MasterCraft Boat Holdings, Inc. (MCFT) Q4 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q4, 2018 MCBC Holdings Incorporated Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today’s conference is being recorded. I would like to turn the call over to Tim Oxley, Chief Financial Officer. Sir, you may begin.

Thank you, operator, and welcome, everyone. Today’s call is being webcast live and will also be archived on our website for future listening. Joining me in today’s call is Terry McNew, MCBC Holdings’ 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 fiscal 2019, 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, September 6, 2018. 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 also provide the most directly comparable GAAP measure. Our fiscal 2018 fourth quarter earnings release includes a reconciliation of these non-GAAP measures to our GAAP results. Before turning the call over to Terry, I would 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 Terry.

Thanks, Tim. I'd also like to thank everyone for joining us today. As you saw from today's press release, we ended fiscal 2018 delivering record sales and net income for both the fourth quarter and fiscal year. Continued growth in retail demand in our unwavering focus on operational efficiency drove results. Moreover, our strong cash management practices enabled us to significantly reduce our total debt. Retail activity with regard to MasterCraft strengthened throughout fiscal 2018, resulting in improved dealer inventory turns in the largest June retail sales in MasterCraft's history. This sets the stage for continued healthy dealer inventory levels and activity in fiscal 2019. On the NauticStar side of our business, we're nearing our one year anniversary of welcoming NauticStar to the MasterCraft family. In that time, we've leveraged our industry leading strengths and operational excellence and financial management to further improve NauticStar's output, quality and margin. Daily production volume is up and we've made strides in improving both safety and quality. We've also added nearly 20 dealer locations since the beginning of calendar year 2018. In fiscal 2019, we look forward to building on the operational and financial improvements begun over the past 12 months, while executing additional dealer network expansion and new product development strategies to drive further market share in the high growth fiberglass outboard category. As a company we continue to be at the forefront of product introductions and innovation in the performance for both category, highlighted by our recent introduction of the X24 model and our previously released XT25, XStar and XT22 models. With the X24 MasterCraft engineers put surf science into motion, starting with a new surf specific hull design that when equipped with up to 4,300 pounds of ballast and the Gen 2 Surf system creates the industry's largest wake that is perfectly sculpted and customized to MasterCraft technology. New wake-specific technologies work in concert on the X24 to operationally speed up the boat’s wake-specific functions. A premium 2018 feature, the new FastFill Ballast System, speeds time to towing by filling the X24’s ballast tanks in under three minutes. Once full, the X24 debuts the new switchback ballast tank that instantly shifts ballast from side-to-side to serve the rider’s preference. The X24 has room for 18 passengers and was thoughtfully designed with new surf-friendly storage features that allow friends and families to have more people, gear and fun on the water. The X24 Pickle Fork bow and U-shaped seating layout create a spacious and comfortable configuration for spectating and lounging. An optional transom lounge and reverse seating scenarios create more options for owners to customize their interior. Storage on the X24 is considerable at 106 cubic feet, including storage compartments above the ballast tanks. With the X23 in the iconic XStar setting the bar for wakeboarding, surf and performance, it was tough to outdo ourselves, but we delivered. The X24 offers an exceptional wake surfing experience, while providing the ultimate in on the water durability, reliability and performance. Now I’d like to turn the call back over to Tim to go over our financials.

Thanks Terry. From a top-line perspective, net sales for the fourth quarter ended June 30, 2018, rose 63.6% or $37.1 million to $95.4 million, compared to $58.3 million for the year ago fourth quarter. The gain was due to the inclusion of NauticStar, which increased net sales by 37.1% or $21.7 million and Mastercraft, which increased sales by 26.5% or $15.4 million. The increase was attributable to a rise in Mastercraft unit sales volume, favorable product mix and price increases. Gross profit increased $11.4 million or 69.5% to $27.9 million, compared to $16.5 million for the prior year period. Mastercraft contributed $7.6 million this increase primarily due to growth in Mastercraft unit sales volume, a favorable product mix, lower warranty costs and reduced retail rebate activity. The inclusion of NauticStar contributed $3.8 million to our increase in gross profit. Gross margin increased to 29.2% for the fiscal fourth quarter, compared to 28.2% for the year earlier fourth quarter. On the expense front, selling and marketing expense rose $0.8 million or 38% to $3 million for the fourth quarter ended June 30, 2018, compared to $2.2 million for the year earlier period. This increase results mainly for an inclusion of NauticStar, which added $0.6 million in selling and marketing expenses. Fourth quarter, general and administrative expense increased by $1.7 million or 46.9% to $5.4 million compared to $3.7 million for the prior year period. This increase resulted mainly from an inclusion of NauticStar, a litigation settlement charge, startup costs for a new brand in a different both segment and higher compensation costs. General and administrative expense as a percentage of net sales decreased by 70 basis points to 5.6% compared to 6.3% for the prior year period. This favourable impact resulted from the -- from significant net sales increases compared to lower increases in general and administrative expenses. Turning to the bottom line, fiscal fourth quarter net income totaled $13.1 million, versus $6.3 million for the year earlier period, driven by the inclusion of NauticStar, lower warranty costs, reduce retail rebate activity and reduced tax rates from the enactment of the Tax Cuts and Jobs Act. Adjusted net income of $12.4 million or $0.66 per share on a fully diluted weighted average share count of 18.8 million shares was completed using the company’s estimated annual effective tax rate of approximately 29%. This compares to adjusted net income of $6.5 million or $0.35 per fully diluted share in the prior year period. Due to the Tax Cuts and Jobs Act, MasterCraft's annual effective tax rate for fiscal 2019 is expected to decline to approximately 24%. Adjusted EBITDA was $19.8 million for the fourth quarter, compared to $11.5 million in the prior year period. Adjusted EBITDA margin was 20.8% from 19.8% in the fiscal 2017 fourth quarter. See non-GAAP measures below for reconciliation of adjusted EBITDA, adjusted EBITDA margin and adjusted net income to the most directly comparable financial measures, presented in accordance with GAAP. The company’s strong cash flow enabled debt payments of $39.3 million, representing almost half of the $80 million borrowed for the purchase of NauticStar. Net debt leverage at year end was down to 1.1 times adjusted EBITDA compared to 2.1 times at the time of the NauticStar acquisition. In the interest of time, I won’t discuss the details of our full year results today, but I will echo Terry's comments and reiterate that we’re very pleased with our performance and look forward to fiscal 2019. I’ll be happy to answer any year-to-date questions during the Q&A. With that, I’ll turn the call back over to Terry for our outlook.

Thanks Tim. Financially, operationally and on the new product development front, we delivered strong performance in fiscal 2018, which gives us confidence in our ability to execute again in fiscal 2019. Looking ahead, we remain steadfast in our strategy of driving sustainable profitable growth, through the development of new and innovative products, strengthening our dealer network, driving margin expansion through operational excellence and capturing additional market share from adjacent boating categories, both organically and through acquisition. For full fiscal year and June 30, 2019 guidance, we expect net sales percentage growth to be up in the low teens. Adjusted EBITDA margins are expected to be in the mid-18% range, adjusted EPS percentage growth is expected to be in the high teens. The guidance is adjusted for start-up costs of approximately $2.5 million associated with the completely new both brands in a segment in the market neither MasterCraft, nor NauticStar currently serves. We’re excited to share more on this in the coming quarters. With the first fiscal quarter ending in September, net sales percentage growth is expected to be in the high 30% range, with adjusted EBITDA margins in the mid-16% range. Adjusted EPS percentage growth is expected to be in the mid-teens. Recall, NauticStar was acquired during our fiscal second quarter last year. Now I would like to turn it over to the operator for questions.

[Operator Instructions] And our first question comes from the line of Craig Kennison of Baird. Your line is now open.

Hey, good afternoon and congratulations on the great year. Wanted to ask about average selling prices and the impact on margin. You had extraordinarily good margin performance. Wonder to what extent that’s driven by ASPs and to what extent your ASP growth is sustainable?

The recent new products that we launched at Mastercraft were in the larger kind of size including the XStar, X24, XT25. So that's pushed up our AUSPs for Mastercraft a bit. And the demand remains strong and so I do think that that, that is sustainable.

So the dollar level that you reported in the fourth quarter is maybe a good proxy as a starting point for next year or the growth rate?

I'd say it's a pretty good proxy for the starting point to next year.

And then looking at your strong margin performance this year, you're calling for some erosion in EBITDA margin next year. What's driving your thinking behind that?

Yeah, we have NauticStar for 4 quarters next year. And even though they are doing well they're bit dilutive to the gross margin. So that's the most significant piece driving the margin down.

Helpful. And then with respect to the channel, could you comment on retail trends during the quarter for NauticStar and Mastercraft, and then also kind of where inventory finished relative to last year?

Yeah, Craig, this is Terry. Inventory turns, dealer pipeline of both NauticStar and Mastercraft were up. So we're very pleased with that. That retail activity continues into July and August as well. So we're actually seeing continued improvement in dealer turns. The new product is selling very well. And we were up substantially at Mastercraft year-over-year in terms of global retail especially in Q4.

And then finally, you've disclosed some desire or some plan to launch a new boat brand at some point in fiscal 2019. I imagine you're not going to share much in terms of detail, but can you tell us when we might see revenue and what the cadence maybe as we try to model that out?

Yeah, very excited about that opportunity. The marketing launch for that product won't be until calendar year '19. So we'll withhold the details, but it is a wide space activity. It is not Mastercraft type product. It's not a watersports specific or centric product that is a wide space. We will be sharing more with you probably specifically on the February call. And we have a plan to launch 3 models in calendar year '19. So the cost, the add backs were related to work we're doing now in terms of design and engineering, we added staff. We've done additional work to prep for the launch of those products. We will continue those add backs when sales commence. We should expect to be in fiscal 2020 correct.

Okay great. Well thank you so much.

Thanks Craig.

Thank you. And our next question comes from Joe Altobello of Raymond James. Your line is now open.

Thanks hey guys good afternoon. First question I want to follow up on the EBITDA margin guidance particularly for the first quarter I guess you said mid-16s. And I know you're lapping a quarter that did not include NauticStar last year. But the last couple of quarters you've also lapped quarters that didn't include NauticStar You've seen some nice EBITDA growth. So maybe or I'd say EBITDA margin expansion. So maybe help us understand what's putting that downward pressure on the first quarter beyond just the tough compare?

The revenue recognition rules that are effective for fiscal '19 caused us to have to book any expected discounts if you will the time of sale as appose to when we announce the program as we did have done previously. And so that's going to change the timing of those discounts if you will. And so that's pushing discounts into Q1 that normally would be booked in Q3 or Q4.

Yeah so on a full year basis Joe, as I mentioned in our prepared comments adjusted EBITDA margins are in the mid-18s, but the timing of is negatively impact Q1. So on a year-over-year basis it's pretty nominal.

Okay. That's very helpful, thank you. And then I guess secondly you guys have talked about wanting to have the ability to produce boats up to 39 seats. When do you expect to have that capability? And I guess where do you stand today as far as capability to produce larger boats?

So specifically that comment was related on earlier call, it's relates to NauticStar. 70% of NauticStar's portfolio is 24 feet and below. And that market, that size product is kind of flat. It's up a bit, but the larger product above 24 feet is where that segment is growing. We have 4 models in development at NauticStar currently. I don't want to get ahead of the marketing launch. I won't talk about those specifically. But the 3 of the 4 models are larger. And over time, over the next few years, we will introduce product up to 39 feet at NauticStar.

Okay, great. Just one more if I could. Obviously a lot of discussion about tariffs for Canada in the EU. What do you guys assuming in terms of the impact from tariff for this year, whether it be on demand in those markets or direct costs being borne by either you or your dealers?

First of all, we think the tariffs are going to be on a temporary basis. Second thing to know is that because we are ourselves are so strong in the U.S. and in particular, Australia is offsetting the bit of softness, in particular in Europe. And we'll have some level of support tariff support for our dealers. But it can -- that's correct. And that has been included in our guidance.

Okay, great. Thank you guys.

Thanks Joe.

And our next question comes from the line of Eric Wold of B. Riley FBR. Your line is now open.

Thank you, guys. Good afternoon. Two questions for me, one following up on the new product you have brand product introduction and they're not talking much about great but kind of maybe what's included in fiscal '19 guidance around, I assume you've got initial launch costs and probably marketing costs are in there, Is there any revenue associated with that included in fiscal '19? Or is it all on the cost side?

No, on the new brand that revenue will be beginning of fiscal '20 costs are being incurred now. And from the MasterCraft side, in the NauticStar side of MasterCraft in particular we'll continue to launch 3 new models just like we have for the last 6 years.

Okay. And then on the NauticStar side, where are you in terms of improving production on that in terms of the number of boats per day? Kind of what is anticipated within fiscal ‘19 guidance around that?

Yes. So if you remember back in our calls in February, and again in May, I mentioned we went up in count and in December about a day and again in January we went from 9 to 10 and then 10 to 11, we’ve held that count. And this year is focusing on completing the institution of our quality systems that we have at Mastercraft. We’ve got almost an entirely new senior management team, very excited about the very qualified good industry veterans. So we’ve executed the environmental health and safety, housekeeping and probably 60% to 70% of the quality processes. So our guidance now on NauticStar is to hold them at their count. For now we’ll make some count increases throughout the fiscal ’19. But they won’t be until first one will probably be in Q2. But that’s all baked into our guidance.

Okay. Where do you think, you can end fiscal year ‘19 at in terms of boat per day [ph]?

Well, right now, we just, we always adjust as we do in Mastercraft wholesale to, based on retail. So we will never just stuff both into the dealers. We have a plan right now depending on mix, I wouldn’t get too focused on units per day because as we mix up its dollars. So our dollars are going to increase certainly we’ve got four quarters to the year. But don’t get too highly focused on boat count.

Yeah and so we’re not providing brand specific guidance when we talk about fiscal ‘19. So just keep that in mind.

Perfect, understand it. Thanks, guys. See you next week.

[Operator Instructions] And our next question comes from the line of Michael Swartz of SunTrust. Your line is now open.

Hey, good afternoon guys.

Hey Mike.

Hey Mike.

Hey, just wanted to follow up on question, I think Joe asked about just the strength in gross margin in the June quarter and then the implied guidance for the September quarter which show a pretty marked slowdown. So I'm just wondering maybe how much of that -- Tim you had mentioned there was a change in accounting practices for rebates or discounts, I think is the way you put it. I mean is there a timing issue there between the fourth quarter of '18 and the first quarter of '19 that we should be thinking about?

Yes, there is. We're booking it rateably. Think of it like you book your warranty expense. Every time you sell a boat you book the estimated warranty that's going to be incurred over the next several years. And so we're doing that now with the new revenue recognition guidance. And what that does is it pushes more of the retail rebates that ordinarily would have been recognized in Q3 and Q4 into now into Q1. So it's a pretty significant number when you look at Q1 this year versus last year.

Yeah, it's most of the timing issue Mike.

Yeah, no. that's what's I was trying to understand. I mean is there any way of looking at how -- just to quantify what that kind of push is from maybe the fourth quarter into the first quarter or the third and fourth quarter into the first quarter?

I think on a -- when I look at Q1, versus Q1 last year is probably 1 point to a 1.5 point of discounts associated with this revenue recognition.

Okay, got you. That's helpful. And then I know you're not giving kind of brand specific guidance for your fiscal '19, but could you just maybe give us some parameters around how we should be thinking about NauticStar, I know you've been ramping up production there relative to the Mastercraft brand?

Yeah, we don't give the unit guidance because again mix changes. So I think the biggest thing for us is just to understand that it's four quarters of revenue now instead of 3 from the last year. I think their mix is going to drive rolling 12 up a bit. But we see from a Mastercraft standpoint that probably up in the certainly in the double digits. We think units are going to be up probably in the teens and are high single to low-double digit dollars will be up a bit higher than the units.

And that was for the Mastercraft brand?

Yeah.

One of the important thing that I don't know that we emphasize enough, Mike is the fact that we did this acquisition last October. And we did not lose focus of our core products. So not only we're able to acquire this company, pay down almost half the debt and help them start on their continuous improvement journey, if you will, but we did that well maintaining our focus on Mastercraft as well. So I think that's important to note.

Okay, thanks a lot guys.

All right, thanks Mike.

And I'm showing no further questions at this time. I would now like to turn the call back to Terry McNew, Chief Executive Officer for closing remarks.

Thank you, operator. Appreciate it. And once again thanks to everyone for joining us this afternoon. Across the organization, we are well positioned for fiscal 2019 and beyond. We do look forward to updating you on our progress and first quarter results in November. Thanks again.

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.