MasterCraft Boat Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 29, 2024

There are 6 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Master Aft Boat Holdings, Inc. Fiscal 4th Quarter and Full Year 20 24 Earnings Conference Call. Please be advised that today's conference 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.

Speaker 1

Thank you, operator, and welcome, everyone. Thank you for joining us today as we discuss MasterCraft's fiscal Q4 and full year performance for 2024. As a reminder, today's call is being webcast live and and 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 an overview of our operational performance from the Q4 and full year.

Speaker 1

I will 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, August 29, 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.

Speaker 1

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 Investors 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.

Speaker 2

Thank you, Tim, and good morning, everyone. MasterCraft delivered results ahead of our latest expectations while continuing to navigate a challenging economic environment and highly competitive retail landscape. Entering fiscal 2024, our focus was to proactively navigate market headwinds and execute our strategic and operational priorities to generate value for our stakeholders. Our efforts were centered around destocking field inventory levels, advancing consumer and dealer centric initiatives and returning capital to shareholders, while optimizing profitability and cash flow. Throughout the year, market conditions put downward pressure on retail and wholesale demand.

Speaker 2

In anticipation of this softness, we took early action to adjust production plans. Our proactive approach to wholesale proved to be prudent as we work to alleviate pressures our dealers are facing. In the summer selling season, we experienced a general slowdown in demand from retail customers across our brands consistent with the majority of the marine industry. This combined with continued economic uncertainty, elevated interest rates and lingering competitor dealer disruptions has driven up inventory carrying costs for dealers contributing to caution throughout the dealer network. Field inventories have improved by approximately 20% from fiscal 2023, which was near the low end of our targeted range.

Speaker 2

We're pleased with our progress to date, but filled inventories remain higher than optimal based on recent retail trends. We continue to incentivize our dealers to sell through inventory in a judicious manner. Although these conditions have short term implications for wholesale shipments, our inventory rebalancing efforts are positive for long term dealer health. Pipeline management remains a primary focus as we move forward, positioning us well for the market recovery ahead. Before we turn to fiscal 2025, I would like to discuss the announcement we issued earlier this month relating to the divestiture of the Aviara business.

Speaker 2

After a thorough review of our strategic plans, we determined that exiting this business would best position us to extend our leadership position in our MasterCraft, Crest and Belize brands. This focus also allows us to optimize our cost structure and direct resources towards other long term initiatives to drive sustainable and profitable long term growth. As part of the asset exchange agreement, we are transferring the rights of the Aviara brand to Cruisers Yachts, a subsidiary of MarineMax, the brand's primary retail partner. We anticipate the transaction to close during our fiscal Q1. We are winding down operations at our Merritt Island, Florida facility and have begun marketing the site for sale.

Speaker 2

In Q1 of fiscal 2025, we will begin reporting the financial results of the Aviara segment as discontinued operations. The hard work and dedication of our strong Aviara team quickly enabled this product line to become a blue chip brand in boating. Decisions that impact our employees are always difficult, but we are fully committed to supporting them through this transition. We appreciate the contributions of all who have been involved with the operation. As we turn our focus to next year, we are encouraged by the market response to the launch of our new premium pontoon brand, Belize.

Speaker 2

Through cross collaborative efforts of our experienced MasterCraft and Crest teams, Belize will allow us to reach an affluent and resilient customer base in the pontoon segment. These products will be manufactured at Crest's existing facility in Michigan, requiring minimal capital investment and leveraging an experienced team. The Belize lineup is being sold through a diverse and largely incremental dealer network. This brand brings accretive margins for our pontoon segment and will be profitable in year 1. To date, the team has already onboarded 11 dealers new dealers with locations in 26 expansive markets.

Speaker 2

We will provide more details on this brand later in the call. As we enter fiscal 2025, we will continue to prioritize a healthy distribution network across all brands. Our production schedule aligns with current dealer sentiment and credit availability and consequently we plan to ship a higher number of boats in the second half of fiscal twenty twenty five compared to the first half. The industry will benefit as other OEMs also take the necessary measures to rebalance dealer inventories in this challenging environment. We appreciate the support of our dealers and we will work closely with them to capitalize on the opportunities ahead.

Speaker 2

Due to the economic and industry headwinds combined with the cautious dealer ordering patterns and elevated carrying costs, we expect the destocking trend to continue in fiscal 2025. To align with our production plans, we've taken measures to right size our cost structure, while maintaining a healthy balance of continued investment in our key long term growth initiatives. Given our refined portfolio of strong brands and proactive cost control, we expect to generate positive free cash flow in fiscal 2025. This is particularly notable while being at or near the bottom of the cycle. Supported by our strong balance sheet and free cash flow generation, we have the flexibility to continue to fund long term growth initiatives.

Speaker 2

This includes focused innovation and product and brand development. Given near term uncertainty in the marine environment, we will take a selective and disciplined approach to M and A. In addition to maintaining a resilient balance sheet and investing for the future, we will also maintain a flexibility to continue funding our share repurchase program. Turning to our full year fiscal 2024 financial results, we concluded with net sales of $367,000,000 declining from last year's record of $662,000,000 primarily due to lower volume in a challenging market environment. Despite the net sales decline and the dilutive impact of Aviara, we generated $33,000,000 of adjusted EBITDA.

Speaker 2

Excluding Aviara, we generated $40,000,000 of adjusted EBITDA and positive free cash flow during the year. Our ability to proactively adjust to market conditions allows us to optimize profitability through planning and cost control efforts, while also maintaining investments in our long term growth initiatives. This execution provides us with a strong financial position as we continue to navigate through the current cycle. Let me now briefly review some of the latest developments across our brands. MasterCraft's model year 2025 lineup, which includes a range of new features and enhancements, has been well received by our dealers.

Speaker 2

The X and XT series received upgraded dashes and new software and the XT series now has a stern thruster upgrade option allowing maximum maneuverability. The new Elmore 5.3 liter GDI high output engine is now standard on NXT and XT coupled with underwater exhaust delivering a powerful, reliable, more fuel efficient and quieter experience. Our diverse product lineup delivers top performance, superior comfort, unmatched quality and reliability and industry leading technology. With a renewed focus on innovation, our team is preparing for an exciting product launch later in the year that will enhance our premium lineup. Turning to our pontoon segment, which includes both the Crest and Belize brands.

Speaker 2

Crest's model year 2025 lineup includes 2 redesigned models, an all new high performance tri tune and a streamlined product portfolio. The redesigned classic model features a refreshed helm, all new interior and superior styling. The lineup also includes a redesigned Caribbean model featuring a new luxury interior, new color options and an updated exterior. Our Tri Toons have received upgrades including an extended rear deck that comes standard, improved handling and performance and an all around better boating experience. For our luxury pontoon brand, Belize, we've been shipping our innovative Horizon and Helix models to dealers in targeted markets across the country in our fiscal Q4.

Speaker 2

Both models offer differentiated style and detail as well as high end standard features that prioritize on water entertainment and relaxation. The Belize models offer the industry's most refined finishes, high-tech features and luxurious comfort. Although standard boats come well equipped, upgradable options are available to take each model to the next level. Both models offer the ability to upgrade to the industry's 1st in water power cooler, tube lighting and underwater lighting. The ultra premium Helix model boasts an innovative gas assist tower and integrated premium Bimini and dual raised helms.

Speaker 2

The market response from dealers and consumers for both innovative pontoon brands have been encouraging and we're confident in the future of this segment. I'll now turn the call over to Tim, who will provide additional commentary on the year

Speaker 1

and a detailed discussion of our financial results. Tim? Thanks, Brad. Focusing on the top line, net sales for the fiscal year were $366,600,000 a decrease of $295,500,000 or 45% from the prior year. This decrease was primarily due to lower unit sales volume and an increase in dealer incentives, partially offset by higher prices.

Speaker 1

For the year, our gross margin was 18.3% compared to the prior year of 25.6%. Lower margins were the result of lower cost absorption from the planned decrease in unit volume and higher dealer incentives, partially offset by higher prices. Operating expenses were $59,500,000 for the year, an increase of $6,700,000 when compared to the prior year. This increase was predominantly due to a $9,800,000 non cash impairment related to the Aviara business and was partially offset by lower general and administrative expenses. Excluding the non cash impairment, operating expenses decreased during the year as we prudently managed cost.

Speaker 1

Turning to the bottom line, adjusted net income for the year was $20,900,000 or $1.22 per diluted share, calculated using an estimated annual effective tax rate of 20%. This compares to adjusted EBITDA, adjusted net income of $95,000,000 or $5.35 for the prior year calculated using the tax rate of 23%. Adjusted EBITDA was $32,900,000 for the year compared to $131,500,000 for the prior year. Adjusted EBITDA margin was 9% compared to 19.9% in the prior year. Our balance sheet positions us well as we ended the year with more than $86,000,000 of cash and short term investments.

Speaker 1

We have no net debt as our cash and short term investments exceeded our debt by nearly $37,000,000 We maintain ample liquidity and financial strength to prioritize funding key growth initiatives and returning capital to shareholders. During the year, we spent approximately $16,300,000 to repurchase more than 750,000 shares of our common stock. Since initiating our share repurchase program in June of 2021, we allocated nearly $65,000,000 to repurchase approximately 2,600,000 shares. These cumulative repurchases provided a 13% benefit to our full year adjusted net income per share. At the end of fiscal 2024, we had more than $35,000,000 remaining on our $50,000,000 program authorized in July of 2023.

Speaker 1

Now turning to our expectations for fiscal 2025, which consist of continuing operations only, we have developed plans for a wide range of potential market scenarios. Our guidance reflects an assumption of retail unit sales being down between 5% 15%. This cautious approach is indicative of market uncertainties as we exit the summer selling season. Our guidance also considers that our dealers are competing with boats being sold at liquidation prices due to certain competitor dealer disruptions. For fiscal year 2025, we expect consolidated net sales to be between $265,000,000 300,000,000 with adjusted EBITDA between $15,000,000 $26,000,000 and adjusted earnings per share between $0.36 $0.87 per share.

Speaker 1

We expect capital expenditures to be approximately $12,000,000 for the second half of our fiscal year compared to the first half. This dichotomy will be more pronounced this year as we prioritize dealer health coming out of the summer selling season. For the Q1 of fiscal 2025, consolidated net sales is expected to be approximately $61,000,000 with adjusted EBITDA of approximately $2,000,000 and adjusted earnings per share of approximately $0.04 I'll now turn the call back to Brad for his closing remarks.

Speaker 2

Thanks, Tim. Despite the uncertain macroeconomic environment and the industry headwinds faced during the Q4 fiscal year 2024, we executed well against our strategic priorities and reduced dealer inventories. We continue to exercise a disciplined approach to capital allocation. For the past 3 years, we've returned nearly $65,000,000 of excess cash to our shareholders through our share repurchase program. Our strong balance sheet provides us with the financial flexibility to pursue our strategic growth initiatives.

Speaker 2

The launch of the Belize brand and product enhancements at MasterCraft and Crest are examples of our forward commitment to innovation. As we look forward to fiscal 2025, we have developed business plans for a range of potential retail demand scenarios. Our highly variable business model allows us to proactively adjust to changes in demand. With a strong emphasis on pipeline management, we are positioning the business well for the market upswing that lies ahead. As we navigate this dynamic environment, we are well positioned to leverage our strong portfolio of brands and drive long term growth opportunities while maintaining the flexibility to return capital to shareholders.

Speaker 2

Operator, you may now open the line for questions.

Operator

Thank you. Our first question comes from Joseph Altobello with Raymond James. Your line is open.

Speaker 3

Good morning. This is Martin on for Joe. I was looking at the guide, I'm trying to understand a little bit better. We're looking at the lower EBITDA margin. Is that largely coming from the volume deleverage?

Speaker 3

Or do you anticipate that the promotional environment is going to get a little bit worse?

Speaker 1

It's primarily from a lower volume, deleveraging from the overhead absorption, there is additional G and A expenses as we fund bonuses at 100%. So we have both those headwinds.

Speaker 3

Got it. Thank you. And just to better understand sort of the guide, would you mind providing the adjusted EBITDA and EPS ex Aviara for the year? I believe in your prepared comments, you said $40,000,000

Speaker 1

For fiscal 2024, that is correct, dollars 40,000,000 for without the effect of Aviator.

Speaker 3

And would you have the adjusted EPS?

Speaker 1

I don't have that in front of me, sorry.

Speaker 3

Okay. Thank you very much.

Operator

Thank you. Our next question comes from Drew Crum with Stifel. Your line is open.

Speaker 4

Okay. Thanks. Hey, guys. Good morning. Just on your guidance again, you laid out a range of scenarios in terms of retail demand.

Speaker 4

What are you assuming or how are you assuming that trends as the year progresses? And then I have a follow-up.

Speaker 1

We're off to a decent start, a little bit ahead of our expectations. But as Tommy's inventory continues to be reaching the hands of retail customers, we expect that to be a significant headwind for our dealers.

Speaker 4

Got it. So, Tim, would you expect things to get better as the year progresses or it's too early to tell?

Speaker 1

I think it's too early to tell. We're off to a good start, but it is really early.

Speaker 4

Okay, okay. Fair enough. And then maybe more big picture Drew,

Speaker 2

just to add to that, of course, we're going to continue to work with our dealers from an incentive perspective and balance and with their participation, of course, to help that through the selling season, primarily through the winter. It's we all remain hopeful that the retail environment is going to improve. And at some point, this protracted recession in marine is going to rebound and we're positioned well for that.

Speaker 5

Got it. Okay.

Speaker 4

And then maybe more big picture, but with Nordic Star and now Aviara, the company has moved on from 2 brands that seemed promising at least initially, but just didn't work out. So based on those experiences, is adding new brands, whether it's organically or through acquisitions still an important part of the strategy? And if so, is the company refining its approach to portfolio management? Thanks. Yes.

Speaker 2

Drew, on the decision with Aviar relative to other forward looking ventures, obviously, that's a careful decision we made after a thorough strategic review. As you know, that business was challenged with volume to truly absorb cost in a startup facility that was dedicated to that unit. There's a we stomach losses there for quite some time, never was able to be profitable, pretty much due primarily due to volume issues. Let me just remind you too, that deal is not closed yet. We do expect it to close in our fiscal Q1 here.

Speaker 2

But going forward, there's some big differences in a brand launch like Belize, which is underway compared to Aviara. In fact, in some ways, it's opposite. I would just remind you that the lease is being manufactured in our existing Crest facility where we currently produce pontoon side by side with the same experienced team. There's open capacity in that factory, so it helps us actually with utilization on day 1 in producing those new units. A couple of other things I would highlight, the Belize product line is largely going to an incremental new dealer network in exciting markets with strong dealers, whereas Aviara, we had a strong dealer with a retailer, but it was largely exclusive to that retailer.

Speaker 2

So it's much more diverse channel strategy and we're really excited about that. So from a margin perspective, it's accretive to the segment as well we expect it to be profitable in year 1, very different scenario and circumstances from Aviara.

Speaker 4

Thanks guys.

Operator

Thank you. Our next question comes from Kevin Condon with Baird. Your line is open.

Speaker 5

Hi, good morning everyone and thanks for taking my question. I think on the call you mentioned that you finished fiscal 2024 with inventory 20% lower year over year. Is that true? And I guess when you think about your guidance in the retail outlook, is there a similar target that you might have to finish fiscal 2025? Yes.

Speaker 1

And speaking of the raw numbers, we were planning on the year being down between 600 and 1,000 units in fiscal 2024, and it was at the lower end of that range. So we did have significant destocking in 2024, but the market has been soft. So we anticipate also destocking in 2025, probably in that same kind of range between 600 and 1,000 boats.

Speaker 2

And that is between MasterCraft and Crest?

Speaker 1

Correct. And then probably a little more weighted toward the Crest as we look at those numbers.

Speaker 5

Is there any way to think through the Bailey's impact of you're ramping up there? Does that I mean, I guess that's all in the pontoon segment now, but would you still expect that overall segment to destock?

Speaker 1

Yes. And keep in mind, the Belize units are significantly higher AUSP, and so the destocking will be on Crest as opposed to Belize.

Speaker 5

Okay. That's helpful. Thank you.

Operator

Thank you. As there are no further questions, this does conclude the question and answer session. You may now disconnect. Everyone, have a great day.

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Key Takeaways

  • MasterCraft reduced field inventories by approximately 20% year-over-year through proactive production adjustments and dealer incentives, but expects continued destocking of 600–1,000 boats in fiscal 2025 to align with cautious retail demand.
  • The company announced the divestiture of its Aviara business to Cruisers Yachts (MarineMax) in an asset exchange, with closing expected in Q1 FY25 and the segment to be reported as discontinued operations.
  • MasterCraft launched the new premium pontoon brand Belize—manufactured at Crest’s existing Michigan facility with minimal capital outlay—and has already onboarded 11 new dealers, targeting profitability in year one and accretive margins.
  • In fiscal 2024, net sales fell 45% to $367 million, but the company generated $33 million of adjusted EBITDA (or $40 million ex-Aviara) and positive free cash flow, while repurchasing $16.3 million of shares with $35 million remaining under its program.
  • For fiscal 2025, MasterCraft guides to net sales of $265–300 million, adjusted EBITDA of $15–26 million, and EPS of $0.36–0.87, assuming retail unit sales down 5–15% and continued cost control to deliver positive free cash flow.
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Earnings Conference Call
MasterCraft Boat Q4 2024
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