Q1 2020 Earnings Call
And gentlemen, thank you for standing by and walk into the Q1 2020, Mastercraft boat Holdings earnings Conference call.
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I'd now like to hand, the call over to some Oxley Chief Financial Officer. Please go ahead.
Thank you operator and welcome everyone. Today's call is being webcast live in wells will be archived our website for future listening.
Joining me on today's call will spread right Bill Mastercraft boat Holdings interim Chief Executive Officer, and Board Chair, along with George Die Barker, Our Vice President strategy and business development.
Our agenda includes a strategic overview the business by Fred Fred George bought by my analysis, the financials and our expectation fiscal 2020.
By the Q and a session before we begin we'd like to mine participants that the information contained this call. This current only as of today November seven 2019.
The company assumes no obligation to update any statements, including forward looking statements Staples Center, an artist Oracle facts are forward looking statements and subject to safe Harbor disclaimer in today's press release.
Additionally, on this conference call, we will discuss non-GAAP measures the include or exclude special right Im not indicative of our ongoing operations reach non-GAAP measure. We also provide the most directly comparable GAAP measure and our fiscal 2021st.
First quarter earnings release, which includes a reconciliation of these non-GAAP measures to our GAAP results.
I'd like to remind listeners that there's a slide deck summarizing our financial results in Investor section of our website.
That I'll turn the Colbert Fred.
Thanks, Tim.
I also like to thank everyone for joining us today.
Before we dive into the first quarter results when her financial highlights.
As you likely saw in a separate announcement last week tearing mcnew resigned as president CEO and director Mastercraft, Both holdings Inc. effectively Cobra thirtyth pursuing other opportunity outside the marine space.
Terry has been instrumental and cultivating a best in class product portfolio and driving a culture of innovation and operational excellence on behalf of the board and the entire organization would like to thank Terry for his leadership steadfast dedication and service to Mastercraft over the past seven years, and we wish him well in his future endeavors.
Moving forward I'm excited to take on the role of interim CEO I look forward to working alongside Mastercraft long tenured industry veteran leadership team as wells are seasoned and dedicated employees wallboard manages a process of finding a new CEO to drive the company into the field.
We're in the beginning stages of the CEO recruitment process and we'll share more information with investors on the status of that process on future calls with that I'd like to turn the call over to George to discuss our first quarter highlights.
Thanks, Brad.
As you saw from today's press release during our first quarter, we delivered record results net sales and adjusted earnings. This performance was driven by the inclusion of crest, which celebrated its one year anniversary as part of Mastercraft boat Holdings in October and the successful execution of our operational excellence and product development initiatives across all.
Our brands.
Ralph the quarter, we experienced an improved retail demand environment, which combined with our decision to pull back wholesale production across our Mastercraft Nordic Star and craft brands led to improved dealer pipelines encouragingly. We've seen this retail momentum extend into the early part of our fiscal second quarter.
At our Mastercraft brand, we saw a 50% improvement in our excess dealer inventory at the ended the quarter compared to fiscal 2019 yearend levels. This dealer inventory reduction was inline with our internal plan, but will remain a key area focus for us as we progressed through the balance of the year.
Importantly, we accomplish this deal or pipeline improvement, while expanding our mastercraft brand gross margins versus prior year.
This gross margin expansion was driven by two major factors first as we discussed on our last call our low fixed cost high variable cost model allowed us to efficiently flex down our wholesale unit production by nearly 13% in the first quarter, while minimizing the impact of lost overhead absorption.
Second our highly strategic and disciplined approach to retail discounts allowed us to make meaningful improvements to our dealer pipeline, while maintaining our focus on growing market share in a sustainable profitable manner.
We caution investors do not focus to greatly on near term market share data has elevated discounting by competitors across all boating segments may lead to short term market share gains and fluctuations, which we believe our neither sustainable nor profitable in the long term.
Regarding the impact of the G.M. strike recall that our exclusive engine supplier it'll more marine utilizes a G.M. block in the production of our Maronite inboard engine.
EBIT Omars long standing relationship with GM and its safety stock of GM engines, Mastercraft production was not impacted by the strike in the first quarter.
However to allow for GM its supply chain and no more marine to get production back online we will be shifting several production days out of the second quarter and into the second half of fiscal 2020.
This production timing shift will have no impact to our forecasted mastercraft financial performance for the year.
Transitioning to craft, we saw excess dealer inventory levels improved sequentially from June to September , which will remain a key focus area for the brand as the year progresses.
The pontoon segment has been one of the most impacted segments from an excess dealer inventory standpoint.
Utilizing the same strategic and disciplined approach, we employ mastercraft in Nordic Star that's crest team made meaningful improvements to with dealer pipeline year to date.
As we prepare for the all important boat show season, we believe craft is poised to continue the strong retail growth and market share gains the brand has experienced over the past several years.
Operationally, we continue to drive the integration initiatives already underway and are confident we're on track to meet our long term gross margin target of low 20% over the next couple of years.
At Nordic Star, our strategy to pivot the product portfolio to a greater mix of larger models and the continued execution of our operating improvement initiatives are beginning to pay dividends.
In the first quarter, we saw nearly 10% increase in average selling price driven in part by higher mix of units larger than 24 feet. Unlike Additionally, we realized expanded gross margins year over year. Despite a decrease in wholesale unit production up 7% and an elevated retail discount environment.
We're pleased with the progress, we're making it not star despite the broader slowdown in the salt water fishing segment.
We remain bullish on the segment over the long term and are confident that the product development and operational improvements were making it not of star will position the brand for future success.
Recall that not star ended fiscal 2019 with healthy dealer pipeline levels, which we've been able to maintain through the first quarter. We will remain disciplined with Nordic started dealer pipeline as we prepare for the upcoming boat show season.
Regarding how the era, we began shipping our first model the Abthirty two in July and cannot be more pleased with the reception of the brand by both our dealer partner Marine Max and consumers alike.
The hours European styling and open water performance are driving consumer to the brand and leading to retail sales trends ahead of even our already lofty expectations.
This past weekend I'll be ours newest model. The AB 36 was released to the public at the Fort Lauderdale International boat show.
The Abbey 36 is a 36 foot luxury bow rider that takes Abhi Rs progressive luxury to a grander scale aiming to further elevate the consumers experience on the water.
The AB 36 started production in our second quarter with shipments beginning late in our second quarter, we will be releasing the flagship model of the RV our lineup. The Avi 40 at the Miami International Boat show in February of 2020.
As previously disclosed the our brand will ultimately have gross margins that are slightly accretive to our mastercraft brands gross margins.
The integration of the Abhi, our production line into our Mastercraft facility is going smoothly and we remain on track to realize this gross margin expansion as we achieve full production run rates across all three models by fiscal 2021.
As we enter the slowest quarter of the retail boat selling season, we continued to anticipate retail growth in 2020 across all our segments, albeit at more modest levels and experienced in previous years.
The combination of elevated dealer inventories across the industry, coupled with continued economic and political uncertainty, including fears of a slowing economy in the upcoming 2020 presidential election result enough, taking a measured view in the near term.
Our short term focus on prudently rightsizing, our dealer pipelines across all brands and hyper focused on operational excellence initiatives will allow us to successfully manage the business for the long term through all business cycles now.
Now I'd like to turn the call back over to attempt to go over our financial results. Thanks George.
On the topline perspective net sales for the first quarter ended September 29, 2019, rose, 17.2% or 16.1 million to 109.8 million compared to 93.6 million for the year ago first quarter.
Inclusion of Crist, which was acquired during the second fiscal quarter of 2019 represented 18.9 million of the overall increase.
Not at Star contribute point 6 million over the overall increase.
And by higher wholesale average selling prices due to a greater mix of larger products and price increases partially offset by lower unit sales volumes.
As George mentioned, we will continue to prudently manage our newer pipeline in the face of slowing saltwater fish segment retail sales in a challenging weather condition.
Conditions experienced during last summer selling season.
At our mass craft segment net sales decreased by 3.3 million, primarily due to lower unit sales volumes for a mass craft brand as we work to right size, our dealer inventory levels, partially offset by a richer mix of higher priced and higher content at models.
The decrease for the mass Chris segment was partially offset by the start of sales for a new off your brand, which began shipping to remix stewards across the country in July of this year.
First quarter gross profit increased 2.3 million or 10% to 25.5 million compared to 23.2 million for the prior year period.
The increase was primarily due to the inclusion of Chris which grew gross profit by 2.6 million.
On a consolidated basis gross margin decreased to 23.3% for the first quarter compared to 24.8% for the prior year period.
This decrease was primarily due to the dilutive effect from the inclusion of crest.
Gross margin percentage dilution was partially offset by margin improvement at our Mastercraft segment, driven by price increases lower discounts and her material margins intermixed craft brand as well as price increases and operational efficiencies that are not exceed our brand.
Operating expenses increased 1.2 million to 12.8 million for the first quarter compared to 11.6 million for the prior year period.
This increase resulted mainly from the inclusion of Crist, which added 2.2 million, partially offset by 1.1 million decrease at our mass craft segment due to lower acquisition related costs, and lower selling and marketing costs.
Operating expenses as a percentage of sales increased 70 basis points to 11.7% for the first quarter.
Fair to 12.4% for the prior year period.
Turning to the bottom line adjusted net income for the first quarter decreased 1% to 10.1 million or 53 cents per share.
On a fully diluted weighted average share count of 19 million shares.
Computed using the company's estimated annual effective tax rate of approximately 23% up from 22.5% in the prior year period.
This compares to adjusted income of 10.2 million or 54 cents per fully diluted share in the prior period.
Adjusted EBITDA was 15.9 million for the first quarter up 5.7% compared to 15 million in the prior year period.
Adjusted EBITDA margin was 14.5% down from 16% in prior year period, principally due to the dilutive effect of Chris.
Please see the non-GAAP measures section of our press release and tempt you for a reconciliation of adjusted EBITDA adjusted EBITDA margin and adjusted net income to the most directly comparable financial measures presented in accordance with gap.
We believe we have a healthy balance sheet with a pro forma net leverage ratio of 1.3 times adjusted EBITDA that ended the quarter.
We will continue to emphasize the payment of that in the near term investments and high ROI organic growth initiatives.
Regarding our view for fiscal 2020, we maintain our previously provided guidance of net sales down in that low single digit percent range adjusted EBITDA margin down in the 50 to 100 basis point range and adjusted earnings per share down in the high single digit percent range.
Our updated cadence for net sales and adjusted earnings guidance in the first and second half of fiscal 2020, now anticipates net sales to be split approximately 40% 60%.
Adjusted earnings to be split approximately 35%, 65% respectively.
The back end loaded nature of our guidance is driven in part by the shift and several production days at or Mastercraft brand from the second quarter. Two second after the year due to the GM strike impact the increased contribution or our beer as we're all rollout of year at 36, and all of your 40 models and our third and fourth quarters as well as.
Planned pullback at wholesale production across all brands in the second quarter.
Help support our dealer dealers during the slowest retail quarter the year.
In summary, we were very pleased with our store to fiscal 2020.
We are well positioned to execute our plan for the balance of the year.
With that I'll turn it back to spread for closing remarks.
Thanks, Tim.
We didn't begin the process of finding the next leader for mass Cripple Holdings, we remain bullish on the long term prospects both markets, we serve and brands we don't.
Despite any short term fluctuations, we will continue to navigate the challenges ahead, including the economic trade and political uncertainty and we remain focused on prudently managing the company and positioning it for long term success.
In closing, we will not stand still during this transition period, we will maintain our focus on driving sustainable profitable growth through the development of new and innovative products strengthening our dealer network driving margin expansion through operational excellence and capturing additional market share across all brands we will.
Continue to emphasize dealer pipeline correction.
Working in a disciplined strategic manner.
Position the company for new growth in fiscal 2021 and beyond.
Now I'd like to turn it over to the operator for questions.
As a reminder to ask a question you would need to press star one on your telephone.
To withdraw your question pressed to Pam key please standby, while the compiled acumen a roster.
Our first question comes from Brett Andress.
Of Keybanc capital markets. Your line is open.
Good morning.
Good morning.
So I guess, just just help me out with your earlier comments around the market share data and I think not not putting too much focus on that I guess, specifically how did your retail track during the quarter. So any color on the cadence there.
It also give any comments on October .
Or any of the recent vojo.
Yeah I'll start out.
Our market share. We think is supported look at on a trailing 12 basis, all states reporting and for June were up almost 50 basis points of Mastercraft, we had market share improvement at Chris and I think not at star was flattish.
Our Q1 retail for Mastercraft.
Was up over the highest Q1 retail in the company's history. So we're very pleased with retail results in Q1.
We maintained a healthy pipeline as we as we mentioned our remarks at did not start in and crest was up as well.
As far as boat show results go what George once you cover the Hey, Hey, Brad It's George Yes. So.
Some of these fall shows are much more geared towards some of the larger product as you know so certainly more meaningful for obvious and now not X dollars. We continue our product development initiatives. There. So great results I'll start with not a star.
Year over year performance at both the Fort Lauderdale International Boat show, which just happened this week as well as the Tampa boat show, which as you know was delayed this year due to weather, but strong improvement there not only from a unit growth perspective at those shows but also seeing a higher mix of the larger product. So.
Our 32, which we launched last year. This was the first time that FFO was shown at both of those shows that and performed very well as well as the new to 51 hybrid that we introduced last year. So very pleased with that as we mentioned in the prepared remarks, starting to see the impact of those larger models flowing through especially at these early show so very pleased there.
On the RF front couldn't be more happy with the way that that products being received from both consumers and marine Max.
We sold several units at the four Lauder, but so far lateral art Lauderdale boat show and actually we've shipped Weve retail sold and all the art every boat show we've shown it at this season, so it's being extremely well received.
We see the 32 has had the longest time in the market, but the 36 was well received and we're excited for what that model is going to do for the brand and we're excited to launch the Avi 40 at the Miami show in February .
Understood. Thank you and.
Sorry, if I missed this but how many.
Units did you ship in the quarter and then if I look at Mastercraft.
Peas X obviously.
Any any color on what that would have been on a comparable basis.
Yes, so Brad as you know this is George we were not providing a breakout of units for the Mastercraft segment.
So, but what would I will say is our Mastercraft brand asps were up year over year for us. So so that was.
Driven in part by some of the higher higher uptake that we're seeing and some of the newer models that we introduced late last year, which continued to be well received in the marketplace. Like Dx 24 is an example, so very pleased with our product portfolio in the innovation, we continue to drive consumers continue to.
Take options and Thats driving up Asps at our Mastercraft brand so.
We're very encouraged by that.
Understood. Thank you for further clarification.
Our next question comes from Michael Swartz with Suntrust. Your line is open.
Hi, good morning, guys.
Okay.
Maybe just help us with a little bit of color on the I guess, the auto strike and how that's impacting timing. This year were there any costs related to that in the quarter are there any costs embedded.
In your guidance that just just try to help us out a little bit there.
Yeah, Hey, Mike This is George happy to provide some more color gas. So as we stated we've had a very long term relationship with Elmore theyve been our exclusive inboard marine supplier for off for several years now and.
As you may or May not know Thats, a Roger Penske back to business. So theres, a long tenured relationship between that entity and GM. So one elmore was appropriately stocked from from an inventory perspective, which allowed us to have zero impact to our production in the first quarter and.
And secondly, just given their relationship we were one of the first one is the star getting engines. Once the GM strike ended so we have zero financial impact to our full year results as a result of the GM strike.
Other than just from a timing perspective, we are giving him more in the GM supply chain a couple of days in our second quarter, two to kind of get everything back flowing again, but that's really more of a timing shift and we'll have zero minimal as zero impact from a financial perspective for the year.
Okay, great. Thanks for that and then just just with your your market share commentary George I think you had mentioned kind of disregard near near term market share trends would just be choppy I guess with some of the things going on in the market I guess I'm just trying to understand.
As the implication that your competitors.
Being more maybe irrational or aggressive on pricing or is it maybe that inventory levels are your you assume your inventory levels are in better shape than than the rest of the market I'm just trying to figure if there's anything to read through.
From from your comments there.
Yes, Hey, Mike No I think what we're trying to impress upon investors is.
We're going to go about clearing our channel maybe differently than other competitors are as Ed as other companies have reported were certainly seeing an elevated competitive environment environment out in the retail landscape. So we anticipated that but we're very strategic with how we deploy our retail rebates and it's.
Not just going to see an environment, where we throw retail rebate that it. We're also we believe prudently pulling back wholesale production as evidenced by the pullback in units that mastercraft and and and not nexstar. So it's really just it how do you how do you accomplish the goal.
We're taking a more long term profitable view on and how do we accomplish that to get our inventories, where we want them to be by the end of the year, but in the short term. Other competitors may may tried to attack it more aggressively early on in the year versus our approach to assist the try to consistently bring it down throughout the year and and try to keep them.
Our margins as high as possible. So given that dynamic you may see some fluctuations in the near term. The ESI data certainly is less meaningful and these next couple of quarters, given the lower percentage of annual retail that they represent and with some of the up with this most recent data being only around 20 425 states.
Without having all the states reporting the data just can look.
US back so we just caution people to take a more long term view on the on the market share, but not trying to imply anything other than you will see some fluctuations here as competitors go about a differently.
Okay. Thanks for the color George.
Our next question comes from Joe Altobello of Raymond James Your line is open.
Thanks, Hey, guys good morning.
Good morning.
Just a follow up on that last point, you made George regarding promotional activity seems to be pretty heavy in August September are you seeing.
That continue into October and is that primarily saltwater fish or is it also on the ski wake side as well.
Yes, Joe This is George I'll say that it's been pretty consistent starting even as early as July .
We have seen heavy competitive discounting and I would say, it's been pretty much across all segments certainly all segments that we were end today.
Pontoon as we mentioned in our remarks is.
Isn't is a segment that's been pretty impacted by inventories than we've seen competitor discounting there we continue to see it in the salt water fishing segment certainly.
A lot in the smaller portion of the segment that 24 foot and smaller.
Given given the difficulties and challenges that segments, having there and then also in certainly in ski wake, but I wouldn't say, it's any one segment more than the other it's been pretty consistent and broad and we have seen that continue here into the into our second quarter, which is into given that this is the slowest retail quarter of the year.
Our retail demand that's not to be honest unexpected, but where we're managing through that we have a good sense of our plan of attack and we feel appropriately that we've got the right discounts and plan in place to continue to.
Improve our inventory situation and put us in a position for renewed growth in 2021.
I had I would add Joe this is Tim that that was embedded in our budget and bedded in our.
Certainly our guidance as well.
Got it Okay, and then secondly, the terms the outlook for this year, obviously no change.
Are you guys still assuming that dealer take turns up next year.
Yes, Joe This is George so, yes, I think our view on the on the on the next nine months isn't very different than our view last last quarter. When we reported full year results. So our experience tells us that dealers and consumers alike. We will continue to approach. The next nine months concern.
Actively dealers given the elevated inventory levels, but from the consumers with the upcoming election in particular, we think theres, a strong chance that dealers and consumers both take a pause and so given that we think there will be continued.
Conservatism on behalf of the dealers to ensure once they've once the mentality is once they've got to enter an environment, where they've got excess dealer inventory that can take a little while to clear that mental hurdle. So so yes. Our view is consistent from what we said last last earnings call.
And thats reflective in our in our maintaining our outlook for the year as we still got about three quarters of the year to to get through and agility I'd like to add this is Tim that because we're flexible manufacturing, we'd love to be wrong here.
And have some pent up demand occurring this spring.
And we can now we can take advantage of that pent up retail demand if it occurs.
Got it okay. If I could just squeeze in one or is there a timetable for Urdu CEO is that a three month process or six month process.
Uh huh.
Joe This this for a bright let me answer that question.
You know.
There's a CEO succession policy that was implemented by the board has been in place.
And.
Search committee is going to be formed.
The next steps include retaining and executive search consultants, creating a profile establishing the criteria interviewing candidates presenting them to the finalists to the board.
And.
You know I've been associated with.
Mastercraft and with the board since 2009.
Brought Terry to Mastercraft so.
He was the right person at that time and you know at this point, we have the luxury of having maybe able to step in here being familiar with the team having long standing relationships and knowledge of the company in the industry and we're going to be very carefully to make absolutely certain that we selected the best candidate.
Thats possible to lead this company forward and as the best match for the exact needs of the company at this point in time Terry was the perfect match at the time he entered and we'll make sure. We have the same thing this time around.
In terms of timing.
We're going to we're going to move diligently forward on the process and.
We're fortunate to find the exact right person it will be quick if not we'll take as long as we need to make sure. It's right. We're not just going to.
Beyond a force March.
In an accelerated timeframe.
I completely understand thank you.
Our next question comes from Craig Kennison of Baird. Your line is open.
Hey, good morning, Thank you for taking my questions as well, maybe I'll follow up on the CEO search question, but not texstar Kras. They were acquired under this premise that.
The team had some operational expertise to bring to bear.
Those acquisitions.
Do you feel like you still have that with Terry gone.
First of all and second is this.
Put any M&A on hold until you identified index candidate.
Let me take last question first because that's the simplest our focus now is on organic growth in improving the businesses, we have and so our heads are down we have good plans in place in those plans are going to continue in ball to evolve as we see additional opportunities.
But I do not expect any M&A in near future.
You know as as we see the results were looking for those businesses as we have a better.
Insight into the economic climate will make that decision about any.
Organic growth with regard to operating expertise.
Remember that.
As manager was.
You know operational excellence and performance is about process and about.
You should not about any one individual and I think thats a legacy thats been left we have very capable team.
You know that he brought in and trained and.
Those people are performing very well so with respect to the concern about operational expertise and the loss.
Believe we're in good shape, there, having said that rest assured that we will thoroughly examine every element of the business in our CEO selection in recruiting process and make sure that we have the right skillset and or that were supplementing that skill set as necessary throughout the senior leadership team.
Thank you and then with respect to dealer inventory I'm trying to frame the progress you've made to reduce inventory in the channel.
It sounds like.
Through your words, it sounds like you've made progress, but you know the stock reflects.
Lot of skepticism frankly about earnings expectations for next year trading around seven times earnings I'm wondering if you could put some.
Numbers around the targets you've made on inventory to get us confident that that destocking process is well underway.
And.
This is Fred the other fills hirel fill in further but.
Once again just to reiterate.
Out of what we estimated to be the level, we would prefer not to have we've taken at least half of that out. So we've made really good progress in the initial part of the year and then the notion is we'll continue to make progress as we go along but good progress ends up in the months. We're you know there's higher sales activity.
So as you know, it's really looking into the third quarter.
When.
The next big vital come out to put ourselves exactly where we want to be for the heavy selling season. So you.
Second we did not expect to in the first quarter be able to put ourselves.
100%, where we wanted be but once again.
It is.
There are marginal amounts in the overall picture.
Gentlemen.
Hey, Craig it's George.
As you know we look at dealer inventory turns its by far the most important metric that we track and where we do that across all of our brands and as Fred mentioned them and we feel very good about the progress we've made we've seen sequential improvements.
At Mastercraft in craft.
Obviously, thats part of pulling back wholesale but also the the strategic use of the retail rebates and remaining competitive but.
We're not there we still have work to do we tried to make that very clear, but we're going to be very strategic there, but we are on plan for where we wanted to be in terms of getting those turns back to appropriate levels. We've made fantastic progress that mastercraft.
Good progress at crest, and with with not a star we've been able to maintain our turns which as we commented at the end of last year that those turns were actually the healthiest of all three of the brand so.
We don't actually provide our turns as you know but.
Hopefully that's helpful and just framing that.
We were very encouraged by the progress we saw and see no reason that we can't continue to to to make progress on that front and be where we want to be to set us up for renewed growth next year.
Thanks, and finally, I'm, obviously I'm curious now that you sold units at retail have you learned anything about the customer profile to what extent to that customer match, what you expected or is that customer different than who you expected to purchase that both.
Yes, Hey, Craig This is George Yes, I would say that overall it's.
The consumer the demographic that we had targeted with that product specifically building a luxury bow rider within that 30 to 40 foot segment.
Is exactly what we've seen from a from a consumer perspective.
Thats in large part why we partnered with the marine Max because that is their core customer and knew that they would be.
The best set up from day, one to be able to attract that customer into their sjogrens and really sell.
The competitive features and value proposition of the brand. So I will say just given the the the concentration of some of the early shows along more of that coastline. We have seen a higher percentage of outboards sold at resale retail, but we expect that to more normalized to outboard and stern drive as.
We as we get into the more boat show season early next year, where you've got to a better mix of inland and outboard shows what we think the this stern drive is going to be a great product for a lot of those inland lakes those large bodied inland lakes.
So once we get that product out there and show that we fully expect expect to that side of the of the engine selection to to increasing mix, but but other than that I would say, it's really hit the mark from for what we expected from the brand and are very pleased with the retail performance today.
Thank you.
Thank you.
As a reminder, if you'd like to ask a question. Please press Star then one.
Our next question comes from Tim Conder of Wells Fargo. Your line is open.
Hey, good morning. This is actually more tenancy on for Tim. Thanks for taking your questions. Just a few we had.
Gross margin improvement both in the core Mastercraft segment, and then not start despite the lower volumes could you maybe quantify some of the puts and takes here you called out lower discounts year over year Mastercraft side.
Yes, the certainly we had a lot more international discounts at the Mastercraft side in Q1 of last year that was probably about two cents.
Worth about two cents the improvement year over year there.
The headwind that we're having certainly use overhead absorption when you look at a decrease in your volume, but obviously it was instrumental in assisting us there.
So that you and Thats one of the reasons that we that we're diversified and really for different segments now so.
Thats certainly a headwind the other headwind that you experienced when you introduce new larger products like this is certainly some labor variances.
Again pleased to note that we have overcome these headwinds.
To show the year over year improvement gross profit margin Mastercraft and overhead absorption frankly is a headwind at both not extortion Chris.
Yes, Mark.
George I would also add we did see as I mentioned, we did see an increase year over year in Asps at our Mastercraft brand driven by.
The acceptance of our new product.
Our model to your 2020 product and some of the innovation that we brought to market. There has helped drive that we've seen we saw a good mix in our first quarter at our Mastercraft brands.
We expect that mix to kind of mix down in the second quarter as our as the new annex tease that we released than we redesigned both the NXT 20 in the 22 that we launched.
To start the model year, we expect those to continue to gain.
As an overall percentage of our production so that'll that'll kind of mix back down a little late in Q2, but in Q1, we did see favorable mix with some of our larger higher priced products. So.
Those that factor contributed what 10 described on the the lack of Canadian tariff and in the overhead absorption or kind of the puts and takes that allowed us to.
As we think pretty impressively improve our margins there and then it not XR I would just point out that.
Where we are starting to see the benefits of those operational improvements that we've been working on.
Since we acquired and certainly seem to benefit from seeing some larger product flow through the facility there as well. So all of those factors helped to drive the margins higher not exceed our year over year.
One thing I want to kind of reiterate this.
Retail selling environment, where competitors or discount the boats in some cases pretty heavily.
Because it makes even more impressive we deliver on the margin.
We have.
Okay, and then just to clarify on the expectations for.
Margin contribution did that change at all from your prior outlook.
No as we previewed this is George Mark as we previously discussed we expect our the are to be slightly accretive to our overall mastercraft brand margins.
As we stated there will be a ramp up period in terms of as we launched the we launched the Abthirty two there some production inefficiencies as you get the line accustom to running that both through we've made significant improvement there.
But we'll we'll experience that with the AB 36, which just started production this quarter.
And we'll see it again with the 40, when we start production of that model in our second half so as we get to full run rate across all three of those models beginning in 2021, that's where we would expect to see that full year run rate up higher margin, but we are seeing improvements and we're very pleased with the operational.
Progress we've made on the RV are aligned and integrating that into our Mastercraft facility.
Okay, great. Thanks, guys.
Thank you.
Our next question comes from Eric Wold, a B. Riley your line is open.
Thank you good morning, guys.
She questions I guess first of all on of Euro.
How much how much inventory only used in general are you seeing.
The.
Rematch deals take on site and how is that kind of varied by geography and mix.
Yeah, Hey, Eric It's George.
So we obviously just started production of the 32 this quarter.
You know Marine Max has 60 65 plus locations as Weve indicated before we expect.
Around a third of those to be quote unquote stocking locations, although the brand will be available at all of their location. So.
Sure.
It's a good problem, but we're actually struggling to to keep inventory and stock at the location so they've been retailing through.
Very well, which we're very pleased with but we're very focused on getting inventory into those those stocking dealers.
From a geography standpoint, as I mentioned earlier, we are seeing a higher mix towards the coastal areas just given some of the early season boat shows and marine Max's desire to have models available for shows like Annapolis Norwalk Fort Lauderdale, obviously so.
Yes, so thats directionally, what we're seeing but we're still early on and that production and shipping and getting those out to all of the marine Max dealers that want to have a stocking units and.
Again high class problem, but to where we're working we're working extremely hard in the team's doing a great job of getting those getting those models out, but we're going to be very focused on its a new brand at the luxury brand, we're going to be very focused on quality, making sure the fit and finish is where it needs to be to really hit the mark with that that high end.
Customer so we're going to be much more focused on making sure the product that leaves here leaves here in the best condition possible, but very pleased with the take rate that marine Max has and how those are retailing through.
Okay, and then on the Mastercraft you noted that it's fees were higher again, excluding the are from the minutes I guess.
In somewhat of a cautious environment, how should we think about your desire to continue to push it's much higher possibly moderate growth in any sense from dealers to want to take a different model or kind of price mix in this environment and then we're going to last going to some question on that how much.
That ASP movement is kind of.
Push forces pool and incentive.
Consumers, taking one from a floor versus then you're going to getting pushed to then versus im going to pulling at higher themselves when choosing the options are going to moving it proactively higher yes.
As you as you know this is Tim.
We've been judicious on our price increases and remains over the last several years, so it's primarily higher option uptake.
And that's very encouraging because it tells that that high end consumers still out there.
The Malays, we saw in the industry was largely driven by the weather and so.
The economies in good shape and we are a poll system President Bush. So that's reason we have these options and somebody checks the box.
It's better for them. Yes. This is George Eric what I would add I think given the pent up demand that we saw this first quarter given the weather delays last summer I think what we saw was a higher mix of custom air retail sold boats with which tend to have a higher option uptake. So we may be saw a little bit of that.
Fall into our first quarter, which normally may have.
I'll hit more in our fourth quarter last year. So that was really to Tim's point. It was really more pool customers the customer that weighted to July to get their custom order boat.
Thats certainly benefited the quarter as we move forward as I've mentioned earlier, what we'll see that mix come back down.
As as dealers take more what we call stocking boats, which are more likely content did as well as you see a greater mix impact from some of the new product that we've introduced especially around the NXT 20 in the 22. So I think there was a little bit of uplift there and that Q1 due to those factors, but but much more pool than than us pushing price, which.
We've been very judicious about.
Okay and final question.
As you you're going to work production levels lower any any risk on where you see risks going on retaining the workforce, especially some of the higher value guys in the line.
Your thoughts on wage pressures on the heading into next year.
Yes, Eric this is George so.
The several days that were pushing out of our production.
In our second quarter are pretty minimal.
And with those have been communicated to our workforce and are appropriately timed. So we don't anticipate any.
Drop off in employee workforce due to that and then it's really just like I said several days in our second quarter in the rest is just our our normal holiday shutdowns, which we have every year. So.
That we're not we're not taking off and excessive amount of production days out of Q2 that we believe would have any negative impact from a workforce perspective. So.
We don't have any risk around that we don't believe we have any risk around that Eric I would add that when we do these when we take some days out we do it in conjunction with a holiday because it's very well received by employees and so.
For instance, we will be shutdown Thanksgiving week as an example of doing in conjunction with holiday.
Perfect. Thanks, guys.
There are no further questions like to turn the call back over to Fred right Bill for any closing remarks.
Well. Thank you again for joining us we look forward to updating you on our progress in the second quarter results in February .
Thanks, everyone. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.