MasterCraft Boat Holdings, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Mastercraft Boat Holdings Incorporated Fiscal First Quarter 2025 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. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your speaker today, Tim Oxley, Chief Financial Officer. Please go ahead, sir.

Thank you, Operator, and welcome, everyone. Thank you for joining us today as we discuss Mastercraft's fiscal first quarter performance for 2025. As a reminder, today's call is being webcast live. We'll also be archived on our website for future listings. With me this morning on this morning's call is Brad Nelson, Chief Executive Officer. We will begin with an overview of our operational performance from the first quarter. I'll then discuss our financial performance. Then Brad will provide some closing remarks before we open the call for questions. Before we begin, we'd like to remind participants that the information contained in this call is current only as of today, November 6, 2024. The company assumes no obligation to update any statements including forward-looking statements. Statements that are not historical facts or 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 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.

Thank you, Tim, and good morning, everyone. Mastercraft delivered strong physical first quarter results above expectations despite facing a backdrop of continued economic and industry headwinds. We've made significant progress on our key priorities this quarter. Notably, we reduced dealer inventory levels more than we anticipated due to encouraging retail results. This promising start sets a strong foundation for the rest of our fiscal year. Due to the incremental visibility and added confidence in our wholesale plans, we are raising the lower end of our full-year guidance. Tim will provide more details later on. Before discussing our results, I wanted to address the recent weather events that have impacted the Southeast region. Our thoughts are with all of those who were recently affected by hurricanes Helene and Milton, and we sincerely hope there is quick recovery from these disasters. We are thankful that the disruption to our business and our dealers has been minimal. Given the dynamic market, we continue to closely monitor economic conditions and the interest rate environment. As short-term rates trend lower, We and our dealers benefit from reduced floor plan interest costs. Consequently, this strengthens the health of our dealers amidst the ongoing market uncertainty. We are cautiously optimistic that more attractive financing rates could provide a psychological boost and motivate potential buyers to come off the sidelines. Internal retail results to date have exceeded our initial expectations and we're positive compared to the prior year and significantly ahead of preliminary SSI results. Keep in mind, our fiscal first quarter historically accounts for around 30% of retail units in our segments, marking this as the second most important quarter for retail. This momentum, combined with our disciplined approach to wholesale, has positioned us well if retail continues to perform. Due to our focused efforts towards reducing filled inventories, we removed nearly 500 units at our Mastercraft and Crest brands during the quarter, well ahead of schedule. Over the last 12 months, we have reduced more than 1,000 units from dealer inventories at both brands. Excluding the pandemic, this is by far the most units removed from the pipeline in any 12-month period since we have been a public company. As a result, dealer inventory turns, are in the range of pre-pandemic levels. Although we are pleased with our inventory rebalancing efforts, we expect dealer ordering patterns to remain somewhat cautious through the off-peak retail season due to market uncertainties and elevated carrying costs. Our wholesale plan continues to include an increase in production levels the second half of the fiscal year to capitalize on the upcoming boat show and summer selling seasons. We recently held dealer meetings across our brands, which were met with a renewed energy and excitement for the future. This was an important opportunity to strengthen our dealer relationships and reinforce direction and strategic alignment. We are optimistic that the energy from these dealer meetings is indicative that we are at or near the bottom of the cycle. We look forward to partnering with our dealers to capitalize on market opportunities in our segments. Now, let me briefly address the status of our Aviara transaction. As we announced in October, the branding component of this deal successfully closed as expected. We expect the sale of our Merritt Island facility and related plant assets to close for $26.5 million towards the end of our fiscal second quarter. This will add to our financial flexibility and enhances focus across our business. We continue to take measures to align our cost structure with current production levels while maintaining upside flexibility and investment in our key long-term growth initiatives. Despite these low cycle volumes, we generated $3.8 million of adjusted EBITDA during the quarter. This combined with our robust balance sheet and strong cash flow generation reinforces our financial stability through the business cycle. We remain committed to growth through innovation, products and brand development, and highly selective inorganic opportunities. Now turning to our brands. For our Mastercraft segment, our model year 25 products have been well received, and the initial retail visibility has been encouraging. The team is gearing up for the launch of our completely redesigned flagship product, the X-Star, which will further enhance our model year 25 lineup. This product is a testament to our renewed focus on differentiated innovations. Initial reactions have been highly positive and is driving high energy among our dealer network and consumer base. This strategic launch reestablishes our position in the ultra-premium ski wake space and will further expand our addressable market. We anticipate the first shipments of the X-Star will occur in the second half of the fiscal year. Innovation and differentiation are the lifeblood of the Mastercraft brand, and we look forward to sharing more details in coming quarters. Turning to our pontoon segment. For Crest, we began the year with positive retail signals. However, this interest rate sensitive consumer remains cautious, which has led to higher than optimal inventories throughout the pontoon market. We have prioritized right-sizing channel inventories even more at Crest than our other brands. Further easing of interest rates could provide strong retail demand for payment buyers in the entry-level pontoon space. A recent successful dealer meeting reinforced that our Crest team and dealers are strong. The brand has deep equity, and we are positioned well for a return to growth in this segment. Our new premium pontoon brand, Belize, continues to gain early traction in the market despite the challenging environment. Belief continues to receive incremental dealer interest, and early consumer feedback has been positive. We are in early stages and continue to expand distribution in specific target markets. Keep in mind, pontoon retail sales are more seasonal than other categories, with roughly half of retail sales yet to come in April through June. Although we are optimistic regarding recent retail and macro trends, We have prudently held our production plans as we prioritize dealer health and pipeline management. At all of our brands, our production schedule is aligned with current market and dealer sentiment, and we remain equipped with wholesale plans for a range of potential retail demand scenarios throughout the year. I'll now turn the call over to Tim, who will provide additional commentary on the quarter and a detailed discussion of our financial results. Tim.

Thanks, Brad. Focusing on the top line, net sales for our fiscal first quarter were $65 million, a decrease of $29 million or 31% from the prior year period. This decrease was primarily due to lower volumes and an unfavorable model mix. For the quarter, our gross margin was 18.1% compared to the prior year period of 23.8%. Lower margins were the result of lower cost absorption from the planned decrease in production and higher dealer incentives. Operating expenses were $10.8 million for the quarter compared to $11.9 million in the prior year period. Operating expenses decreased as we closely managed discretionary spend and due to lower share-based compensation costs. Turning to the bottom line, adjusted net income for the quarter was $1.9 million or $0.12 per diluted share. This compares to adjusted net income of $10.3 million or $0.60 per diluted share for the prior year period, calculated using a tax rate of 20% for both periods. Adjusted EBITDA was $3.8 million for the quarter, compared to $14 million in the prior year period. Adjusted EBITDA margin was 5.9%, compared to 14.9% in the first quarter of fiscal 2024. Our balance sheet positions us well as we enter the quarter with nearly $83 million of cash and short-term investments. We have no net debt as our cash and short-term investments exceeded our debt by more than $33 million. As we recently announced, we entered into an amendment related to our credit agreement at the end of the first quarter. Concurrently, we paid the remaining $49.5 million on the term loan with our revolving credit facility. We maintain ample liquidity and financial strength to fund key growth initiatives and return capital to shareholders. During the quarter, we spent approximately $3.5 million to repurchase more than 180,000 shares of our common stock, as we believe our stock represents an outstanding value. Since initiating our share repurchase program in June of 2021, we've allocated more than $68 million to repurchase nearly 2.8 million shares. During our fiscal second and third quarters, we intend to repurchase shares at a slower pace due to the modified terms of the credit agreement. As we look ahead, we are raising the lower end of our full-year guidance based on Q1 performance. For fiscal 2025, consolidated sales are now expected to be between $270 million and $300 million, with adjusted EBITDA between $17 million and $26 million, and adjusted earnings per share between $0.55 and $0.95. The incremental increase in adjusted earnings per share is reflective of lower interest expense and taxes. We continue to expect capital expenditures to be approximately $12 million for the year. For the second quarter of fiscal 2025, consolidated net sales are expected to be approximately $60 million with adjusted EBITDA of approximately $1 million and adjusted loss per share of approximately $0.01. Keep in mind our lower wholesale shipments in the first half remain consistent with our initial production plans for the year as we prioritize pipeline reductions. In the second half, we plan to ramp up production as we execute our new product initiatives and meet seasonal demand. I'll now turn the call back to Brad for his closing remarks.

Thank you, Tim. Our team executed well against our strategic priorities during the fiscal first quarter, and we appreciate their efforts. Our disciplined approach to balancing production volumes combined with promising Q1 retail has improved the outlook for dealer health as we exit the selling season. Further strengthening of the retail environment could open the door for some wholesale plan adjustments later in the year. Our fiscal first quarter results provide a solid foundation for the remainder of fiscal 2025 and into 2026, and our strong balance sheet and cash flow generation provides us with the financial flexibility to pursue our key growth initiatives. Moving forward, our focus remains on positioning the business to capitalize, as the market recovers and over the long term. We appreciate the ongoing support of our dealers, team members, and shareholders as we work together to achieve our goals for fiscal 2025. Operator, you may now open the line for questions.

Thank you very much. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star 11 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 at Raymond James. Joe, your line is open.

Thanks. Hey, guys. Good morning. I want to start with retail. It sounds like, as you mentioned, several times already. It was a little bit better than you anticipated. Was that really share gains, or are you seeing any improvement in underlying demand across the categories?

You know, it's difficult to predict the share gain because we did have, you know, Tommy's Boats starting to enter into the retail results. I'm pleased that it's held up and we're in positive territory. But I can't attribute the share gain yet. I'll wait and see how the numbers shake out.

Okay. And you mentioned Tommy, so I'll go there next. Any impact in the quarter from the liquidation there? And is it now complete, or do you still expect some impact in Q2?

You know, based on the SSI results in September, they're starting to show up in retail results. I've been pleasantly surprised that it has not been more disruptive. to Mastercraft. I think it speaks to the loyalty of our dealers and consumers and really the strength of our brand, the fact that people haven't been tempted by fire sale prices from Tommy's. So that was one of our pleasant surprises during this quarter. But all the Tommy's boats haven't shown up in retail yet. I expect, you know, that The good news is I expect those to get into the hands of retail consumers before the upcoming boat show season.

Okay. Got it. Thank you.

Thank you very much. One moment for our next question. Our next question comes from the line of Craig Tennyson from Barron. Craig, your line is open.

Hey, good morning. Thanks for taking my questions as well. I wanted to follow up on retail. To what extent did elevated promotional activity contribute to the trend?

You know, certainly that was a contributing factor. We focused really on helping the dealers clear out their aged inventory and made good progress there. So it was a contributing factor. It's always difficult to isolate one variable versus others, but certainly that was a contributor.

I would add, this is Brad, our model year 25 product has been pretty well received out there too. We've been encouraged at some spiking happening there at the retail level.

Thanks. And Brad, I think you mentioned that inventory was down 500 units. Is that sequentially?

Yeah, that's sequentially. Our plan remains, and I think we've stated this prior, of taking out in the range between 600 and 1,000 units across our brands. That skews a little bit more towards Crest than Mastercraft. And typically, Q1, looking backwards, is relatively flat from a pipeline perspective. So removing around 500 units in the fiscal first quarter is pretty significant.

And is there a channel fill opportunity of any significance related to your premium pontoon category?

Well, the stocking levels, you know, certainly, you know, being a new brand and now we're just a reminder, we're in low rate production mode consciously right now as ramp production, get the product right, sign on new incremental dealers in our targeted markets. And that's, that's going well. in the early phase of the ramp, but this is still a startup. Yes, new dealers will need to take a stocking position on Belize. Now, this is a higher touchpoint premium boat, so it does consume floor plan, and the volumes on this boat could be relatively modest just because of the price point, but there will be a stocking load, as well as we expect some incremental demand for boat show season.

And finally, just to clarify on your retail comments, are you saying that retail for all of your bolt brands was up in the quarter? Correct. Year over year? Yes. Is there any way to quantify the magnitude of it?

Sorry, I don't want to quantify the magnitude, but I will say that they continue to be up on a year-to-date basis. Obviously, we monitor that weekly, so it wasn't just a flash in the pan in the first quarter. Good to know. Thank you.

Thank you very much. One moment for our next question. Our next question comes from the line of Eric Wold of B. Reilly Securities. Eric, your line is open.

Thanks. Good morning, guys. A couple of questions. I guess, can you talk about the strong ASPs? Your Mastercraft held up well. You had a nice move sequentially upward in Crest Marine. How much of that reflects price taken? And then how much reflects kind of a mix of buyers, maybe towards the cash buyers right now with industries remaining elevated as we move through the year? and maybe, you know, production ramps and payment buyers start to return, where would you expect ASPs for the two brands to move throughout the year?

You know, the ASPs in Q2 will be down a bit due to mix. And then we continue, we'll see pretty significant increases in particular with the ASPs at the Mastercraft brand in the second half as we ramp up at Star Production, which is an ultra-premium product of ours. Very little price driving this. Mastercraft's net price was flat to down a little, and Crest's price increase for this model year was certainly low, low single digits. So, we're not seeing price being the drivers of the ASP growth.

Got it. And then, last question. As you move into boat show season, obviously, you mentioned you're well ahead. of your plan, removing inventory from the from the channel. So I guess, what would you expect? But yeah, obviously, there's, you know, some competition and some other ones in the market still are not doing as well as you. So what would you expect to see at the boat shows in terms of discounting and promotion from both your dealers and competitive brands? And then how much would you lean into support to continue to move inventory?

Yeah, it is a highly promotional environment that we're living in now, and we expect that to continue in boat show season. We try to be judicious about our retail rebates and help dealers, and certainly the dealers participate in that on their side. So, yeah, it'll continue probably for the balance of this year. I think what will cause the promotional environment to go kind of back to normal is when, you know, non-current inventory kind of gets back to, you know, normal levels, and dealers are no longer kind of dealing with that burden.

I would add, although we remain in a highly competitive environment, and we're anticipating that's going to continue somewhat into the boat show season, specifically probably more pronounced in the pontoon space, But promotional activity for us remains relatively balanced and appropriate for the level of the competitive environment that we're seeing now. And just a reminder, we, of course, share in those discounting levels with our dealers.

Understood. Thank you both. Thank you very much. One moment for our next question. Our next question comes from the line of Drew Crum from Stifle. Drew, your line is open.

Okay, thanks. Hey, guys. Good morning. Obviously, a lot of moving pieces, parts on the gross margin line. How do you guys see that progressing as you move over the balance of fiscal 25? And then I have a follow-up.

Yeah, I think, you know, because mix is going to be down a bit in Q2, so I think the The margins will be down a bit as well and will remain kind of at a lower level due to lower levels of production, so we're not getting the overhead absorption that we will be getting in the second half. Likewise, you know, Belize and X-Stars both have higher margin profiles than our other products, and so we'll see some margin improvement in the second half, both for overhead absorption and as a result of mix.

Got it. And then on capital allocation, aside from the planned slowdown in share repurchases you mentioned in your preamble, with the expected proceeds from the Aviera facility sale, any other changes around redeployment of cash flow? Thanks.

Well, I'll hit that initially here, Drew. Our priorities remain unchanged on capital allocation. Number one, Fortress balance sheet, of course. Number two, funding our Foley funding, our organic growth and strategic initiatives and balanced CapEx. Number three, returning capital to shareholders through our share purchase program, although slightly adjusted through the next couple quarters. And then fourth, very selective and opportunistic inorganic activity as it presents itself if it aligns with our with our strategy. In terms of the recapture of the cell of the Merritt Island facility, that basically further adds to that flexibility within those priorities.

Okay, got it. Thanks, guys. Thank you very much. As a reminder, to ask a question, please press star 11 on your phone. One moment for our next question. Our next question comes from the line of Michael Schwartz of Truist Security. Michael, your line is open.

Hey, guys. Good morning. Just maybe a couple of points of clarification. One is, is the outlook for Belize still, from a revenue perspective this year, still about $10 million or a little over $10 million? I think that's what you said before.

Yeah, that remains unchanged.

Okay. And then you had mentioned in the preamble that inventory turns at the dealer level I think currently are back to where they were pre-pandemic. Any, um, any color on where, you know, absolute inventory levels are weeks on hand are right now.

We, we have not guided, uh, or provided that, that, uh, detail in the past. Um, but it's something that we were watching on, on literally on a, on a weekly basis. So please with the progress we made in Q1, uh, and you know, the, the, the dealers do the carrying costs, uh, probably would like to have less inventory than they traditionally have had, and we're preparing for that. Okay.

Also, Michael, inventory levels, Michael, inventory levels, too, we're pleased with the progress there. And in general, at Mastercraft, are relatively in line with historic levels, you know, pre-pandemic. slightly more elevated in the pontoon space just because of the nature of that business. You know, that consumer, although pontoons are a minority of our business, that consumer being very sensitive to interest rates, more of a finance buyer typically has added to that pressure in the pontoon space. But at Mastercraft, a healthy spot, we think, relative compared to the rest of the industry and remains a key focus.

Okay, that's helpful. And then, Brett, maybe just a final question for you. Now six, seven months into the role, any additional insight or opportunities that you've identified with the business that you can speak to, whether that's innovation, product development, distribution, just anything you can share with us? Thanks.

Yeah, you bet. You know, we have an opportunity to further simplify business. You know, this is a strong operating company, as everyone knows, with iconic brands, more iconic than what I even expected coming in. You know, with the industry outlook, market rebound looming, we're positioned well. As we simplify our product offerings, reduce overlaps, and then drive differentiated innovations, at a whole new level through product and brand development. And there'll be more to come on that, you know, in future periods of time. We felt very good about that baseline. But those are the areas of focus right now. Simplifying, differentiated innovation, products, brand development, and then continuing to just advance and develop as a strong operating company, which we already have a high baseline. Okay, great. Thank you.

Thank you very much. One moment for our next question, please. Our next question comes from the line of Noah Zatzkin from KeyBank Capital Markets. Noah, your line is open.

Hi, thanks for taking my question. A lot of my questions have been kind of asked and answered, but maybe just one kind of higher level industry question. If you could provide kind of an update on how you're feeling about kind of the health of the broader dealer base. And then from an industry perspective, kind of how are dealers feeling about their inventory levels in general? Thanks.

Sure. I think as dealers move through their non-current inventory, which has more of a carrying cost burden for them, you know, they become more optimistic. So at the same level of inventory, the more occurrence they have, the better they feel and the healthier they are. So by selling a number of the non-currents for our brands, I think they're incrementally healthier than they were at the end of June. And so pleased with that progress and optimistic about the future. We look forward to the boat show season to kind of see how this all shakes out.

I would just add, you know, a strong consumer, obviously, is what makes all this work. And we certainly feel better about that picture of inventory, as do our dealers, than three months ago, as Tim stated. And then on the strengthening of consumer, you know, with some modest down-ticket interest rates, that's certainly helping some more psychologically. But overall, the retail picture, As you know, we stated an expectation prior of a pretty broad range of retail being down between 5% and 15% for the year. Our updated retail view is now down mid to high single digits across our brands, really driven by positive Q1 start being the second most important quarter for retail being the most recent Q1.

Very helpful. Thanks.

Thank you very much. At this time, I'm showing no further questions. This concludes the question and answer session. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.