any quarter since FY2020, and sequential net sales up >20% in Q3.

What Went Well and What Went Wrong

What Went Well

• Beat vs internal Q3 guidance: delivered net sales $95.7M, adjusted EBITDA $9.7M, and adjusted EPS $0.37 vs prior guide of ~$92M, ~$7M, and ~$0.23, respectively. Management: “We delivered results ahead of our expectations”.
• Aviara execution: shipped 39 units, “the most units in any quarter since the brand was introduced in fiscal year 2020,” with sequential net sales up >20% and ~40% unit growth on efficiency actions.
• New product/brand momentum: launched Balise luxury pontoons, leveraging Crest facility for capital-efficient capacity; model year 2025 availability already in motion. CEO: “Balise will further diversify… expand our addressable market… production has already commenced”.

What Went Wrong

• Significant YoY contraction: net sales -42.6% to $95.7M and gross margin down 630 bps to 19.2%, driven by lower unit volume and higher dealer incentives despite price/mix tailwinds.
• Competitive pressure and promotions: distress at a competitor’s largest dealer heightened promotional activity, pressuring margins and dealer ordering; “We’re seeing it now, and we anticipate it to continue”.
• Guidance cut on production reductions: full-year net sales, adjusted EBITDA, and EPS all lowered to prioritize dealer health amid macro/interest rate headwinds and elevated dealer caution; “we plan to reduce planned production for the remainder of our fiscal year”.

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Q3 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 this session, you will need to press star 11 on your telephone, and then you will hear an automated message advising you your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, CFO Tim Oxley. Please go ahead.

Tim Oxley (CFO)

Thank you, operator, and welcome, everyone. Thank you for joining us today as we discuss MasterCraft's third quarter performance for fiscal 2024. As a reminder, today's call is being webcast live, and it will also be archived on our website for future listening. With me on this morning's call is Brad Nelson, Chief Executive Officer. We will begin with a review of our operational highlights from the third quarter. I'll then discuss our financial performance for the quarter. Then Brad will provide 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 8, 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 a 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 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's also a slide deck summarizing our financial results in the investor section of our website. As a reminder, unless otherwise noted, the following commentary is made on a continuing operations basis. With that, I'll turn the call over to Brad.

Brad Nelson (CEO)

Thank you, Tim, and good morning, everyone. We delivered results ahead of our expectations in what remains a dynamic and challenging environment for the marine industry. We'll dive into the details shortly, but let me first begin by sharing how pleased I am to be here on my first earnings call as CEO of MasterCraft. My first six weeks with our team has been energizing, and it's clear to me that our capabilities and opportunities are even greater than I anticipated. Since I joined the company, I've been on the road meeting with and getting to know our team, our customers, dealers, and business partners. And thanks to the openness and preparation of our strong and experienced team, I have learned a great deal in this short time. The headline takeaways from my listening tour, if you will, are highly encouraging. The foundation of the business is strong.

MasterCraft is home to iconic and leading brands. Customers and dealers are passionate about our products, and the long-term outlook for the industry is bright. We are intensely focused on and well-positioned to navigate the near-term challenges in our industry as we evolve our long-term growth strategy. I would like to acknowledge the commitment of our employees, as well as our dealer and vendor partners who remain dedicated to achieving our shared goals. Our proactive approach of prioritizing inventory rebalancing and dealer health as we entered fiscal 2024 has proven to be prudent. The current retail environment is highly competitive and uncertain as we approach the all-important summer selling season. Recently, news that a competitor's largest dealer is in financial distress has heightened this competitive pressure with the potential for higher-than-normal competitor discounting.

Although we made continued progress during the quarter, dealer inventories across the industry, including our brands, remain higher than optimal. Elevated inventory levels are driving higher carrying costs for dealers. This, combined with competitor dealer disruptions, is causing dealers to approach ordering with extreme caution. We remain committed to reducing our dealer inventory by the end of the fiscal year to best position the company for a return to growth. Moving forward, we have a clearly defined set of capital allocation priorities that we will continue to execute on, including investing in innovation for our customers and sustainable growth for our shareholders. We are doing so prudently through targeted initiatives that will take advantage of the industry's positive underlying secular trends. Supported by our strong financial position and with our current strategic growth initiatives fully funded, we also expect to continue to prioritize our EPS accretive share repurchase program.

Our balance sheet and capital allocation framework, together with our flexible operating model, provides us the ability to capitalize on the dynamic environment when our stance improves from cautious to optimistic. Given the currently challenged marine environment and near-term uncertainty, we will remain opportunistic and disciplined in our approach to inorganic growth through M&A. Let me now briefly review some of the latest developments across our brands. At our MasterCraft brand, net sales were $70 million for the quarter, down 41% from the 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 currently executing an exciting Model Year 2025 product rollout, and I look forward to sharing those details with you next quarter.

At Crest, net sales were $14 million for the quarter, down 61% from the prior year period. These results were also in line with our expectations and are the result of a pullback in production to align with retail demand. We recently announced the launch of an all-new luxury pontoon brand, Balise. Balise will further diversify our product offerings, expand our addressable market, and grow our portfolio of strong brands. The Balise product will be built by our experienced team at Crest's existing manufacturing facility in Owosso, Michigan, which is a capital-efficient use of existing capacity. Balise production has already commenced, and products will be available to consumers for model year 2025. The team behind Balise prioritized timeless artistry, sophisticated entertainment, radical innovation, and uncompromising quality in developing this exciting new brand.

Balise will initially launch with two models, the Horizon and Helix, which have been extremely well received by dealers and consumers. We're eager to see this brand achieve its mission to become the most luxurious and innovative pontoon boat in the segment. At Aviara, net sales were $12 million for the quarter, down 8% compared to the prior year period, again, as expected, as that business continues to mature. Aviara continued to ramp up production of the all-new AV28 during the quarter. Sequentially, net sales were up more than 20% from the second quarter, driven by a nearly 40% increase in units. Aviara shipped 39 units during the quarter, the most units in any quarter since the brand was introduced in fiscal year 2020, thanks to actions taken to increase operational efficiencies.

Aviara has also expanded its dealer network by adding 11 new domestic and international points of distribution fiscal year to date. During the quarter, Aviara added its first dealer outside of North America as the brand begins its international expansion. Finally, we recently received acknowledgment of the success of our strategic focus on consumer and quality. In February, the National Marine Manufacturers Association announced MasterCraft as a recipient of the 2023 Marine Industry Customer Satisfaction Index Awards for excellence in customer satisfaction. The annual CSI award recognizes marine manufacturers who attain the highest levels of satisfaction as voted on by consumers. We are pleased that all three of our eligible brands won the award this year. MasterCraft has a long track record of winning the CSI award, and Crest has received the honor for five consecutive years, which is every year under MasterCraft ownership.

Aviara received the award for the first time in its history this year, a proud and well-deserved accomplishment. I will now turn the call over to Tim, who will provide additional commentary on the quarter and a detailed discussion of our financial results. Tim.

Tim Oxley (CFO)

Thanks, Brad. Focusing on the top line, net sales for the quarter were $95.7 million, a decrease of $71.1 million or 43% 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 retail rebates and other incentives as the retail environment remains very competitive. For the quarter, our gross margin was 19.2%, a decrease of 630 basis points when compared to the prior year period. Lower margins were the result of lower cost absorption due to the planned decrease in unit volume and higher dealer incentives, partially offset by higher prices and favorable model mix and options.

Operating expenses were $14.4 million for the quarter, an increase of $0.8 million compared to the prior year period, primarily due to higher general administrative expenses, including leadership transition costs. Turning to the bottom line, adjusted net income for the quarter decreased to $6.3 million or $0.37 per diluted share, calculated using an estimated annual effective tax rate of 20%. This compares to adjusted net income of $24.1 million or $1.36 for the prior year period, calculated using a tax rate of 23%. Adjusted EBITDA decreased to $9.7 million for the quarter, compared to $33 million in the prior year period. Adjusted EBITDA margin was 10.1%, down 970 basis points from 19.8% in the prior year period.

Our balance sheet remains incredibly strong as we entered the quarter with nearly $206 million of total liquidity, including nearly $106 million of cash and short-term investments and $100 million of availability under our revolving credit facility. We entered the quarter with no debt and net cash and short-term investments of $55 million. Year to date, we have generated more than $23 million of cash flow from operations. Our balance sheet positions us exceptionally well and provides us with ample financial flexibility to perform during the business cycle and to fund strategic growth initiatives as well as capital returns to shareholders. During the quarter, we spent approximately $1.6 million to repurchase nearly 74,000 shares of our common stock. Since initiating our share repurchase program in June of 2021, we have spent more than $60 million to repurchase nearly 2.4 million shares.

These cumulative repurchases provided a 14% benefit to our third 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 drive growth and generate long-term shareholder value. As we enter the prime retail selling season, macroeconomic uncertainty continues to limit demand visibility. Dealer inventories remain higher than optimal, and inventory carrying costs are elevated. Consequently, dealers are taking a cautious approach to ordering ahead of the annual Model Year changeover. We continue to focus on balancing dealer inventories with retail demand to prioritize dealer health. During the quarter, we made continued progress with respect to dealer inventory rebalancing as expected.

On a unit basis, inventory levels at the end of the fiscal third quarter were lower than at the end of fiscal second quarter, which emphasizes the extent of our efforts to manage inventories and support the health of our dealer network. For context, dealer inventory levels typically increase from the second quarter to a seasonal peak at the end of the third quarter, just prior to the summer selling season. We have a flexible operating model that allows us to adjust production to both mitigate near-term risk and capitalize on the upside when we return to growth. We plan to utilize this flexibility by reducing planned production for the remainder of our fiscal year. We have a highly variable cost structure and will continue to actively and aggressively manage cost.

We have taken a proactive approach to production planning, inventory management, and dealer incentives to best position our dealers to capitalize on retail demand during the upcoming selling season and will end the year with improved inventory levels. As a result of reducing production to maintain our commitment to rebalancing dealer inventories by the end of the fiscal year, we are revising our guidance for the full year. Consolidated net sales is now expected to be between $360 million and $365 million, with Adjusted EBITDA between $28 million and $30 million, and Adjusted Earnings Per Share between $0.95 and $1.05. We also now expect capital expenditures to be approximately $17 million for the full year. I'll now turn the call back to Brad for closing remarks.

Brad Nelson (CEO)

Thank you, Tim. As we continued our focus on rebalancing dealer inventories, our business performed well during the third quarter despite continuing macroeconomic uncertainty and a highly promotional retail environment. We continue to exercise a disciplined approach to capital allocation. Over the past three years, we have returned more than $60 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, including continued investment in innovation and product development. The launch of Balise pontoon boats is the latest example of our unwavering commitment to growth and innovation. As we continue to take action to best position MasterCraft in this dynamic environment, 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 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment while we compile our Q&A roster. Our first question is going to come from the line of Joe Altobello with Raymond James. Your line is open. Please go ahead.

Joe Altobello (Equity Research Analyst)

Thanks. Hey, guys. Good morning. First, welcome, Brad. Looking forward to working with you. I just want to try to understand the 4Q guide or implied 4Q guide a little bit better given the 3Q beat. Did demand get worse? Did the promotional environment actually get worse, or are you expecting it to, or just expecting it to? Or did dealers get more cautious, or was it sort of all of the above?

Tim Oxley (CFO)

I think the dealer caution is largely driven by the distress in one of our competitors' channels that has caused our dealers to pause and really reassess their stocking risk. And then the interest rates are not coming down as we had hoped in the macroeconomic uncertainty. So when you combine all three of those, I think it's what's causing us to take production down significantly in Q4.

Joe Altobello (Equity Research Analyst)

Okay, but have you seen the higher promotion levels yet, or are you just anticipating that?

Tim Oxley (CFO)

Both.

Joe Altobello (Equity Research Analyst)

Okay. Got it.

Tim Oxley (CFO)

We're seeing it now, and we anticipate it to continue.

Joe Altobello (Equity Research Analyst)

Got it. My second question, on your last call, I think you estimated that you'll be pulling somewhere between 6-800 units out of the channel this year. Is that still the right number, and does your revised guide assume the channel is clean heading into Model Year 2025?

Tim Oxley (CFO)

We anticipate pulling the inventory down even further, Joe, upwards of 1,000 units. With that kind of reduction, that's our planned reduction based on retail assumptions. We expect the channel to be very healthy at the end of June and hopefully that'll drive additional increases in fiscal 2025.

Joe Altobello (Equity Research Analyst)

Got it. Okay. Thank you.

Operator (participant)

Thank you. One moment as we move on to our next question. Our next question is going to come from the line of Drew Crum with Stifel. Your line is open. Please go ahead.

Drew Crum (Senior Analyst)

Okay, thanks. Hey, guys. Good morning. As far as the competitive pressures that were cited in the press release and your preamble, is this leading to reductions to production for the MasterCraft brand specifically, or is it across your entire portfolio? And is this something that's limited or isolated to fiscal 4Q this year, or do you think it lingers and bleeds into fiscal 2025? And then I have a follow-up.

Tim Oxley (CFO)

Sure. Oh, we certainly hope that this drastic reduction in Q4 is going to get our dealers healthy. And then for fiscal 2025, assuming we take as many boats out of the pipeline as we plan, I think there will be opportunities, even though we do intend for our dealers to operate with lower levels of inventory, higher turns than they have in the past, in recognition of the higher carrying costs.

Drew Crum (Senior Analyst)

Okay. Got it. And then on the Balise product, any financials you can share with us, margins, sales expectations, time to break even, etc.?

Brad Nelson (CEO)

Excited about Balise. We're taking orders now. So far, market interest from dealers and consumers have been very positive. That model is set really for launch to impact Model Year 2025. We're not providing guidance for 2025 at this juncture. But from a unit perspective and from a margin perspective, we expect accretive levels of margin contribution. The unit level might be less than the broader pontoon business, but this is approaching an ultra-premium part of the segment, which we're very intrigued with.

Tim Oxley (CFO)

The fact that we're using the existing facility, Drew, means that the break-even is really not even applicable to this brand because it'll be valuable for the entire Crest facility to get additional capacity utilization.

Drew Crum (Senior Analyst)

Tim, will you guys report this as part of Crest, or will it be broken out separately?

Tim Oxley (CFO)

It'll be reported as part of Crest.

Drew Crum (Senior Analyst)

Got it. Okay. All right. Thanks, guys.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Noah Zatzkin with KeyBanc Capital Markets. Your line is open. Please go ahead.

Noah Zatzkin (Senior Equity Research Analyst)

Hi. Thanks for taking my question. Maybe just on kind of the ASP front, just any early thoughts around Model Year 2025 pricing, kind of given the dynamics going on in the industry right now. Thanks.

Tim Oxley (CFO)

Sure. Our plan for Model Year pricing is to make it as small as we possibly can in recognition of the headwinds in the marketplace.

Noah Zatzkin (Senior Equity Research Analyst)

Thanks. Maybe just one follow-up. Maybe if you could kind of talk through whether it's changes to the new model year, any levers that you have in terms of incenting kind of dealers to take inventory when the changeover does happen, just any kind of controllables, would be great. Thanks.

Tim Oxley (CFO)

Sure. We have some nice enhancements to a number of our models. And so there will be some cosmetic changes, which I think will be well received. And there's always kind of renewed interest when you have a Model Year changeover.

Noah Zatzkin (Senior Equity Research Analyst)

Thank you.

Tim Oxley (CFO)

Not unusual for dealers to remain kind of cautious at the end of one Model Year in anticipation of the new Model Year's product coming out.

Operator (participant)

Thank you. One moment as we move on to our next question. Our next question comes from the line of Kevin Condon with Baird. Your line is open. Please go ahead.

Kevin Condon (Senior Equity Research)

Hi. Good morning, everyone. This is Kevin. I'm for Craig. I wanted to ask a little bit about the go-to-market strategy for Balise and whether you intend for that to go through existing Crest dealers, or maybe there's a different strategy just given the premium positioning of that brand, as well as anything, I guess, that it's a different category, but any learnings from the Aviara launch that maybe are applicable here as you launch that brand.

Brad Nelson (CEO)

Yeah. Hello, Kevin. Given that Balise really enters a new part of the space and a new segmentation of the market, the current strategy is to be additive and expand our distribution for pontoons. And the team is actively working that. Response has been very well with adding points of distribution as well as new dealers so far. We'll have some existing Crest dealers that will pick up that brand, but we will also have new dealers that will be incremental to us as well. We're excited about that space, leaning to the premium side. And it's true across the industry and across our more premium categories. They're more resilient through the cycles as well. So we see long-term benefit.

Operator (participant)

Thank you. One moment as we move on to our next question. Again, ladies and gentlemen, if you do have a question at this time, please press star 11 on your telephone. Our next question comes from the line of Griffin Bryan with D.A. Davidson. Your line is open. Please go ahead.

Griffin Bryan (Senior Equity Research Associate)

Yeah. Thanks for taking my question. I guess if you could just talk about what are the current conversations sounding like with dealers considering the model year 2025 ordering? Obviously, the entire industry is still seeing some bloated inventory. So I'm just curious what the playbook is there as we head into the model year changeover.

Tim Oxley (CFO)

This time of year, since we're so heavily dependent on retail, April, May, June, most of our conventional dealers are focused on getting them healthy now and blowing through as much of the existing inventory as they can. Then it's sort of premature to have very much in the way of conversations with Model Year 2025. Matter of fact, the more we tout 2025, it makes it harder for them to sell the 2024s to have an inventory. Not very many conversations focused on 2025 yet.

Griffin Bryan (Senior Equity Research Associate)

Understood. Just one more follow-up here. Can you speak to the current health of your dealer network and if you're seeing any cracks by maybe geography or by category of product being carried? Thanks.

Tim Oxley (CFO)

We've been fortunate as we have focused on dealer health from the beginning of the year and that we've avoided any significant dealer issues. We remain focused on dealer health. We meet monthly with the floor plan companies. They're kind of our early warning system for us if they see any issues. We have a well-used toolkit on what we do to prevent dealers from getting in financial distress. And we've been utilizing those tools, which includes, obviously, retail rebates, reducing production, moving boats sideways to dealers and markets with healthier demand. So we have a number of those things that we've used. And so far, we've been successful in avoiding any significant dealer failures. And then we certainly have less of a concentration with one dealer than our competitors.

Operator (participant)

Thank you. This does conclude today's question and answer session. Ladies and gentlemen, this also does conclude today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.