MasterCraft Boat Holdings, Inc.

Good morning, and thank you for standing by. Welcome to the Fiscal First Quarter 2024 Mastercraft Boat Holdings 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 1-1 on your telephone, and then you will hear an automated message advising 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 first speaker today, Bobby Porter, Vice President of Strategy and Investor Relations. Please go ahead, Bobby.

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 a 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 investor 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 this call over to Fred.

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 Matchcraft brand surpassed 4 million hours 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. but we now briefly review some of the latest developments across our brands. For 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, Seadeck flooring, along with exclusive underwater in-cockpit 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 weight 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. Prest 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 Aviera, net sales were $9.9 million for the quarter, down 23% compared to the prior year period. During the quarter, Aviera 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 four distinct model variants, an impressive surf variant, a stern drive, a twin outboard, and a single outboard. Javier began shipping this new model during the quarter, and we expect the AV28 production to continue to ramp up for the remainder of the year. Javier also expanded its distribution network by adding five new domestic and international points of distribution during the quarter. I will now turn the call over to Tim, who will provide a more detailed discussion of our financial results. Tim?

Thanks, Fred. Focusing on the top line, 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 work 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. Turn to the bottom line, adjusted as 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 income of $25.7 million or $1.43 for the prior year period. Computed use and 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 evolving 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, consolidating 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 of 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 of approximately 22 cents. Although our guidance reflects a significant decline in earnings for 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.

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 in excess cash to our shareholders through our share repurchase programs. 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.

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Joe Altabello from Raymond James. Your line is now open.

Thanks. Hey, guys. Good morning. 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?

Joe, the inventory is marginally

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, you know, 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.

Hey, 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, and 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.

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?

It may vary by quarter, but certainly I think our easiest comps are 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, the start of the selling season, April through June.

Okay. Thank you, guys.

Thank you. One moment for our next question. Our next question comes from the line of Craig Kennison from Baird. Your line is now open.

Great.

Please rejoin using the call me feature and see if this will help. I'm going to go ahead and go to one moment for that next question. Our next question comes from the line of Eric Wold from B. Reilly Securities. Your line is now open.

Thanks. Good morning, everyone. A couple questions. I guess, can you talk about the significantly higher average prices per boat you saw within the mass draft segment, both 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, you know, mix or feature set? And how sustainable do you think these prices are kind of in the macro compare environment we're in and are you seeing a desire to kind of, you know, go to the moderation?

Yeah, this is Tim, Eric. So what we're seeing is a little bit of a shift toward the, you know, 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 year.

are not going to be used going forward. Got it. Okay.

And then on Aviara, with the launch of the AV28 line, and obviously production or shipment year-over-year were down somewhat as 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 Alvear, either at retail or with your dealer partners?

The transition to ramp up to 28 was definitely disruptive in production. It requires relay out of 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. uh there's tremendous demand for that um it's been extremely well received and uh you know we're phasing back on the legacy products at this point in time to really get the 28 going so um Yeah, that's the overall situation that I would expect to see in the near term and rolling through the year. Couldn't be more optimistic about the demand for the 28. And it's just a matter of us really making sure that, you know, we ramp up carefully and do it well.

And I apologize if I made 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.

YEAH, ABSOLUTELY. WE'LL DRIVE THOSE ASPS DOWN FOR AVIARA. TALKING MORE IN THE RANGE OF A HUNDRED AND I THINK SOMETHING ON THE ORDER OF A HUNDRED AND SEVENTY TO EIGHTY THOUSAND DOLLAR ASP FOR TWENTY EIGHT.

Yeah, Eric, so for FY24, we expect Aviara ASPs to be down mid-20% range for the year. Thank you, guys. I appreciate it.

Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Craig Kennison from Baird. Your line is now open.

If your line is muted... Sorry, Maria, it appears we... Yeah, go ahead.

Yeah, I was just going to say, just as a quick reminder, if your line is muted, please unmute it. But go ahead, Bobby.

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

Great. So sorry about that.

I know you did rejoin using the Call Me feature. Management, how would you like me to proceed?

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

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.

Yes, thank you.

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