MasterCraft Boat Holdings, Inc. (NASDAQ: NASDAQ:MCFT) revealed a significant decline in its Q3 2024 financial performance, with net sales plummeting by 43% to $95.7 million, largely due to decreased unit sales and increased dealer incentives.
The company's gross margin also fell to 19.2%, a 630 basis point drop, while adjusted net income tumbled from $24.1 million in the previous year to $6.3 million. Amidst macroeconomic uncertainties and a challenging retail landscape, MasterCraft has adjusted its full-year guidance and is introducing Balise, a luxury pontoon brand, to diversify its product range.
Key Takeaways
- MasterCraft's Q3 net sales were $95.7 million, a 43% decrease year-over-year.
- Gross margin decreased to 19.2%, and adjusted net income fell to $6.3 million.
- Full-year guidance was revised, with net sales expected between $360 million and $365 million.
- Adjusted EBITDA is projected to be $28 million to $30 million, with EPS between $0.95 and $1.05.
- The company plans to reduce dealer inventory and rebalance production.
- Balise Pontoon Boats was launched to expand MasterCraft's product offerings and distribution.
Company Outlook
- MasterCraft anticipates consolidated net sales for the full year to range from $360 million to $365 million.
- Adjusted EBITDA is estimated to be between $28 million and $30 million.
- Adjusted earnings per share are expected to be in the range of $0.95 to $1.05.
- Capital expenditures for the full year are projected to be around $17 million.
- The company is concentrating on long-term growth opportunities and inventory rebalancing.
Bearish Highlights
- The significant decline in net sales and adjusted net income indicates a challenging quarter.
- Increased dealer incentives and a drop in unit sales volume contributed to the revenue decline.
- Gross margin deterioration reflects cost pressures and inventory management challenges.
Bullish Highlights
- The launch of the Balise Pontoon Boats brand represents a strategic move into a new market segment.
- The company's focus on managing dealer inventory and supporting its network is intended to stabilize operations.
- MasterCraft's dealer network is described as healthy, with protective measures against financial distress.
Misses
- The company fell short of its previous performance, with a stark decrease in net sales and adjusted net income.
- Gross margin suffered a significant decrease compared to the previous year.
Q&A Highlights
- MasterCraft's strategy for Balise involves expanding distribution through new and existing dealers.
- The premium positioning of Balise is expected to benefit the company in the long term.
- Conversations about the upcoming model year 25 are limited as the focus remains on selling existing inventory.
- Measures are in place to support the financial health of the dealer network.
In summary, MasterCraft Boat Holdings, Inc. is navigating a challenging economic climate by revising its strategy and introducing new products to the market. The company's efforts to manage inventory, support dealers, and launch the Balise brand demonstrate its commitment to resilience and growth despite the current headwinds.
InvestingPro Insights
MasterCraft Boat Holdings, Inc. (NASDAQ: MCFT) has faced a tumultuous period, as indicated by the latest quarterly figures. To provide investors with a more nuanced perspective, let’s delve into some InvestingPro insights that shed light on the company's financial health and market position.
InvestingPro Data metrics show a market capitalization of $341.53 million, which reflects the company's current valuation in the market. The P/E ratio, a measure of a company's current share price relative to its per-share earnings, stands at 8.86, suggesting that the stock may be undervalued when considering near-term earnings growth. Additionally, the company's revenue over the last twelve months as of Q3 2024 was $465.97 million, though it experienced a decline of 38.6% during this period, highlighting the challenges faced in generating sales.
InvestingPro Tips reveal that management has been actively buying back shares, a sign that could be interpreted as confidence in the company's future prospects. Moreover, MasterCraft holds more cash than debt on its balance sheet, indicating a strong liquidity position that could help weather economic uncertainties. However, it's important to note that 4 analysts have revised their earnings expectations downwards for the upcoming period, which may suggest a cautious outlook on the company's performance.
Investors looking to explore further insights on MasterCraft can find additional InvestingPro Tips at https://www.investing.com/pro/MCFT. For those considering an InvestingPro subscription, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. With 12 more tips available on InvestingPro, subscribers can gain a comprehensive understanding of the company's financial standing and future prospects.
Full transcript - MasterCraft Boat Holdings Inc (MCFT) Q3 2024:
Operator: 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. [Operator Instructions] 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: 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 will also be archived on our website for future listening. With me on this morning's call are Fred Brightbill, Chief Executive Officer. We will begin with a review of our operational highlights from the third quarter. I 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, 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 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 will provide the most directly comparable GAAP measure in today's press release. This includes a reconciliation of these non-GAAP measures to our GAAP results. There is also a slide deck summarizing our financial results in the Investors Section of our website. As a reminder, unless otherwise noted, the following commentary is made on a continuing operations basis. With that I will turn the call over to Fred.
Fred Brightbill: 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 6 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 clearly decline 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 prioritize timeless artistry, sophisticated entertainment, radical innovation, and uncompromising quality in developing this exciting new brand. Balise will initially launch with 2 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: Thanks, Fred. 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 in 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 and administrative expenses, including leadership transition cost. Trends 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 the 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 ended 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 ended the quarter with no net 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 performed 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 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 we'll 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 to 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 Fred for closing remarks.
Fred Brightbill: 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've 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: [Operator Instructions] And our first question is going to come from the line of Joe Altobello with Raymond James.
Joe Altobello: 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? Are you expecting it to or just expecting it to, or did dealers get more cautious? Or what is was it sort of all of the above?
Tim Oxley: I think the dealer cautions 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, and the macroeconomic uncertainty. So when you combine all three of those, I think it's, what's causing us to take production out significantly in Q4.
Joe Altobello: Okay. But have you seen the higher promotion levels yet or are you just anticipating that?
Tim Oxley: Both. We're seeing it now and we anticipate it to continue.
Joe Altobello: My second question on your last call, I think you estimated that you'll be pulling somewhere between 600 and 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 '25?
Tim Oxley: We anticipate pulling the inventory down even further, Joe, upwards of 1,000 units, and 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 will drive additional increases in fiscal 2025.
Operator: And our next question is going to come from the line of Drew Crum with Stifel.
Drew Crum: 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 '25? And then I have a follow-up.
Tim Oxley: We certainly hope that this drastic reduction in Q4 is going to get our dealers healthy and then for fiscal '25. Assuming we take as many boats out of the pipeline as we planned, 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: And then on the Balise product, any financials you can share with us, margins, sales expectations, time to breakeven, et cetera?
Fred Brightbill: We're excited about the lease. That 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 Crest business, but this is approaching a premium and ultra premium part of the segment, which we're very intrigued with.
Tim Oxley: The fact that we're using the existing facility, Drew, means that the breakeven is really not even applicable to this brand, because it will be valuable for the entire Crest facility, get additional capacity utilization.
Drew Crum: And Tim, will you guys report this as part of Crest or will it be broken out separately?
Tim Oxley: It'd be reported as part of Crest.
Operator: And our next question comes from the line of Noah Zatzkin with KeyBanc Capital Markets.
Noah Zatzkin: Maybe just on kind of the ASP front, just any early thoughts around model year '25 pricing kind of given the dynamics going on in the industry right now.
Tim Oxley: 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: And 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.
Tim Oxley: 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. 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: And our next question comes from the line of Kevin Condon with Baird.
Kevin Condon: This is Kevin on 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 get that it's a different category, but any learnings from the, Aviara launch that maybe are applicable here for as you launch that brand?
Fred Brightbill: 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. Leading 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: [Operator Instructions] Our next question comes from the line of Griffin Bryan with D.A. Davidson.
Griffin Bryan: I guess if you just talk about what are the current conversations sounding like with dealers considering the model, you're 25 ordering? Obviously, the entire industry is still seeing some bloated inventories. I'm just curious what the playbook is there as we end the model year changeover.
Tim Oxley: This time of year since we're so heavily dependent on retail April, May, June, most of our conversations with dealers are focused on getting them healthy now and blowing through as much of the existing inventory as they can. And then it's sort of premature to have very much in the way of conversations with model year 25. Matter of fact, the more we tout 25, it makes it harder for them to sell the 24s to have an inventory. So not very many conversations focused on 25 yet.
Griffin Bryan: And just one more follow-up here. So just can you speak to the current health of your dealer network and if you're seeing any cracks by geography or by category of product being carried? Thanks.
Tim Oxley: 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 at financial distress. And we've been utilizing those tools, which includes obviously retail rebates, producing production, moving both sideways to more 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 a less of a concentration with one dealer than our competitors.
Operator: And 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.
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