Mastercraft Boat Holdings Inc (MCFT) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 and fiscal 2020 MasterCraft Boat Holdings Inc. Earnings Call. (Operator Instructions) Please be advised, today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speakers, Tim Oxley, Chief Financial Officer. Please go ahead.

Thank you, operator, and welcome, everyone. Thank you for joining us today as we discuss MasterCraft's fourth quarter and full year performance for fiscal 2020. As a reminder, today's call is being webcast live and will also be archived on our website for future listening. Joining me on today's call are Fred Brightbill, Chief Executive Officer and Chairman; and George Steinbarger, our Chief Revenue Officer.

To open the call, Fred will provide commentary on our businesses, and I will discuss our fourth quarter and fiscal 2020 results. Then I'll turn the call back to Fred for closing remarks before we open the call for Q&A.

Before we begin, we'd like to remind participants that the information contained in this call is current only as of today, September 9, 2020. The company assumes no obligation to update any statements, including forward-looking statements. Statements that are not historical facts are forward-looking statements and are 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 also provide the most directly comparable GAAP measure, our fiscal 2020 fourth quarter and fiscal 2020 earnings release, which includes a reconciliation to these non-GAAP measures to our GAAP results.

I'd also like to remind listeners that there is a slide deck summarizing our financial results in the Investors section of our website.

With that, I'll turn the call over to Fred.

Thank you, Tim, and good morning, everyone. As the world continues to grapple with the effects of the COVID-19 pandemic, it remains my sincerest wish that everyone with us today has remained safe and healthy. As you saw from today's press release, MasterCraft Boat Holdings delivered financial results in the fourth quarter ahead of Street expectations, closing out a challenging fiscal 2020 with strong momentum heading into fiscal 2021.

For the year, net sales decreased 22% to $363.1 million. Adjusted EBITDA decreased 44% to $44.3 million and fully diluted adjusted net income per share declined nearly 52% to $1.34 per share, principally driven by the disruption to our manufacturing operations due to the COVID-19 pandemic.

Despite the headwinds faced throughout the year, our team embraced the challenge and continued to execute on our new customer-centric strategy, including improving our quality systems and working closely with our dealer partners to capitalize on the unprecedented consumer interest in boating. In the fourth quarter, after our various facilities were shut down from 6 to 8 weeks, we delivered positive adjusted EBITDA on a net sales decline of 58%, a testament to our highly variable, low fixed cost business model and operational execution. Moreover, our strong cash management practices enabled us to pay back $25 million on a revolving line of credit at the end of the fourth quarter and an additional $5 million early in our fiscal 2021 first quarter.

The near and long-term impact of the pandemic on recreational boating industry has been significant. Specifically, our industry experienced a renaissance as consumers and their families found themselves with additional free time and fewer alternatives due to the cancellation of spring break and summer vacations, travel sports and kids summer camps.

Even during the pandemic-induced dealer closures, consumers flocked to our brand websites, social channels and dealer websites to explore the boating lifestyle, resulting in unprecedented retail demand across all our brands, both for new and used models. Our internal data suggests that new to boating and returning to boating customers accounted for a growing percentage of our retail sales since March of 2020. This has served to increase our addressable market and bodes well for all our brands in the medium to long term as we typically experienced high consumer retention rates. In addition, as competing brands have also benefited from this increased boating participation, the opportunity exists to convert these consumers to our leading brands over time. For example, our MasterCraft brand, which we believe is the most recognizable ski/wake boat brand in the world has historically generated approximately 80% of its annual retail sales from current boat owners, including existing MasterCraft owners trading up to a new MasterCraft model, owners converting from a competing ski/wake boat brand and owners converting from a different segment of boating.

Driven by this unprecedented retail activity, dealer inventories across all our brands declined to historically low levels, with dealer inventory turns at historically high levels. Impressively, we have continued to see strong retail demand through the first 2 months of our fiscal 2021, resulting in even lower dealer inventories and higher dealer inventory turns.

On a consolidated basis as of the end of August, we believe that our dealers are under inventoried by more than 2,100 units with nearly half of the shortfall at MasterCraft alone. This shortfall is directly attributable to the strong retail performance we've experienced, combined with production shutdowns in the fourth quarter. We believe the current retail trends will persist beyond next summer's busy selling season as consumers prefer to stay local and seek safe alternatives for fun, family enjoyment. As a result, all of our brands are poised for strong growth in fiscal 2021 and beyond.

Operationally, we continue to ramp up production across all our facilities, working with our suppliers to ensure that we receive high quality parts on time. As our suppliers experience increased demand from other boating OEMs, we believe our scale and efficient supply chain management mitigate the risks of disruption of our production plans and position us to appropriately stock dealer inventories throughout the seasonally low fiscal second and third quarters and allow us to fully participate in the retail momentum we anticipate in the next summer selling season. We will continue to ramp up production in a controlled, measured manner, ensuring that dealers get the inventory they need to meet retail demand while also continuing to drive quality improvements across all our brands, which we believe is a competitive differentiator and a critical element of our strategy to deliver the best consumer experience in the water. Notably, our order books across all our brands are completely filled through the second fiscal quarter and well into the third fiscal quarter as dealers order earlier than usual to lock in production slots.

At our Aviara brand, we continue to see an overwhelmingly positive reception by both our dealer partner MarineMax and consumers alike. Retail performance at Aviara exceeded our expectations in its first fiscal year of production. Combined with the retail momentum we're seeing in the industry, we decided to accelerate phase 2 of the growth strategy we developed when building the business case for this brand.

On August 17, 2020, we announced that we had entered into a purchase agreement to buy a boat manufacturing facility in Merritt Island, Florida, which will serve as the future dedicated facility for Aviara. The new Merritt Island facility will provide more than 140,000 square feet of dedicated manufacturing space. Situated on 38 acres of land, including water access, the new facility provides ample room to grow the Aviara brand and will provide the opportunity for additional vertical integration. Having a dedicated Aviara facility of this scale with access to an experienced boat building workforce provides the quickest and most efficient way for Aviara to add incremental capacity while providing a very efficient use of capital.

Simultaneously, moving Aviara out of the MasterCraft facility will provide for additional capacity for MasterCraft, setting us up for many years of future growth. We expect to close on the facility purchase in October of 2020, with Aviara production up and running in the third quarter of fiscal 2021.

Turning to NauticStar. On August 3, 2020, we announced the appointment of Scott Womack as the new President for the brand. Scott is a seasoned operating executive having held leadership roles in various automotive suppliers over the past 27 years. Scott brings a wealth of knowledge, experience and processes that will help NauticStar improve its operational and financial performance and unlock the value, we believe, can be generated by the brand. Scott's track record of driving continuous improvement through lean principles while generating strong financial results will serve him well in this role. We are confident we have the right leader in place to drive sustainable long-term growth and profitability for one of the leading brands in the fiberglass outboard segment.

I will now turn the call back over to Tim, who will provide more color on our financial results and the expectations for the rest of the year. Tim?

Thank you. As Fred noted, these are difficult times for the boating industry and the broader economy. While we started the quarter off on a strong note, the spread of COVID-19 across the globe and the corresponding economic and production shutdown has had a significant impact on our operations and as a result, our financial performance.

Net sales for the fourth quarter were $51.1 million, a decrease of $71.7 million or 58.4% compared to $122.8 million for the prior year period. The decrease was primarily due to the lost production as a result of the COVID-19 shutdowns and supplier and workforce ramp-up. Gross profit decreased $24.1 million or 76.5% to $7.4 million compared to $31.5 million for the prior year period, principally driven by the lower sales volumes for our reportable segment.

Our gross margins decreased to 14.5% for the fourth quarter compared to 25.6% for the prior year period, a lower overhead absorption across each reportable segment. Operating expenses decreased $33.2 million for the fourth quarter, compared to $43 million for the prior year period due to the $31 million of goodwill and intangible asset impairment charges recognized in the prior year period. Excluding these impairment charges, our operating expenses declined $2.2 million, resulting from cost management initiatives during the quarter in response to the COVID-19 pandemic.

Turning to the bottom line, adjusted net loss for the fourth quarter was $1.8 million or a loss of $0.10 per share on a fully diluted weighted average share count of 18.7 million shares computed using the company's estimated annual effective tax rate of approximately 23%. This compared to adjusted net income of $16.1 million or $0.85 per fully diluted share in our prior year period. Adjusted EBITDA was $0.9 million for the fourth quarter compared to $23.8 million in the prior year period. Adjusted EBITDA margin was 1.8%, down from 19.4% in the prior period, principally due to lower sales volumes caused by the COVID-19 shutdowns.

Turning to our liquidity and balance sheet. We took steps during the quarter to maintain financial flexibility and conserve cash. As of June 30, we had more than $16 million of cash on our balance sheet. As Fred mentioned in his remarks, we paid down $25 million on our revolver during the fourth quarter. Combined with our cash on hand, we ended the year with more than $41 million of liquidity. Since that time, we have proceeded to make additional $5 million payment on our revolver early in our fiscal 2021 first quarter.

Given our current liquidity position and near-term outlook, we do not anticipate any liquidity issues. We remain bullish on the long-term prospects of both the markets we serve and the brands we own. Especially with the backdrop of historically low dealer inventory levels, combined with unprecedented retail demand. You'll recall that we withdrew financial guidance in March given the onset of the COVID-19 pandemic and the expected negative impact on retail demand. Our visibility has improved since that time. While uncertainties in the marketplace remain, we are initiating guidance for both the full year and the first quarter of fiscal 2021. Our guidance assumes that we were able to operate all of our facilities throughout the fiscal year without any COVID-19-related shutdowns.

For full year fiscal 2021, consolidated net sales is expected to grow in the mid-20% range year-over-year, with adjusted EBITDA margins in the 13% to 14% range and adjusted earnings per share growth in the low to mid-40% range year-over-year. This guidance assumes revenue and profitability growth across all our segments with the exception of Aviara, as we facilitate the shifting of Aviara production from our facility in Tennessee to our Merritt Island, Florida facility, we anticipate the midyear integration disruption, production ramp-up with an all-new workforce and the adding of incremental overhead to support Aviara's future growth to result in a moderate adjusted EBITDA loss for the year. We are confident that the Aviara brand will be profitable in fiscal 2022, its first full year producing product in the new facility. With new capacity and a dedicated manufacturing team driving the brand, we expect Aviara to generate more than $50 million in net sales within the next 3 years.

For the fiscal first quarter, consolidated net sales is expected to be down in the low to mid-teens percent range year-over-year, with adjusted EBITDA margins in the 11% to 12% range and adjusted earnings per share down in the mid- to high 30% range. As Fred mentioned in his remarks, we will continue to ramp up production throughout the year in a controlled, measured manner. Heading into the seasonally low selling season -- the seasonally low retail selling season, our production cadence will ensure that dealers get inventory they need to meet retail demand heading into the summer selling season, which historically accounts for 70% to 75% of annual retail.

I'll now turn the call back to Fred for closing remarks. Fred?

Thanks, Tim. While COVID-19 presented many challenges for MasterCraft in the fourth quarter and fiscal 2020, we implemented a plan to manage through the near-term headwinds and position the company for success over the long term. Our #1 priority is the health and safety of our employees as we continue to ramp up production across all our facilities. We are committed to maintaining rigorous health and safety standards. We are following the best practices, including health screen certification, temperature scans, use of masks, physical distancing, enhanced personal hygiene, heightened cleaning protocols and contact tracing in all our locations. We will continue to monitor the sites closely and consider local and federal government guidelines throughout this transition period.

Our outlook has much improved from a quarter ago. Depleted dealer inventories and strengthened retail demand provide an attractive backdrop for the boating industry and, in particular, our leading brands. I am confident in our strong foundation of committed employees and dealers, resilient business model and long-term plan to grow our market share and drive shareholder value.

With that, we'll go ahead and open the line for questions. Operator?

(Operator Instructions) And our first question comes from Eric Wold with B. Riley.

A few questions. I guess one, the 40% to 50% -- the inventory being 40% to 50% below on average at year-end, June, obviously, lower since then in August. I'm assuming that's kind of an average across the 3 brands. Any major variations from that range between 3 brands or all kind of within that area?

That actually isn't the average. That's the range across the brands. So they were all between 40% and 50%. And as you alluded, it's much, much lower than that now.

Okay. And then kind of follow-up on that. Obviously, Crest got off to a little bit slower start following the acquisition, one of the reasons being the level of inventory out there with competitors in the pontoon segment. Maybe given what we've seen recently, give us an update on how you've framed that environment for Crest and the opportunity to potentially take share?

Crest has been doing very well. Their year-over-year retail has been among the highest we've seen amongst our brands. So that segment bounced back, and they've bounced back very strongly. Their inventory is in great shape. Again, it's a fraction of what it was previously, and they position themselves for a great year and are in the process of putting their pedal to the floor and accelerating their production ramp-up.

I would add that the pontoon segment is also benefiting from the first-time boaters because the ease of use and the relative value of the pontoon boats. So we're very happy to be participating in that segment. So more first-time boaters, I think, in the pontoon segment than in some of the other brands.

And then I guess lastly on Aviara. I know you gave the commentary, Tim, about your digital $50 million plus in sales, the next 3 years. Any chance you can give some idea kind of where you ended up last year and how that could change this year? And then on the new facility, the Aviara facility you acquired. One, what will need to be spent there ahead of production start? And two, what do you ultimately think full production capacity could be at that facility over the next few years?

Well, we certainly think it's going to be north of $50 million as far as capacity goes. That's been a successful boat plant in the past. Our ramp-up cost will certainly impact us in -- starting in Q2. But we're going to get back up to profitability in fiscal 2022.

Yes. And Eric, from a revenue standpoint for Aviara, this past year, you'll recall, we guided to $10 million to $15 million at the start of the year. Due to the COVID, we were impacted in that, but still hit the low end of that range. So call it around $10 million of revenue for Aviara this year.

Perfect. And just real quick on -- I know the ramp-up costs, just thinking of CapEx cost at the new facility, not operating costs to get it going.

Yes. We're -- we -- the purchase of the property is $14 million, and we estimate another $4 million to $6 million to get that facility back up and running to where we need it to run high production levels like we intend there, and that would be on top of our kind of normal CapEx across MasterCraft, NauticStar and Crest. So for the full year, we're probably looking somewhere in the low to mid-$20 million CapEx range, all in.

And our next question comes from Mike Swartz with Truist Securities.

Maybe just starting with the fiscal '21 guidance. I think it would imply that revenue gets back to fiscal year '19 levels. But if I do the math, it says that EBITDA would be is somewhere between $15 million to $20 million below fiscal year '19. And I know there's obviously the start-up costs and some of the inefficiencies with Aviara. Can you maybe walk us through why profitability would be lower than what we saw in '19?

Well, let me first start with the top line you commented on. If you remember, '19 came in very heavy with regard -- inventory was very heavy at the end of that year. And so there was a big carryover. That's not a normal situation or one that is a good benchmark. So unfortunately, that's the comp that you're looking at from the revenue standpoint. With regard to the cost, they're all included in our margin. But I would say also a full year worth of Crest in our numbers is one of the diluting factors on the overall margin.

Yes, because we're comparing to 9 months' worth of Crest at dilutive margins in fiscal '19. So as you mentioned, we have the start-up costs at the new facility. In addition, since we're ramping up really on a measured pace throughout the year at MasterCraft, you've got costs associated with getting the new employees up to speed and training and so forth.

Okay. That's helpful. And then I just want to make sure I heard the number right. I think you said, maybe it was Fred, that you believe you're around 2,000 units under inventory right now. I guess, what is that based on? And what would that assume or what's your -- when you state that number, what is your kind of outlook for retail demand going forward?

I would just say 2 things to consider in that. I think that's a conservative estimate because we use much higher inventory turns than historically have been the average in our segment or for us. So we increased our expectation with regard to how fast we're going to be able to turn dealer inventory and, in addition, use very conservative retail assumptions.

Our next question comes from Brett Andress with KeyBanc.

Thank you for all the color on the guidance. If you could just help us a little more with the 1Q sales expectations. I mean, how should we think about that low to mid-teens decline by brand? And I guess, are there any specific factors holding you back from growing shipments in 1Q?

Well, as we mentioned, we're in ramp-up mode throughout the first quarter and so that's holding us back a bit. The cadence is going to be a little more back-end loaded for the year since we are, like I say, in ramp-up mode. As far as holding us back, we're going to maintain our quality standards and suppliers have to come up to speed at the same time. So those are kind of the gating items for Q1.

Got it. And then it sounds like inventory got lighter since the end of the quarter. So just any color on the level of retail demand for your brands here in August and September?

Yes. Brett, this is George. So for July and August, we continue to see strong retail momentum across all the brands. What we'd tell you is that the range was anywhere from up 25% to up 75% across the 3 brands from a July, August retail. So the momentum certainly continued, and we were very pleased by that. And so certainly well positioned for the rest of the year to restock dealers and get positioned to take additional retail and market share next summer selling season, which as you know, accounts are about 70%, 75% of retail that April through September period next summer.

And keep in mind, in particular for MasterCraft, we had challenging comps last year in the first fiscal quarter. So that's even more remarkable that we're up from those comps.

Helpful. I appreciate that. And then I guess I can do the math on my last question. But if we exclude Aviara in the start-up cost and the headwinds there, as you ramp that facility, I guess, what would your EBITDA margin expectation be for 2021, excluding Aviara?

I don't know if we have the math right here in front of you -- Brett. But I would -- just to give you a little more guidance, I would kind of pencil in a negative $2 million to negative $3 million EBITDA loss at Aviara for the year. When we said a moderate loss, that's kind of the range of what we were looking at that bakes in all of those costs. So I think with that information, you can do the math, but I don't have it in front of me.

Our next question comes from Craig Kennison with Baird.

Great. I had a question on your revenue guidance and the comment you made on 2,100 units of inventory. I just can't fully reconcile that. If you shipped 5,300 boats roughly in fiscal 2020 and you replenished 2,100 units of inventory in a flattish retail environment, you'd be shipping almost 70 -- I don't know, 400 boats. That's 40% growth. So no ASP impact much better than, I guess, the 25%-ish revenue growth you're calling for. So what am I missing there? Is that a function of less restocking or more pessimistic retail? I can't quite reconcile that.

No, Craig. I mean, I think we certainly believe that, that 2,100 shortfall in inventory, it's going to take longer than just fiscal '21 to fill the channel. So we're obviously -- we're comfortable putting out guidance with the visibility we see. And so we're confident in our number, but we're not going to just stuff the channel. We're going to guide to high -- we're going to manage this business with higher turns than we have historically, keep dealers healthy. Continue to watch the retail environment and make sure that -- and that stays on track. So we certainly view the 2,100 as a significant opportunity for growth and sets us up for long-term growth beyond 2021. And we'll make sure that we're filling the pipeline in a very measured, controlled way. And so that's really kind of what I would answer there.

Sure. And I think if you think of normalizing the pipeline sometime in fiscal '22 -- 2022, and we also intend to operate the company at higher dealer inventory turns than we've historically seen. We think that's good for the dealers and good for us as well.

And just maybe looking at it from a capacity standpoint, do you even have sufficient capacity to fully catch up to that? Or is there a limit to what you could produce in fiscal 2021?

Well, other than the ramp-up, we do not have a constraint with regard to terminal capacity. Because once again, moving Aviara frees up MasterCraft capacity, a substantial additional amount of MasterCraft capacity, and we don't foresee consuming that for many years.

And then looking at ASP in the fourth quarter, very strong results across the board relative to our expectations. What's the ASP growth expectation embedded in your revenue guidance?

We're expecting a low growth of ASPs in fiscal 2021. And keep in mind, what drove it in our fiscal fourth quarter, was a disproportionate number of retail sold boats that we were producing, and they traditionally have a larger load of options selected.

And finally, I think, Fred, you mentioned first-time buyers or people who are new to boating, could you share those metrics again? I may have missed the actual percentage there?

Well, we just say -- we said 80% are boaters and the other 20% roughly are what we've seen in terms of either returning to boating or new to boating. And I would just say, those are kind of the historical ranges. Currently, we've seen essentially a doubling in the new to boating people. So we're getting those entrants, and it's our focus on making sure that we deliver the experience they're looking for and continue to keep them loyal to our brand. So it's a wonderful opportunity to expand the market. And we think it's not a onetime phenomenon, we think it's a situation that is going to last for years.

Our next question comes from the line of Joe Altobello with Raymond James.

Just want to go back to your comment regarding ASPs and the impact from retail sold boats. Curious what you're seeing from first-time boat buyers. Are they bringing up the average as well with a lot of bells and whistles on the boats that they're buying?

I think, in my opinion, it's a range. We've seen first time -- because you think of our different brands, first-time buyers at Crest at those price points, they're totally different than what we've seen. And across the MasterCraft range, we've seen first-time buyers all the way from the entry-level all the way up to the high-end. So it's -- in my opinion, it's been spread.

Got it. Okay. And then in terms of retail, you mentioned it was still very strong in July and August. Curious what you saw into Labor Day? This is typically the time of year when retail does start to normalize. And I'm just curious if you did see trends start to slow or "normalize" as we approach the holiday?

I think that's a correct characterization that it's starting to "normalize." But remember also, in the previous year, there was a heavy carryover of inventory, and so there was a lot of promotion that took place around the Labor Day holiday to move some of those boats. And certainly, throughout that first quarter. It was a very active promotional time for ourselves and our competitors. So on a comp basis, your normal is not necessarily what last year's results were.

Yes, I meant normalizing in terms of year-over-year growth versus -- for growth that you've see in the last couple of quarters?

Well, we're coming off the selling season. It's finally winding down.

Yes. And then just one last one, this goes back to -- I guess some of the questions that Craig asked about the 2,100 boats that you're under inventory to the channel. How much of those do you think you can address this year? And how much of those are more of a 2022 event?

I think we're going to be in very good shape. But we probably are still going to be lean on inventory exiting this year. And we just feel that, that really provides us a cushion should there be any negative impacts in the environment. And that's why we felt comfortable being able to give guidance.

And our last question comes from Barry Haimes with Sage Asset Management.

So I had a couple. One is the Merritt Island addition. Just on a square footage basis, how much does that increase your capacity?

That facility is 140,000 square feet that will be dedicated to Aviara. That is more than quadruple the amount of square footage that we've got allocated to Aviara here today. So as we've stated, there's ample capacity there to grow that brand, hopefully at or above $50 million within 3 years.

Equally important, it allows us to expand our capacity for the MasterCraft brand. So both of those are very positive.

That was going to be my second question is, what percent capacity increase will MasterCraft get once Aviara vacates that facility?

I think on the order of 35% to 40%.

Okay, great. And then next question I had, in answer to an earlier question. You talked, I think, about $4 million to $6 million cost in addition to the plant cost to get everything moved and up and running. And I missed, if that was the capital cost or expensed items as well? So could you just give us a little help around what's capital and what's expense in terms of going through that change process?

The number that was referenced on the call was the capital number, and we've not itemized. We -- won't be shared. But as we guided to, we'll -- we expect a $2 million to $3 million EBITDA loss, which includes all of the start-up costs and ramp-up of getting that facility operational in addition to the CapEx number.

Okay. And then my final question is if -- so again, you're doing this transition in the first half of your fiscal year. When we look to the second half of the year, should we expect the quarterly results to be more in line with the sort of fiscal '18, fiscal '19 years where you were kind of doing a $2 to $3 a share run rate? And is there any reason you wouldn't get back to that kind of level in the second half of the fiscal year?

Yes, I don't have the -- we're not going to give second half guidance. I think you can look at the implied kind of second half with -- what we've given on Q1 and for full year. And kind of compare that to historical years, but that's as comfortable as we feel at this point.

And I'm not showing any further questions at this time. I'd now like to turn the call back to your speakers.

I want to thank everybody for joining us today. We appreciate your interest and your support of MasterCraft and hope you all stay safe. Thank you.

Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participation. You may now disconnect.