Q2 2023 Mastercraft Boat Holdings Inc Earnings Call
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Good day and thank you for standing by welcome to the Q2 2023 Master Craft boat Holdings incorporated earnings Conference call. At this time, all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during the session you will need to.
Crestar one one on your telephone you will then hear an automated message advising your hand is raised.
You May ask a question. Please press star one one again 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 CEO . Please go ahead.
Thank you operator and welcome everyone.
For joining us today as we discuss <unk> second quarter performance for fiscal 2023.
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, and Chairman George Stein Barker, our Chief revenue Officer.
Greg will begin with a review of our operational highlights from the second quarter I will then discuss our financial performance for the quarter.
I'll turn the call back to Bret for some closing remarks before we open the call for Q&A.
Before we begin we'd like to remind participants that information contained in this call.
Only as of today February eight 2023.
<unk> assumes no obligation to update any statements, including forward looking statements statements that are not historical facts are forward looking statements.
Subject to safe Harbor disclaimer in todays press release.
Additionally, on this conference call, we will discuss non-GAAP measures that include or exclude special items not indicative of ongoing operations.
Each non-GAAP measure we also provide the most directly comparable GAAP measure.
2023 second quarter earnings release, which includes a reconciliation of these non-GAAP measures to our GAAP results.
I'd also like to remind listeners that there's a slide deck.
Zero cash results investors section of our website.
As a reminder, unless otherwise noted the following commentary is made on a continuing operations basis.
Now I'll turn the call over to Fred.
Thank you Tim and good morning, everyone net sales diluted adjusted earnings per share and adjusted EBITDA were all the highest second quarter in the company's history and it is our ninth consecutive year over year, a record setting quarter.
When compared to the second quarter of fiscal 2022, net sales were higher by more than 10%.
Adjusted EBITDA grew by nearly 10% and adjusted net income per share grew by nearly 19% during.
During the quarter strong operating results as diligent working capital management allowed us to generate the most cash flow from operations and free cash flow in our company's history.
This exceptional operational and financial performance was enabled by our strategic focus on the consumer and through investments in people and operations.
During the quarter, we continued to make progress in building much needed dealer inventory ahead of the summer selling season.
As of the end of the second quarter dealer inventories are approximately 55% higher than the second quarter of fiscal year, 2022, and about 20% lower than the <unk>.
Quarter of fiscal year 2019, we.
We believe that the business process and dealer network improvements we have implemented over the past few years will allow us to maintain more levels of dealer inventory than was typical in the past.
Early boat show results recent retail sales data and industry commentary suggests a return to historical seasonal demand patterns for historical context, approximately 70% of the annual powerboat retail sales occurred during the five month period from March to July .
Date, both dealer and consumer demand remained resilient in dealer inventory and production plans positioning our dealers and capitalize on our boat show and summer selling seasons.
Early boat show results were up from Master craft aircrafts versus both last year in 2019 levels.
As a result of the reversion to historical seasonality, we expect to have a clear picture on retail demand as we progress through the third and fourth quarters.
We continue to closely monitor economic conditions and evaluate the potential impact on our business.
Since last year, there have been no significant changes in our view of macroeconomic or other demand indicators.
The associated implications for the upcoming summer selling season.
We remain prudently conservative in our approach to wholesale production for fiscal 2023, and we have developed plans for a range of potential retail demand scenarios.
Given the high degree of macroeconomic uncertainty and the historical cyclicality of our industry. We are committed to running the business in a manner that prioritizes strong performance throughout the business cycle.
Guided by this philosophy, our intent is to maximize our fiscal 2023 financial performance, while maintaining healthy dealer inventories.
Moving on to supply chain, the general environment, including cost inflation delivery disruption is improving with certain pockets of leerink risk expected to continue for some time.
Supplies is longer than normal lead times on certain components, including those with upstream exposure to Asia continued to intermittently affect our production schedules.
However, we do not expect supply chain disruption to be a constraint on our full year production.
Tireless efforts of our World class supply chain team have enabled us to both.
Provide consistent production and capital efficient inventory control this.
Cautious optimism reflects a welcome change from the incredibly challenging supply chain environment in the past two years.
Our strong operating performance has resulted in record cash flow driven by record earnings and diligent working capital management.
Built a fortress balance sheet that provides us with abundant financial flexibility we have.
We're well positioned to pursue our capital allocation priorities first and foremost of which is investment in growth.
Laying the foundation for future growth by making targeted investments and initiatives that will take advantage of the strong underlying secular industry trends let.
Let me now briefly review some of the latest developments across our brands.
Our master craft brand performed exceptionally well by growing net sales to a second quarter record of nearly $109 million and expanding adjusted EBITDA margin by 80 basis points year over year.
This tremendous result is due to the extraordinary efforts of the master craft peaks. The continued success of Master Cramps operating model.
Master craft best in class Carpooling clean engines, and expanded entry and mid priced product offerings had been very well received.
Master craft has gained share in six of the last seven months and remains the number one brand in the fastest growing and highest margin category and the power boat industry.
At <unk> net sales were up by more than 23% year over year, continuing our trend of generating exceptional profitability.
<unk> achieved gross margin of nearly 20% for the quarter.
Since its acquisition in fiscal 2019 crest has doubled net sales and expanded gross margin by 340 basis points crest.
Crest has and will continue to add points of distribution to its dealer network fulfilling a key element of its growth strategy.
The innovation front crest, new all electric pontoon both the current and newly redesigned classic series have both been very well received by dealers and boat show participants.
<unk> sales and earnings growth demonstrates the success of the crest acquisition and highlights our value enhancing growth strategy.
<unk> net sales were up by more than 75% compared to the prior period driven by a 48% increase in units.
Higher prices.
According to the most recent allstate's reporting Ssi market share data as of the Rolling 12 month period ended September 32022 of your increased its market share by 280 basis points in the 30 to 43 foot premium day boat category.
<unk> continues to outpace our competitors further solidifying the brand's position as the preeminent luxury day boat.
Looking ahead of Euro will soon begin to launch innovative new models. These introductions will represent the next phase in <unk> product evolution and will position the brand for continued revenue and earnings growth.
I will now turn the call over to Tim will provide more detailed analysis of our financial results. Tim. Thanks, Brad we delivered another excellent quarter financial performance.
Focusing on the top line net sales for the quarter or $159 2 million, an increase of $14 8 million or 10, 2%.
The net sales increase reflects higher prices, partially offset by slightly lower unit sales volume and higher dealer incentives.
<unk> increased primarily due to greater floor plan floor plan financing costs, driven by higher interest rates and recovering dealer inventory levels on.
When compared to the historically low amount in the prior year discounting was also higher as we anticipate a return to more historical patterns of consumer demand and seasonality.
For the quarter, our gross margin was 24% as we a decrease of 120 basis points.
They are to the prior year period.
Lower margins were primarily result of higher cost for an inflationary pressures.
<unk> and mix higher dealer incentives increased warranty costs, partially offset by higher prices.
Production efficiencies.
Operating expenses were $11 8 million for the quarter or 140 basis points lower percentage of net sales compared to the prior year.
Turning to the bottom line adjusted income for the quarter increased 11% to $21 3 million or $1 20 per diluted share.
Using the company's estimated annual effective tax rate of 23%.
This compares to an adjusted net income of $19 2 million or $1 <unk> per diluted share in the prior year period.
Adjusted EBITDA increased nearly 10% to $29 8 million for the quarter compared to $27 2 million in the prior year period.
Adjusted EBITDA margin was 18, 7% down 10 basis points from 18, 8% in the prior year period.
Our balance sheet remains incredibly strong as we ended the quarter with nearly $190 million of total liquidity.
Including nearly $90 million of cash and short term investments and 100 billion of avail.
Availability under our revolving credit facility.
Also ended the quarter with zero net debt.
On the earnings and favorable working capital management as France translated to record cash flow from operations and free cash flow.
Year to date, we have generated a record $79 9 million of cash flow from continuing operations were nearly 200% higher than the prior year period.
Year to date free cash flow from continuing operations was a record $67 8 million or more than 210% higher than the prior year period, our balance sheet positions us exceptionally well provides us with ample financial flexibility to ensure sound operations through the business cycle and the ability to grow aggressively.
In alignment with retail demand.
Given our recent operating performance strong balance sheet, our positive long term outlook. We believe our stock represents an outstanding value at recent prices during the quarter. We spent approximately $4 8 million to repurchase nearly 225000 shares of our common stock.
To date, we have spent nearly 70% or $50 million program authorized in June of 2021.
Cumulative activity under under our share repurchase program provided an 8% benefit to our Q2 adjusted earnings per share.
We expect to continue to Opportunistically return cash to shareholders through the program, while prioritizing financial flexibility and high return investments in our business to generate growth and long term shareholder value.
Looking forward, we are raising our guidance for the full year based on our strong performance and incremental retail demand visibility. We will continue to monitor the strength of retail demand and adjust our production plans as appropriate to maintain healthy dealer inventories our guidance continues to reflect the potential for range.
A retail demand scenarios as we approach the all important summer selling season.
For full year fiscal 2023 consolidated net sales is now expected to be between $620 million and $640 million with adjusted EBITDA between $111 million and $118 million.
Adjusted earnings per share of between $4 40 per share and $4 66.
We continue to expect capital expenditures to be approximately $30 million for the full year.
For the third quarter fiscal 2023 consolidated net sales is expected to be approximately $158 million and adjusted EBITDA of approximately $26 million and adjusted earnings per share for approximately $1 <unk>.
Despite the dynamic business environment and macroeconomic uncertainties, we are confident in delivering strong financial results for our shareholders I will now turn the call back to Fred for closing remarks.
Thanks, Tim our businesses performed extremely well through the first half of fiscal 2023, delivering record financial results, which have exceeded expectations. Our diligent approach to business planning and our best in class operating model have allowed us to operate efficiently and have provided us with the confidence and agility to respond to a range of.
Potential retail demand scenarios.
Our robust portfolio of innovative products healthy dealer inventory levels, and our flexible production capabilities position us to capitalize on the boat show and summer selling seasons. Despite.
Despite significant macroeconomic uncertainty we remain on track to achieve the second best year of financial performance in the Companys history.
Forward to delivering strong results by prioritizing resilience throughout the business cycle, while maintaining a key emphasis on the pursuit of long term growth opportunities, thereby generating exceptional shareholder returns.
You May now open the line for questions.
Certainly I'd like to note a correction Tim Oxley CFO with are beginning host today. In addition, if you would like to ask a question. Please press star one one on your telephone.
Okay.
And our first question.
Will come from Joe Alto Belo of Raymond James.
Thanks, Hey, guys good morning.
So a couple of questions on the guidance I guess first.
We look at the topline you beat the sales guidance that you gave us three months ago by about 9 million raise the full year by $22 million at least at the midpoint.
Is that on a better demand outlook and maybe help us out is that coming from more units or more pricing.
Yes.
I think when you think about the retail demand environment I don't think that our overall view of industry retail has changed but obviously, we've got it in the debt's not three months of visibility in terms of how our brands are performed at retail we're continuing to take market share. So I think that is a factor in how we have adjusted our guidance to reflect our.
Confidence.
And our ability to deliver retail against a challenging environment.
That said, we obviously still have an eye out to that March through July period, which accounts for 70% of retail so.
We still are being very prudent and cautious with with our production plan and our guidance gives us the flexibility to.
To modulate or retail or I'm, sorry, our production to make sure that we are achieving.
The turns and healthy inventory levels that we've committed to providing both our dealers and our and our brands alright.
And also are you still looking for a sales decline in your categories. This year of call it 15% to 20% is that correct.
That's correct, we're still kind of from an industry standpoint for our fiscal year, we still expect retail to be down in that mid teens mid to mid teens level, Okay, and then on EBITDA.
It was a little bit better than than the guide maybe.
Maybe tell us where the thinking about the margin pressures are coming from in the second half.
Sure.
Floor plan financing costs are kind of number one as interest rates continue to grow as we are successful and restock in the dealers.
That's a big one another important one is mix.
As George mentioned, we try to build what's retailing and we've introduced some new NXT models that had been very successful in the marketplace. So we're mixing down to some of our smaller models as a result.
Got it great. Thank you guys.
Thanks, Joe.
One moment.
And our next question will come from Craig Kennison of RW Baird. Your line is open.
About.
The promotional environment and maybe.
Maybe what the trends you're seeing across your three main brands.
Hey, Greg you kind of broke up there for a minute I caught the last piece of that would you mind repeating the question.
Sure sorry about that my question is on the promotional environment could you. Please comment on trends across your three brands.
Yes sure.
Given what we are seeing is kind of a return to more retail seasonality with that we've also seen a return of higher levels of discount certainly.
Then we've seen the last past couple of years.
And so that's pretty consistent across our brands, probably not as much as Avi Ara, given where that brand is positioned but certainly with our craft pontoon product and the price points that we have there we are.
We're seeing higher levels of promotional activity and then also in the ski wake category. We have seen a return of promotions with that we we try to be good partners with our dealers. So we're really working with them to help how do we help them drive retail and so thats a combination of not just us providing.
Promotional activity, our support for our dealers, but helping our dealers get more aggressive with pricing in that so far they've been very receptive to that and I think that's very much our approach to how we want to work with dealers and be very dealer centric as much as we are consumer centric.
Greg I'd like to add that while the promotional environment is higher than the last couple of years, it's not back up to historical levels. So we're comparing to a period where is.
Kind of an all time low.
Yes, that's very helpful. Thank you both and then just on the floor plan issue and a lot of dealers are struggling with the fact that interest cost now on on all of their inventory.
Just wondering what the pushback has been among dealers to take on inventory and whether maybe you have the.
Infrastructure in place to be more.
Demand driven and operate with less inventory in the channel and keep that Floorplan expense down.
Yes, so I'll answer the latter part first we absolutely have the flexibility and we believe that we can operate our businesses and take market share and get the dealers the product they need while maintaining lower levels of inventory in the channel versus historical levels, we think the <unk>.
<unk> very much view that.
Early as we do and so that very much is built into our financial plan and how we manage the business every day, we're tracking retail activity every day every week and so we're making sure that our production is getting inventory into the market and the dealers, where it's retailing and as I mentioned previously we're very much focused on how do.
We help our dealers retail product.
Not just pushing them wholesale inventory.
In terms of the floor plan financing.
Every every OEM programs are different but with our with our free flooring the flooring.
Flooring support that we provide right now we're not getting any pushback from our dealers in terms of taking product.
And so we feel very confident that our programs are structured in a way that really allows the dealer to minimize the stocking risks.
Throughout the selling season, and allows us and positions us to be able to get the inventory to the dealers to maximize on our retail opportunities.
Just to follow up on that how long does the free flooring last for dealers and how does that flow through the income statement is that that's a contra revenue or is there a cost.
Correct correct, it as contra revenue and.
Every boat has at least six months of free flooring and if it's by early in the season and say July it will get up to nine months 2006 to nine months Theres also a cash alternative which has taken advantage of primarily in Q4 of our fiscal year.
Great. Thank you.
And our next question will come from drew Crum of Stifel. Your line is open.
Okay. Thanks, Hey, guys. Good morning, maybe just sticking with the brand commentary specifically on master craft, maybe a little more detail on the unit sales performance down 12% year on year in the quarter.
Any commentary in terms of what Youre seeing.
Retail in terms of consumer demand and then separately on <unk> can you talk about how the brand is tracking relative to some of the financial targets you had set out for the fiscal year.
I think from a unit perspective at Master craft room.
We have gone back to a more level loaded production schedule throughout the year, that's a big part of the efficiencies that we get in manufacturing. So I think some of the the year over year comparisons are challenging, especially when you compare to last year and some of our production was more dictated by supply chain and product availability.
Then what we would consider more of a normal manufacturing cadence so.
This year reflects a more level loaded production versus what we expect to ship throughout the year and thats going to influence the year over year comparisons, but nothing we would note there from a negative perspective, nothing from a retail perspective, that's driving that more so than just manufacturing efficiencies.
And then the second part of your question Javier I will take that one.
<unk> is on track this year, we expect them to.
To at least breakeven.
That's a significant improvement from the past year and the stair step toward where we see that brand in the future. So.
<unk>.
There may be variation month to month, but certainly quarter to quarter overall for the year, we see steady.
Opportunity to continue to improve the margin and profitability.
Significant improvement over the prior year.
Got it Okay very helpful. And then maybe one for Tim Tim you talked about.
Some record cash flow metrics.
Any notable callouts in the quarter and what should.
We expect in the second half of the year for cash flow.
Yes, I think youre going to continue to see some improvements in working capital.
Partly it's the result of supply chain.
Greater supply chain.
Reliability, if you will.
But stock wouldn't be as much as you saw in Q2.
But it should be.
<unk>.
Theme for us so we generate strong cash flow and thats going to continue in the second half.
Got it thanks guys.
One moment.
Our next question comes from Eric Wold of B Riley Securities. Your line is open.
Thank you good morning.
A couple of questions kind of follow up on what we know so far I guess.
You made the comment that you are kind of watching inventories and kind of expecting a little more efficient.
But with inventory of the box with lower inventory levels.
I think you said you are about 20% below.
Inventories, where you were at 19 in this the right level here or what do you think the right kind of percentage.
The decline or lower level from 19 is the right level going forward to be Jimmy efficient dealerships.
But.
Okay.
Maybe respond your question slightly differently, but hopefully.
Tells you how we think about it how we look at it.
We estimate what we think retail demand is going to be we back into what we think is appropriate level of inventory based on turnover and based on model by model mix and Thats. The way we drive what we think is the right level now, we certainly can compare to 19 or 20 or any other period, but.
That's not the way we set our goals we set our goals based on looking forward and our expectation of retail sales and overall industry trends and segment trends. So.
That regard we are getting very close to where we want to be at master crafted probably.
Good shape it to crest brand.
So.
The other thing I think that's important to consider is we've expanded distribution significantly.
Additional points of distribution.
Take additional inventory to support across the brand. So when you merge that altogether. The key is that we expect to turn inventory at our dealers at a much higher rate than we have in the past.
Got it that's helpful. I guess just last question.
You mentioned some of the pressure on margins as mix as huge.
We introduced some lower price NXT models based on where Youre seeing demand maybe talk a little bit about.
What other kind of <unk>.
Demand drivers youre seeing in terms of where consumers are shifting their purchasing I think going towards lower models kind of overall are they going to.
Less options I guess, maybe kind of give a sense of is that the only indication of where youre seeing maybe some pressure on spending or are there as well.
Yeah, what I would say.
We're not seeing a real change in the consumer habits in terms of options and whatnot I think part of it is in our NXP portfolio. We previously had three models and within the last 12 months. We've added two incremental models. So part of it is just as we level load our production and try to make sure that we're getting those new models into the market.
It plays into the consumers that are demanding that new product that is partly driving the mix towards some of the higher percentage of NXT production relative to prior years, but we're seeing pretty good very strong ordering patterns throughout the portfolio, both the dart premium X line.
All the way through our midline in NXT models, so and consumers continue to option up the boats and put different features on that being said, we are seeing a higher percentage of stock boats that dealers are ordering more boats that are going into stock inventory versus the last couple of years, we had a high percentage.
That niche of retail sold boats being ordered where the customers were ordering the boats backing them out to their particular needs and when you have a higher percentage of retail sold boats you tend to see more options more higher margin type of option selected versus a stock boats. So it's really.
Last about what we're seeing from the consumer and more about just the mix of retail so do our consumer retail ordered which is consistent with past seasonal type of patterns.
Eric.
Two sometimes.
We have a segment mix going on with.
Crest versus master craft that can impact margins as well as again, just a reminder, in the model mix we refreshed.
NXP and the <unk> product offering.
So those have been doing very refreshing and expanded so those have been doing very well and then in some other cases too in the Covid era.
We were able to.
Strange if you will the mix of <unk>.
<unk> based on our ability to.
Well manage throughput and now we're much more responding to true retail demand. So there is some reversion there in some models there that we've constrained in the past that there is pent up demand for.
Yes.
Got it helpful. Both of you. Thank you.
One moment.
And our next question comes from Michael Swartz of Trust. Your line is open.
Hey, guys good morning.
Maybe a quick question on I think you mentioned that NXT is this kind of margin dilutive in the back half of the year, but I think if we go back a couple of years. The commentary was there was no real difference between kind of the premium master craft in the annex key sub.
Sub brand if you want to call. It that I guess has something changed in that margin relationship between the two or is this totally a commentary just around kind of content or attachment rates.
It's really content.
NXT models don't have the same level of options available to them. So when those are ordered because we have very healthy margins on the on the options. They tend to have on our.
Baseball basis, it's comparable but when you add the options and Thats, where the margin erosion comes it comes about it's not it's not terrible, but it's less.
Mike I would just comment.
We have competitors that are being very aggressive in terms of pricing and so it's very important for us to make sure. We contest. These models. So they can compete with that pressure.
Okay. That's helpful and that kind of leads into the next question I think Fred you had made a comment just on maybe what you've seen at some of the early boat shows and I think you said, you're you're up both year over year <unk> versus 2019 levels, but just a clarification on that is that in units or is that in dollars and then maybe just.
<unk> had a little bit on the on the some of the discounts or incentives or rebates that are being offered at some of these shows is there any way to quantify maybe the level of discounting this year versus 2019.
Well.
First comment is.
The boat shows steps with regard to units Thats the way we track those traffic with a two week window. After the end of the show. So we're giving you the results from those shows that we've had this shows has taken place and we've had a couple of weeks after the finish up closing.
<unk>.
So that was one part of your question.
And the second part George.
In terms of promotional activity I think as Tim mentioned earlier, we're certainly seeing higher promotional activity.
This year versus the last two years compared to 19, we're not seeing we're not back to 19 level of promotional activity.
If you recall, we ended 19 with heavy inventory, which resulted in an heavy promotions and I would say.
As a whole, we're probably not back to that level, but I think certainly our expectation is that the competition will get more aggressive as we get into the retail selling season, depending on what happens in the macro economic environment and.
Our guidance and our plan provides us the flexibility to appropriately adjust our level of discounting to make sure that we are appropriately taking share where we expect to so.
But I would say, it's still lower than where it was in 2019 sure. If I had to put a number on it I mean in Q2, so the combination of <unk>.
Retail rebates as well as the initial four plant cost probably will be a headwind of about 150 basis points.
Driver number.
Okay, and I assume that the year over year comparison.
That is correct, Okay, and then just final.
Question for me just more of a house, maybe a housekeeping question.
In the second quarter I think there was a pretty big drop in Opex.
Dollars.
Was there something timing related in that or was this kind of the new run rate that we should be thinking about going forward.
The estimate of capital expenditures for the year Hasnt changed since then.
Im sorry, not capex.
So SG&A.
Sales and marketing.
There is some seasonality there Mike obviously, we've got a return to boat shows so youre going to see some higher operating especially on the sales and marketing side in the second half of our year as we kind of go back to boat shows travel expenses supporting the <unk> boat shows those types of expenses are going to are.
We're going to be more backend loaded or second half of the year loaded as an example, so.
I would expect to see higher levels of operating expense in the second half of the year versus the first half.
Okay perfect. Thank you.
And I'm showing no further questions. This concludes today's conference call. Thank you for participating you may now disconnect.
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