Good afternoon, everybody, and thank you for joining us for our next presentation from MasterCraft. The company is one of the leading boat manufacturers in the United States, and while it's probably best known for its MasterCraft-branded towboats, they are complemented nicely by the rest of the portfolio, including Crest Pontoons and the Aviara line of luxury dayboats. Over the past few years, we've seen a fair amount of volatility across the boat industry in terms of both supply and demand, though MasterCraft seems to have weathered the storm rather nicely, helped to some degree by its very strong balance sheet. We are very pleased to have with us today CEO Fred Brightbill, who, by the way, last night—or actually, yesterday afternoon—announced that he was retiring. He is retiring in two weeks, as well as CFO Tim Oxley.
I believe the plan is for Fred to go through some slides, after which we will have some time for some questions. With that, let me hand things off to Fred.
Thank you, Joe. Afternoon, everybody. I'll try and make the slides short and sweet, so I apologize if I expedite a little bit, but I thought Q&A would probably be the most interesting part for all of you. But if you feel like I'm progressing too quickly, either I can catch up later or just slow me down. Again, these are the folks that are here today, as Joe just introduced. And this is kind of, as we see the brand from an overall perspective, a company, if you will, anchored around MasterCraft. That's the iconic brand. That's the core of our business: 70% of the revenue and significantly more than that in terms of earnings. Extremely profitable business, extremely flexible business in terms of contribution margin. We'll talk a little bit more about that later. In terms of financial flexibility, Joe alluded to some of that.
We'll go through that in a little more detail, but we find ourselves in very good financial shape in spite of the current economic conditions, and we think that positions us for entertaining a variety of strategic alternatives. We're committed to growth, and that's how we think, first and foremost, after financial security in terms of how we allocate our capital. And certainly, we expect to be disciplined about that allocation, and if we don't find the opportunities that are related to growth directly, then we'll return that capital to shareholders. Just an overall framework of the industry. It's a significant industry, and power boats are certainly a significant contributor to the overall economy.
As you can see here, there are the ups and downs that you all know from looking at unit sales volumes, but when you look at it from a revenue dollar standpoint, it's a pretty steady stream of growth. Now, we don't have the data for the most recent year; it still hasn't rolled in yet. That's been a long string of growth within the industry, and that's, frankly, from a historical perspective, abnormal. In my opinion, that growth period was extended somewhat unnaturally by the post-COVID demand. These are the major brands that MasterCraft Holdings represents. Again, MasterCraft, first and foremost, being the anchor, it's a number one ski-wake brand. It's the most awarded.
It's got a long history, and it's very much a premium brand, and it's sold at a price above some of our major competitors, and that's the way we go to market. So in competitive times, we do what we need to do to adjust, but we do not lead with price being our first alternative in terms of the tools we use. Crest is a brand that we picked up in 2019, done very well with it. It's certainly experiencing the economic downturn that the whole industry is experiencing now, but it's overall performed very well. We're very satisfied with it, and we're talking about expansions there in terms of introducing a new brand at a super premium level. Pontoon. Aviara is the luxury dayboat that is a de novo brand that we introduced in 2019. It began its life being produced in Vonore, where MasterCraft produced.
With the push to expand production for MasterCraft, we moved it out, and we moved it to a facility in Florida and Merritt Island. It's been growing there, and most recently, we've introduced the AV28, which is really four different boat brands: a single outboard, a dual outboard, a stern drive, and an inboard, all within that length. It substantially increases the unit volume, and it's just being ramped up as we speak. When we look at the industry and our performance from a recent history standpoint, we have the dip in 2020. Yeah, it was COVID-related, but other than that, pretty significant increase in revenue over that period and over my tenure. Make no mistake, I view this as being in a boating recession currently.
We can call the economy whatever we want in terms of stable or touch and go or potentially even a minor recession at this point, but it certainly doesn't look like we're going to see the dramatic downturn that, frankly, we thought we might see at the beginning of this year. So when I look at this, the way I think about this is this is a tough year, a year of survival, a year to invest in the future and position ourselves to take advantage of the upswing that will come when we head out of this. I don't view the current situation as being related to pulling demand forward due to COVID. I view this as essentially returning to what would have been a normal downturn within the industry off the pre-COVID kinds of numbers.
When we think about capital allocation, again, $109 million of cash in short-term investments, $51 million worth of debt, another $100 million on our line of credit, so substantial financial liquidity available to deploy toward growth, which is our primary objective. We have a number of internal objectives, either new brand introductions or line expansions, but those typically don't require a dramatic amount of capital, a significant amount of capital. Today, we're essentially using all the cash flow in this depressed period for buybacks and for return to shareholders of our capital. So we think those capital uses are not exclusive as we look not only near term, but when we look forward, we have the ability to substantially invest in M&A as well as return capital to shareholders.
If we do not find M&A opportunity that we find attractive and there are really very specific targeted areas that we're interested in, if we can't find a transaction that meets our criteria, then we'll return that capital to shareholders. And so far, we utilize the first $50 million that we had introduced a few years ago. We're into the second authorization and essentially spreading that out over time, not trying to be smarter than we think we are with regard to the market and when we buy. So when we think about growth, these are some of the avenues that are available for us. As I mentioned, we will be launching new brands in existing categories. Balise, a super premium pontoon, is an example of that.
New brands in new categories is another alternative, and we can debate about that with another introduction that's coming down the line, whether it's an extension or whether it truly is a new category with regard to tow sports space. And then acquire new brands. I alluded to that, and we would not be interested in turnarounds or fixer-uppers or damaged goods or value buys. When we look at that area, we'd be looking at premium product offerings and would fully expect to need to pay a fair price. However, that price at this point in time should be attractive to us relative to what their earnings potential is over the full cycle of the business.
And then in our existing brands, we think about how we appeal to specific consumer segments in the demographics and psychographics and where our brands are most well received and what we need to do to target them. And if we don't feel that we have one that lines up the way it should, then we'll develop a new one. And that's, to some extent, what I'm talking about with regard to Balise and with regard to offering that will be coming down within the next year within the tow sports offering. The share repurchase program has added in the most recent quarter 13% to the EPS and really over the year to date about 12%. So it's had a significant impact on our EPS. And this is my successor. This is a thumbnail sketch. Brad Nelson's his name. He comes to us from Oshkosh Truck.
He ran the commercial segment there. It was about a $1 billion segment. Makes heavy, complicated vehicles like waste refuse, garbage trucks, if you will, and other moving and mobility type vehicles. So we think he's the right guy with the right attitude, the right culture. Board undertook this search, began this summer. I've always had the relationship with my board that I serve at their will, and I have a flexible time frame. And when we think we can find the right successor, I'm flexible in terms of how and when I move on. And so we were fortunate to be able to find Brad. We think he's going to be a great fit, somebody that can take this business forward and leverage it. He comes to us with deep operating experience. As I said, he's been a successful team builder, strategic thinker.
He's a really great guy, and I can't emphasize how committed I am to make him successful and allow him to take the business to the next level. And so with that, Joe, I don't know if you have a couple of questions that you'd like to ask and/or certainly after that, turn it open to the floor.
Thank you, Fred. Appreciate that. I guess first question, maybe from a high-level standpoint, if you could talk about what you're seeing in terms of demand. We were at the Miami Boat Show, and it seemed like it was a pretty good show, but I'm not sure that's indicative of the boat industry broadly. So I've heard there's plenty of inventory out there. There are buyers out there. It's just that they're not moving very quickly. So if you could, maybe you and Tim could sort of assess where we are from a demand standpoint at this point.
Well, of course, it's somewhat different with each one of our brands, but Miami is a key show for the Aviara brand, and it was a very successful show for them. It's not a big show in terms of retail demand for MasterCraft. It's more of an industry show for MasterCraft. And if I were to characterize the shows overall, it's been highly varied. There have been some great shows, and there have been some mediocre ones, and there's been some lousy ones. When you distill that all down, it's allowed us to narrow our guidance somewhat for the year as we get a little better visibility, but hasn't dramatically changed that outlook.
I will say, though, how we got to the point that we're at is a little bit different than what I originally thought early in the year, where, frankly, given the rate at which the Fed increased interest rates, I thought looking at historical performances in past cycles, we were likely to see a downturn and a sharp one. I was just hoping it would be short and we would recover quickly. Turns out we didn't have that. And I don't know how many of you expected the economy to perform the way it did, but it's been amazingly resilient considering what we're going through. And it looks like we could end up with the fairy tale ending here of a soft landing and transition our way right out of this with rate increases in the summer.
And if we see those rate increases, not only will they have increases, I mean, decreases, but will we see a technical impact in terms of cost of capital to us, cost dealer floor plan financing, and ease the burden on dealers. But also, I think there'll be a very significant psychological impact to dealers, or not to dealers, but to consumers from the fact that we've seen the end, and now we're going to see less restrictive monetary policy. So I'm hoping, and right now the projections are that we see that this summer. We see it this summer. We're able to take advantage of it in the busy selling season.
So it sounds like you expect the industry to sort of plot along here for the next few months until a rate cut and then hopefully psychologically starts to spur.
Joe, as we talk about so many times, 45% of the retail sales occur in the fourth quarter of our fiscal year, the second quarter of the calendar year, and 35% of that occur in May and June. So this is all about time track and plan whether or not that year is going to end the way we expect. Right now, we're not seeing anything that suggests it's going to end dramatically differently than what we thought. That level of demand that we're assuming for May and June is along the line of a conservative pre-COVID period. That's the way we're thinking about the year.
So you and the rest of the industry are in de-stocking mode to a large degree. So how much of what you're doing today is geared toward driving near-term results, and how much of it is really kind of setting the company up for an even better model year 2025? I guess what I'm sort of asking at is we're heading into a selling season, so you want to have enough boats out there for the selling season, but at the same time, you also want to clear the decks for the model year 2025 shipments that start roughly July, let's call it.
I think the primary focus right now is making sure that stocking levels are healthy, and therefore the boat shows are a major opportunity for our dealers to sell their 2023 model years that they've carried over. And so that's where the heaviest discounting occurs. The 2024s are being priced competitively, but substantial premiums to what the '23s are priced at. So again, the focus is on clearing that out of the pipeline, being in healthy shape as we come into the fourth quarter, and then finishing cleaning up the pipeline through that period and setting ourselves up for a very successful 2025.
Got it. In terms of a new brand, you talked about a new pontoon brand. You did Aviara a few years ago. That's going well. It's pretty rare to see a new brand created in the marine space, and you guys have obviously done it once, about to do it twice. How come you guys have been successful at it, whereas other companies really don't want to try it?
Well, it's interesting. Introducing a brand versus buying a brand, obviously you have a longer development period. You have a longer gestation, but you have less investment overall typically, and the returns are very attractive to us. And in this particular case, we thought we had a unique concept in terms of what the styling would look like, what the appeal would look like, where we were going to position it. So there really wasn't something that exactly fit what we wanted to do. And like Aviara, where it was unique, even though it's in a space and competes, there's nothing else that looks exactly like it. It has its attributes of progressive styling, enhanced comfort, elevated control, and then also all the quality details.
So along that same line, if we think about that kind of thinking and applying it to the pontoon space, that's what we're looking to do.
You've obviously been through this, like you mentioned earlier, with Aviara. What are the biggest challenges to creating a new brand?
Well, first and foremost, we also create a new brand where we feel like a new identity is going to best target the customers that it will appeal to. So while we could consider stretching the Crest brand upward in that particular case, in this case, we felt a new brand and a new identity would be best able to do it. And it also opens the door to unique distribution suited for that. You're not compelled, as you would be if you introduced it as a Crest brand, to offer it to all the Crest dealers. And we think there will likely only be a handful of Crest dealers that are suited to this new brand. Most of them will be new distribution.
When we think about it, we start out looking at the market, looking at what we think the opportunity is, looking at the psychographics and demographics and the elements that need to appeal, and then evolve that back to making the decision: is it an extension, is it a new model, or is it a new brand?
This will be positioned above Crest. Will there be any overlap in terms of pricing at all?
Yes, there will be some overlap at the very highest end, and there'll be three different models offered at different levels, but it will extend substantially above it.
Okay. Have you named it yet or announced the name?
Balise is the name.
Balise. Thank you. Okay. And it sounds like the impact on your 2025 results should be fairly minimal at this point.
On the 2024 results?
Well, you're launching at 2024. I mean, more on fiscal 2024.
2025 is where it will have a much more significant impact. Yes.
Okay. You've got a very strong balance sheet. You talked about this earlier. Maybe talk to us about some of the types of acquisitions you would be looking at.
We like both of the major spaces we operate in today. We like all three of them, but in terms of acquisition opportunity, it would be pontoon first and foremost because it's such a fragmented market. Crest today is like a 4% market share. There's 90 different participants in that segment. Tow space is very attractive to us because of the returns of that business, although we're proceeding very aggressively on the expansions of brands and product offerings there. That still is a very attractive space to us, but a highly concentrated space with three major participants controlling 75% of the share there. Then we do like the center console fish. We like the offshore fish segment. It too, overall, is very fragmented. But again, you start narrowing it down when you're looking at the true premium brands within that segment.
But those are the three that we think have the strongest secular long-term growth potential, not only if we track from 2019 forward, but also extending beyond that.
Okay. The AV28 you mentioned earlier, that's ramping up nicely, and that's going to significantly increase your addressable market here. How much of a growth driver could that be in 2025 and beyond?
Well, let me just reiterate that the 28 itself will be very significant in terms of unit volume and numbers compared to what we produce in what we call the legacy offering from Aviara, which is a 32, a 36, and a 40-foot boat. This 28 can serve in many different inland and smaller markets that aren't necessarily suitable to those larger boats. So that's one element. And then we have not only the expansion within our current major distribution relationship, MarineMax, but also in dealers beyond that, both domestically and internationally. And then stay tuned because that won't be the end of the expansion of that product line. There'll be more to follow.
I assume smaller boats sort of going down that length. In terms of the promotion environment, we've heard it's a little bit more promotional than it was the last couple of years, but not surprising since we're coming off a period where there was very little promotion going on. How would you describe it, and how would you compare it to 2019? Is it normal?
I would describe it as intense. I would describe this as one of the most intense competitive environments that we've seen, and it's due to the level of inventories. 2019 reached periods in the middle before COVID struck and turned everything on its head. But I think some companies had not responded yet in 2019. At this point in time where we are, everybody's responded. Everybody's competitive. It's as competitive as I've ever seen it. So I fully expect that this is as bad as it can get, and we're going to see very tough conditions through the remainder of this fiscal year. And then I think as inventories become normalized, pricing will get more rationalized. It will not go back to the post-COVID kind of environment, but it will go back to normalized kind of levels. And by that, I mean what we would have seen in 2017, 2018.
How much of that relates to the categories you're in, right? Because you're in ski-wake, as you mentioned. You're in pontoons. Two of the most competitive areas of boating. I think if you ask somebody who is in saltwater fish, they might say that this is sort of a normal environment, kind of what we saw in 2019. So is that really just an issue of where you guys play?
I think saltwater fish has lagged a little bit, and I think we're starting to see the competitiveness there increase. It also depends pretty significantly on what the price points and value propositions of the brands are, less so on the premium brands. But on the more competitive brands, I think it has gotten quite competitive.
Okay. Inventory. You mentioned earlier that the goal is to clear the channel as best you can ahead of the Model Year '25s. How tough is that? Because as you mentioned, a lot of your retail comes in the June quarter. So how do you guys manage that dynamic where you're trying to clear the channel, but you just don't know what retail is going to look like as we saw last year, right, where retail came in below what you were expecting?
Well, we won't achieve our full objective to the end of the fiscal year according to our plan, but the objective for the overall year is to take 600-800 units out of inventory across all of our brands. And again, that's focused primarily it's almost split evenly between Crest and between MasterCraft. So when we think about that, the boat shows in the early selling season are great opportunities. You're offering the differential between normally discounted 2024s and highly discounted, not only from the incentives we're providing, but also in terms of the aggressiveness dealers are willing to take on those 2023s. So the notion is, let's get those moved, clean those up as soon as we can, pick up the tail end of that as we finish up the year.
So some of those 600-800 boats could slip into Model Year 2025 in terms of or fiscal 2025 in terms of.
If we don't get it right.
Correct.
They could.
Okay. Let's open it up to the audience if anybody has a question?
ASP since 2019 up maybe 30%-40%, depending on which currency you're talking about. Why the 30%-40%? Is it because it had to be because you had to pass on higher costs? Does it make the margins go up? But it seems like an awfully big increase over a four-year time frame per boat.
Yes. The answer is yes, it is an awfully big increase. And the answer is that essentially the cost increases that we saw, we passed along and maintained our margins. That was essentially what we were able to do during that period because the demand was so great. Now, the reality is you have to pay the piper at the end of the day. So now we're in a situation with elevated prices and a price sensitivity and high interest rates. And so there will be a keen focus on cost reduction and a keen focus on value engineering and product expansion in the more affordable categories.
Go ahead. Have higher ASPs been a contributor to people buying boats? Is it because a boat was $160,000, now it's $225,000? Is that part of the reason that inventory has ballooned a little bit?
Well, certainly obviously, not in terms of units, in terms of dollar value, in terms of impact on the participants, yes, right? You have higher value boats per unit. You have more units in the field. You have higher interest costs. You have curtailments. You have a whole variety, all those things contributing to that, right? But your point is very appropriate. One I think that you were hinting at earlier, which is content has increased. The boats have become more sophisticated. There's more equipment in them. There's more functions and features, and that has a cost too. So to some extent, you're looking at like-to-like increases, and to some extent, you're looking at the continued evolution of the offering. I mean, way back in the first ski boats, I mean, you basically had an engine and a steering wheel. I mean, there was very little else in those boats.
You look at them today with the sound systems and the integration and the cruise control and the ballast systems, etc.
I think it's worth pointing out that the discounting that we're doing at retail and the margin decreases that dealers are taking, so some of that price is coming back. So if 30 points was the number, I'm thinking we've at least given back 10-15 points of that recently, especially on the 2023s.
Is that split between you and the dealer, or is that what the dealer margins are? The dealer margins are. I have no idea what it is.
The dealer margins are very tight today on that aged product. They're more normal, I would say, maybe slightly on the lower side of normal, but in that range for the 2024 product. But for the 2023 product, it's extremely aggressive. It's more of a cash flow issue there. Let's move that inventory out as a good retailer, get it cleaned up, and move forward. Those are not sustainable long-term kind of levels. So we've seen this offset that Tim refers to in the near term, which has helped, but long-term, as you revert to normal kind of margins for healthy businesses, there's work to be done to continue to make sure the product is affordable and attractive. But again, you've got two totally different kinds of customers at the different ends of the spectrum. You alluded to it.
I would say with our next offering at the high end of the MasterCraft model, it will be a price increase, and it will be more highly contented. I know some of our competitors have had great success, and it's almost like the high price is worn as a badge of honor. If it really is the best of the best and has everything, that customer's style there that can pay for it. But it's bifurcated.
How does the lending environment look? I mean, we've heard from some companies that there's still ample capital out there, but banks are redefining how they define good credit customers, for example.
I'm going to let Tim take that one.
I'm talking from a retail perspective.
I think from a retail perspective, it's interesting. In the boat show season this year, we're not hearing complaints about the interest rates. So I think part of it, the consumer has become more accustomed to it where they are today. Call it 7.5 to maybe 10, depending on the creditworthiness. And I'm just not hearing the interest rates discussed this year like I did here last year because I do think that the banks tightened up on their lending requirements. And so they're charging a higher rate for the same kind of credit risk, higher than they did previously.
Are they still tightening, or are they tightened last year and they've kind of stayed there?
I don't sense that they're still tightening. I think they're kind of staying where they were.
Okay. Any other questions?
So, just what percentage of people buy a new boat for $200,000 now? What percentage of it put down? What percentage of it would they buy next?
Well, you can finance a boat almost like you can finance a house now. You can put 20% down and finance it for 20 years.
So people are paying more, or are they putting down more?
It's all over the board. As you can imagine, our high-end customer, they have the cash and they have the wherewithal. They're just playing arbitrage between either the tax situation or between what they think they can borrow versus invest, etc. Now, at the more entry end, lower end, then it becomes more of a payment, more of how much can I afford. Certainly, interest rates have a much higher impact on there.
Actually, I think we have to end it. I apologize. We're having a breakout. Thank you, Fred.