MasterCraft Boat Holdings, Inc. (MCFT) Q1 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the MasterCraft First Quarter 2017 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today's conference Mr. Tim Oxley, Chief Financial Officer. Sir, please go ahead.

Thank you, operator, and welcome, everyone. Today's call is being webcast live and also will be archived on our website for future listening. Joining me on today's call is Terry McNew, MasterCraft's President and Chief Executive Officer. Our agenda includes a strategic overview by Terry, followed by my analysis of the financials. Then Terry will discuss our strategies for growth and expectations for fiscal 2017, followed by the Q&A session. Before we begin, we'd like to remind participants that the information contained in this call is current only as of today, November 10, 2016. The company assumes no obligation to update any statements, including forward-looking statements. Statements that are not historical facts are forward-looking statements and subject to the safe harbor disclaimer in today's press release. Additionally, on this conference call, we will discuss non-GAAP measures that include or exclude special or items not indicative of our ongoing operations. For each non-GAAP measure, we will also provide the most directly comparable GAAP measure. Our fiscal 2017 first quarter earnings release includes a reconciliation of these non-GAAP measures to our GAAP results for the first quarter. Before turning the call over to Terry, I'd like to remind listeners that there's a slide deck summarizing our financial results in the Investors section of our website. With that, I'll turn the call over to Terry.

Thanks, Tim. I'd like to thank everyone for joining us today. As you saw from today's press release, we kicked off fiscal 2017 with solid performance, in line with our expectations, delivering key sales, gross margin and net income gain. These were driven by continued demand for our entire portfolio and innovative new products like the XT20. Market reception to our newest model, the XT23, has been very strong, and we look forward to unveiling additional models and a number of exciting product innovations in fiscal 2017. For the quarter, net sales grew high single digits from the prior year period, primarily due to a rise in MasterCraft unit volume. And on the efficiency front, we continue to deliver notable first quarter gains in gross margins and adjusted EBITDA. Looking at the broader picture. While international markets have been challenging, an industry-wide trend that's not unique to MasterCraft, domestic demand for our boats remain solid, and we continue to focus on delivering profitable, sustainable market share and driving efficiency in every area of the business. One innovation I'm particularly excited about, during the quarter, we unveiled our new XT20. The highly versatile 20-foot XT20 packs best-in-class performance and styling into a garage-friendly size. Building on the success of the recently released XT23 model, the XT20 is our latest addition to MasterCraft's new lineup of crossover boats that deliver premium comfort and performance at a more affordable price. The XT20 delivers agile, responsive handling with minimum bow rise, maximizing the enjoyment on the water, and the spacious helm and new ergonomic dashboard allow the driver to control everything from the size and shape of the wake to the sound and lighting systems to the intuitive Murphy touchscreen. From bow to stern, the XT20 is packed with innovation. Armed with MasterCraft's award-winning optional Gen 2 Surf System, the fully loaded XT20 lays down a clean wake for water skiing, perfectly sculpted lips for wakeboarding and large curling surf waves. The boat also features our signature pickle-fork bow and wrap-around interior seating that can comfortably accommodate up to 11 passengers. Moreover, the XT20 can be outfitted with our new Cool Feel vinyl that stays cool to the touch even after extended exposure in direct sunlight, an industry first. In addition to the XT20, we look forward to sharing our other 2 new models later in the year. A new feature for 2017 that we are particularly excited about is the revolutionary DockStar Handling System, our innovative flanking rudder system that makes maneuvering in tight spots and crowded marinas a breeze. Drivers used to traditional inboard handling are amazed at the boat's ability to reverse and more easily navigate tight docks and crowded marinas, while newcomers to the inboard category, especially from outboard and stern drive categories, instantly feel comfortable maneuvering in constricted spaces. I would also like to note another very strong quarter of margin improvement in MasterCraft at both the gross margin and adjusted EBITDA margin levels. While we do expect some quarterly volatility in margins in fiscal 2017, due primarily to the cadence of the operational calendar and production launch activity, we believe the first quarter will likely represent the peak in margins for the year. We expect the trend to be positive for the full year as we continue our relentless focus on operational excellence. The operational flywheel is truly turning at MasterCraft, with the continuous improvement culture ingrained at every level of our organization, from the manufacturing floor to engineering to sales and marketing. And as you can see, it's not just talk. It translates to the bottom line every day. This culture is at the heart of everything we do here at MasterCraft and is the foundation that will allow us to perform at a best-in-class level through any operating environment we might encounter. This combined commitment to operational excellence and innovation, teamed with our strong, diverse product portfolio, position MasterCraft well for fiscal 2017 and beyond. Now I'd like to turn the call back over to Tim to go through our financials.

Thanks, Terry. From a top line perspective, MasterCraft's net sales increased $4.7 million or 8.4% to $60.7 million compared to $56 million for the prior year period. The increase was primarily due to growth in unit volume of 36 units or 5.3%, resulting mainly from an increase in calendar production days and the cadence of launch activity. And sales per unit increased by 3%, due primarily to price increases as well as increased sales of higher-end option packages. Gross profit for the first quarter ended October 2, 2016, increased $2 million or 12.4% to $17.8 million compared to $15.8 million in the prior year period. Gross margin rose to 29.3% from 28.3% for the prior year period. The 100 basis point increase primarily stems from sales of higher content option packages, which raises average margins per unit, as well as continued efficiency gains driven by manufacturing improvements and leverage on increased sales. On the expense front, first quarter selling and marketing expense fell $0.4 million or 17.1% to $2.1 million for the first quarter ended October 2, 2016. General and administrative expense totaled $4.1 million versus $9.3 million for the prior year period. This decrease resulted mainly from the lower stock-based compensation cost of $5.3 million, partially offset by higher Malibu litigation cost. Turning to the bottom line. Fiscal first quarter net income totaled $7 million, up from a net loss of $1.3 million in the year-earlier quarter. Adjusted net income increased to $7.6 million or $0.41 per share on a pro forma fully diluted weighted average share count of 18.7 million shares. This compares with 5.7 million or $0.30 per share in the prior year period. Fiscal first quarter adjusted EBITDA margin rose 280 basis points to 21.9% from 19.1% in the prior year period. Adjusted EBITDA was $13.3 million, a 24.8% increase from $10.7 million in the prior year period. See the non-GAAP measures in our press release for a reconciliation of adjusted EBITDA, adjusted EBITDA margin and adjusted net income to the most directly comparable financial measures presented in accordance with GAAP. I'd also like to highlight the fact that during the first quarter, we completed a secondary offering of 4.6 million shares of common stock held by affiliates of Wayzata Investment Partners at an offering price of $10.25 per share, which included 600,000 shares sold pursuant to the underwriters' exercise of their over-allotment option. No shares were sold by the company, and we do not receive any proceeds from the sale of shares. As Terry mentioned and as discussed during our previous call, the quarter-over-quarter comparison for fiscal 2017 will be choppy due to how our production calendar compares to the production calendar in the previous year's quarter. After a net sales increase of 8.4% in fiscal 2017 first quarter, our first half expectations are for net sales -- net sales to be up in the low single-digit range compared to the prior year first half, which is consistent with our fiscal 2017 full year guidance of low to mid-single-digit increase. Keep in mind that we are comparing to a year with an intentional inventory build associated with our additional entry-level model, the NXT22. For the first half of fiscal 2017, the improvement in adjusted EBITDA is expected to be up slightly over the first half of 2016. We also reiterate our expectations for fiscal 2017 adjusted EBITDA margin in the low 19s to reflect the continued strong operating performance we're seeing at MasterCraft. Adjusted earnings per share was $0.41 per share in the first quarter fiscal 2017, up 36%. And for the 6-month period, adjusted EPS will be in the high single-digit range. Full fiscal 2017 guidance for adjusted EPS is expected to be up in the mid to high single-digit range. Before leaving our financials, I'd like to highlight our best-in-class working capital management. The combined balance of trade receivables and net inventory was $16.2 million and $17.5 million at the end of June and September, respectively. Our outstanding cash conversion cycle days runs in the low single digits. Superior working capital management affords opportunities to enhance shareholder return in a variety of ways and is a hallmark of a well-managed company. With that, I'd like to echo Terry's comments and reiterate that we're very pleased with our performance and look forward to fiscal 2017. I'll be happy to answer any questions during the Q&A. I will now turn it back to Terry for our strategy and outlook.

Thanks, Tim. MasterCraft is off to a great start in fiscal 2017, and we're optimistic about the future. Across the organization, we remain committed to our 5-pronged growth strategy: developing new and innovative products in core markets, further penetrating the entry-level and midline segment of the performance sport boat category, capturing share from adjacent boating categories, strengthening our dealer network and driving margin expansion through continuous operational excellence. For the fiscal year ending June 30, 2017, we are reiterating our expectations for continued growth in net income and adjusted net income despite increased interest expense due to our refinancing completed in the fourth quarter of fiscal 2016. We also expect net sales growth in the low to mid-single digits and continued growth in adjusted EBITDA margin, with, as Tim indicated, a target in the low 19% range. At this time, I'd like to turn it over to the operator for questions.

[Operator Instructions] Our first question comes from the line of Jimmy Baker with B. Riley & Co.

So Tim, I think you mentioned Q1 being at the peak this year for sales and margins. That was in your original guidance, I believe. So I just wanted to clarify if anything changed in your mind or if you're just emphasizing this cadence, given the nuances of the production schedule and comparables.

There's nothing that's changed, Jimmy. We're just emphasizing that since it is choppy, we want to make sure people don't extrapolate and run past what our guidance is.

Okay, understood. And then just at least through the -- the preliminary reporting states, it seems like you had a very strong close to the 2016 retail selling season or start to year fiscal '17, if you want to see it that way. Any color on how you fared nationwide and how you fared in Canada at retail during the selling season and if you -- do you see any changes in regional performance later in the selling season?

This is Terry. We did. We performed really well, especially in the first quarter of this fiscal year. Our retail registrations, when you compare it to the SSI data, is running above what's been reported for segment growth in performance sport boat. So we're pretty confident that we'll see market share gains after all states reporting on a rolling 12 through September. United States continues to be strong. Canada, we characterized that as we feel like it has found the bottom. The rest of the world still is experiencing challenges outside of North America, so we don't expect any significant change in that trend in the near future. But the -- once again, any sluggishness outside of North America is being offset by solid U.S. performance.

Okay. Great. And then Terry, just wondering if I could get your initial take, if you have one, from dealers on any change in post-election sentiment. I mean, I realized we're only -- or not even 48 hours into this. But just wondering if there's been any notable change, positively or negatively in terms of dealer sentiment and -- especially given that strong finish to the year at retail, if maybe there's a little bit more risk appetite out there in terms of adding inventory.

Well, a couple of things, Jimmy. Prior to the election, where we've been seeing strong retail, especially in the U.S., we are very comfortable with our dealer pipeline inventory. However, there is a bit of reluctance on some dealers' parts to restock because the curtailments are being strictly enforced, so there's some caution there. However, we fast forward. The night of the election, I did receive -- and it's all anecdotal. It's not statistically significant. But I have -- did receive several texts and e-mails and calls from dealers that were very positive about the results of the election. If the President-elect does do what he said in terms of reducing not only corporate but personal income taxes and reducing regulation of businesses, this should be a positive for the entire industry.

Okay. Great. Just last one then from me. I just had a couple of questions on model year '17 content. So I'm wondering if you could speak to any change in price or margin difference, if it's meaningful to the consolidated ASPs and margins as it pertains to the new engines. And I realized it's a small sample so far, but are you seeing any notable difference in the option uptake on the XT series versus the X series that those models replaced?

Yes. Let me break that down in a couple of pieces, Jimmy. So the XT23 has been out in the market now. It launched early July, so we have seen some market input on that, and that has been very strong. It was certainly strong when our dealers saw premarket launch in early July. We expected it to do well in the marketplace. But again, it launched in July, halfway through the selling season, but orders for wholesale continue to be very strong. The new XT20 released just at the end of this quarter. Our dealers got to see it at our dealer meeting in early October. They were very, very positive. It's a very, very good boat in terms of a crossover. So we're designing the XTs around that true crossover capability. One of our pro riders actually was able to do 32 off at 34 miles an hour and did the entire course on a crossover boat, so it's not the ProStar. So that's pretty significant. We expect that to do as well or better than the X23 once it sees its first selling season coming up April, May, June. So we're pretty high on that. The DockStar, I guess let me back up even further. We are seeing higher option uptake in the first quarter. Now as we've explained on previous calls, that's kind of our algorithm. We do we see early adopters in Q1 generally pull our average option uptake above the full year average, but we're seeing DockStar, in particular, has been very, very positively received in the marketplace. In fact, that's over a 50% option uptake. And keep in mind, that was released at the beginning of the model year. So again, it didn't really start to ship out to dealers until July, did not see a full selling season out in the market. But the initial market acceptance has been very positive. We'd get a lot of positive comments by customers about it. Again, pretty expected how easy it is to drive. Couples, spouses that don't typically feel comfortable driving now are sending us stories about how they don't mind driving at all. So that's absolutely going to be a game-changing technology for us. So kind of in summary, we are seeing option uptakes higher than even last year first quarter, and we think a lot of that is being driven by the new innovation.

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

So first of all, I just want to kind of go back to the calendar production day issue here in the first quarter and kind of explain out a little bit how many more days did you have on production in this quarter versus a year ago? Maybe how much that added to units in the quarter?

It represents about 5 days, so very consistent with our unit growth quarter-over-quarter.

Okay. And does that mean 2Q will have 5 fewer days?

There will be some offset in Q2. I don't have that in front of me, but there will be a reduction in Q2 in just how the calendar falls out, both where June 30 lands as well as the Christmas holidays causes this kind of disruption in the calendar.

And there will. Just to add on to that, Joe, so directionally, yes, there will be fewer days, and that is adding to the choppiness of quarter-over-quarter. And that's why we're taking a bit more time on the guidance and adding -- as we mentioned on the last call, additional sales were helped by the XT23 was brand-new. We were starting to roll those off the assembly line in late June. It was a July 1 marketing launch, and we held maybe 20 of those units and shipped them into Q1 so it will finish goods. So more days on the calendar in Q1 compared to last year's Q1. And then we had some additional intentional holds that shipped in Q1 of the brand-new XT23.

Got it. Okay. That's helpful. And then just moving on to the dealer inventory. Last call, you mentioned there's probably 100 to 150 units excess in the channel. It sounds like that got cleaned up. So it sounds like over the next 3 quarters, you guys will be shipping to demand.

Yes.

We've seen a nice improvement in the pipeline from June to the end of September. So yes, I think that's fair to characterize that, Joe. Our turns are [indiscernible] flat with last year.

Okay. Okay. And then just one last one, on international. I mean, obviously, you guys, as you mentioned, are not alone in terms of seeing a headwind here. But is there a sense that international markets are close to a flattening out or it's still pretty tough out there?

Yes, I'd characterize Europe as still pretty tough. Australia, we're starting to see it maybe finding a bottom. Canada is definitely closer to finding a bottom. Now it's been almost a year since the currencies had the time to level off. And again, reminder, the currency in Canada is really now closer to long-term average. So as Tim had stated in our prior calls, really the rate of change that happened 12, 18 months ago that caught them. Oil seems to be stabilizing, if not returning a little bit, at least coming off of the bottoms of the high $27 a barrel. It's been pretty consistent in that $40 to $50 range. So they're starting to get their heads around it, and we definitely think Canada is returning or strengthening, finding the bottom sooner. Then Australia, probably Australia is behind it. And then Europe, I think is still a little ways off.

Yes. I think we'll know a bit more as we go through the Canadian boat shows. Some of those end a bit late, but we'll know a bit more probably when we -- in the March quarter on how Canada is doing.

And our next question comes from the line of Tim Conder with Wells Fargo.

This is actually Marc Torrente on for Tim. Just looking at the U.S. market, it sounds like all trends are intact for both the broader marine industry and then also the ski wake segment. Are you seeing any other regional trends of note? Especially in the West, it seems to be a major region for opportunity. Are there any other areas may be outperforming or underperforming?

Mark, we've mentioned on prior calls that we felt like we had a long runway, and we're bullish on California and Texas. So I'll just kind of go back and repeat it. Though in California, our dealer in the first half of this calendar year changed their footprint from 2 large big box stores to 8 smaller stores from the Pacific Coast over to Tahoe, and that was completed towards the middle part of this calendar year. So now that, that seems to be in place, we think that's going to get traction coming up in the next selling season. Texas, we started doing that. We added a location in the Fort Worth/Dallas area about 12 to 18 months prior, made some additional changes in the state. And we've actually gained just under 4 points of market share through June rolling 12 in Texas. So those 2, in particular, we're very pleased with that. Of course, we always do well in Michigan. So between California and Texas, California and Michigan, those are the top 3 MTAs. We generally have almost 50% market share in Michigan, so that's always continued to perform strong for us.

Okay. Great. And then within Canada, are you seeing dealers starting to restock more or they're still hesitant following recent inventory draw-downs?

We're starting to see them feel more comfortable. Certainly, off of a bottom, they've come up. They're not restocking where they were at the end or during model year '15, but they're certainly off the bottoms of model year '16.

And our next question comes from the line of Craig Kennison with Robert Baird.

This is actually Erin Welcenbach on for Craig. Just wanted to follow up a bit on Mark's question. I know in your most recent filings, you have talked about adding the net 14 distribution points. I know you mentioned earlier California in terms of changing the dealer strategy. But maybe could you just highlight other markets where you're having success on that dealer distribution strategy?

Yes. Sure. We've added some locations throughout the last year, about a dozen, but we continue to focus also on helping our dealers improve their business. We're giving specific help and guidance in business acumen, lean management activities and effectiveness. So those have helped. We've certainly -- we've added dealers in the Upper Midwest and the Southeast, really all over; added those locations we've been talking about, Northern California, the Upper Plains states as well; added location in Texas. So it's been really all over. Outside of North America, we've also added more points of distribution around Europe and the Middle East, and we've changed out some dealers in Australia, which has really been very, very effective for us, especially around the Melbourne area.

Yes, I think it takes -- there's a little lag between the time you add a dealer, obviously. And certainly, there's a significant lag before it shows up in market share but also a lag before the boats land there and so forth. So we're optimistic that that's going to continue to drive some of the wholesale demand in the near future.

Great. And then just a follow-up question on the dealer inventory front. You mentioned that you've done a nice job of working down that inventory. But I'm wondering on sort of an aged inventory basis how your inventory position is looking and perhaps what the promotional environment looks like for the industry as a whole just kind of based on some of the model year '16 inventory that's left in the channel.

So Erin, I mentioned on our last call back in early September that we had seen some aggressive competitive pricing beginning in June. That continued through the selling season. It seems to have abated a little bit. But if you look at -- we look at full year '16, our incentives were pretty much flat from prior year within a few tenths of a percent. So we -- as Tim had mentioned, we're pretty judicious about that. We don't just do those wide peanut butter spreads on discounts and incentives. We have to play in some markets where it's very competitive. But our turns at the end of the first quarter, and we had mentioned this in our September call, our goal was to get turns down equivalent to where they were prior year, and we're really close to that. We're right on top of that. So statistically, we're about even. So we feel good about the product. And if you look at the makeup of our dealer pipeline inventory worldwide, over 95% of that is current and minus 1 year. So it's very healthy inventory. It's not aged much at all.

Yes. One thing I'd like to mention on market share, I mean, Terry and I have been saying this since our IPO, we're all about profitable, sustainable market share. And I think when you see our growth in sales as well as our growth in profitability, that demonstrates that we're going to continue that. I'm fine with being #2 in market share as long as we're #1 in profitability.

[Operator Instructions] Our next question comes from the line of Michael Swartz with SunTrust.

Just maybe a little more clarification with some of the commentary you've made around, I guess, market share, expecting that to be up on a trailing 12-month basis. Inventory is clean. It looks like the U.S. market at least is going to grow this calendar year around 10%, maybe a little higher than that. So can you just help us back into -- I mean, how are -- I guess, on the last call, you said unit volume is flat. I don't know if you're reiterating that here with the guidance. But just I guess, what are we missing in terms of the kind of flattish unit volume versus what we're seeing in the U.S. market?

Yes. I think one thing. Obviously, we've been talking about the headwinds in the international markets, and I would reiterate that. We're becoming more optimistic, in particular, about Canada, but I wouldn't say it's really showing up in the wholesale demand yet. And so the other thing is with the dealers being a little more reluctant to stock due to the curtailments. And so I think that you're going to see our retail growth was going to be a little bit stronger than our wholesale growth this year. And so we're going to -- we're projecting to end the year with improved turns certainly versus June, and so I think maybe that's what you've been missing on our guidance.

Yes. And I just want to add on to that, Michael, it is. Tim touched on it briefly at the end. And so we're talking market share retail. Remember, we intentionally built our dealer pipeline, especially with last year with the new NXT22. We characterized it as the sunshine boat, new entry-level product in. So that's sold as we anticipated, so you're seeing the market share gains. When we look at our retail registrations in the first quarter of this year, they were very strong. They were above -- well above the 10% that we've seen and you just mentioned in the segment. So that's why we feel confident the math would suggest that we are going to see some market share data. Of course, that U.S. data, our worldwide retail was up even above that. So we are -- just from a wholesale basis, we've been signaling kind of flattish this year on a unit basis from a wholesale perspective. But again, market share is selling out retail out of our dealer inventory. And so that all lines up. It all triangulates and that's why turns are higher at the end of the first quarter than they were at June, and that's exactly what we expected. So it's all tied in together.

Okay. That's helpful. And then just in terms of -- Terry and Tim, you both mentioned kind of the volatility quarter-to-quarter given the production schedule. And I think -- or at least it sounds like second quarter revenue could be down as much as, call it, mid-single digits. Should we also look at that -- maybe the second quarter as being the toughest in terms of a year-over-year comparison in margins as well?

Yes, I think that's probably accurate to a certain extent. You know how overhead acts with sales, so overhead will be higher as a percentage of sales certainly in Q2 than it is in Q1. So I think you're right that the margin in Q2 will certainly be less than Q1. Q4 is traditionally kind of a low-margin quarter for us as well as I think about the cadence because of retail rebates tied to the retail activity in Q4.

Okay. That's helpful. And then just final question on sales and marketing line for the quarter. You grew the top line pretty nicely, but sales and marketing was off around, I believe, $0.5 million or so. Did you have any kind of, I guess, timing and shifts in marketing spend later in the year?

Yes, yes. I'm glad you asked that question. We had a significant event in fiscal 2016 in the first quarter, a significant market event from a cost perspective. And that marketing money will now be spread throughout the year. So it is timing.

And that event you're referring to, Tim, was the MasterCraft throw-down from a year ago, first quarter.

And I'm showing no further questions at this time, and I would like to turn the conference back over to Chief Executive Officer, Terry McNew. Sir, please go ahead.

Very good. Thank you, operator. And once again, thanks to everybody for joining us this afternoon. We believe that our success has positioned us well for 2017 and beyond, as I mentioned earlier. We do look forward updating you on our progress in second quarter results in February. Thanks again for your time.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.