U.S. Markets closed

Edited Transcript of MCFT earnings conference call or presentation 7-Nov-19 3:00pm GMT

Q1 2020 Mastercraft Boat Holdings Inc Earnings Call

VONORE Nov 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Mastercraft Boat Holdings Inc earnings conference call or presentation Thursday, November 7, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Frederick A. Brightbill

MasterCraft Boat Holdings, Inc. - Chairman of the Board & Interim CEO

* George Steinbarger

MasterCraft Boat Holdings, Inc. - VP of Business Development

* Timothy M. Oxley

MasterCraft Boat Holdings, Inc. - VP, CFO, Treasurer & Secretary

================================================================================

Conference Call Participants

================================================================================

* Brett Richard Andress

KeyBanc Capital Markets Inc., Research Division - Associate VP

* Craig R. Kennison

Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst

* Eric Christian Wold

B. Riley FBR, Inc., Research Division - Senior Equity Analyst

* Joseph Nicholas Altobello

Raymond James & Associates, Inc., Research Division - MD & Senior Analyst

* Marc J. Torrente

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Michael Arlington Swartz

SunTrust Robinson Humphrey, Inc., Research Division - Senior Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 MasterCraft Boat Holdings Earnings Conference Call. (Operator Instructions) Please be advised that today's call is being recorded. (Operator Instructions)

I would now like to hand the call over to Tim Oxley, Chief Financial Officer. Please go ahead.

--------------------------------------------------------------------------------

Timothy M. Oxley, MasterCraft Boat Holdings, Inc. - VP, CFO, Treasurer & Secretary [2]

--------------------------------------------------------------------------------

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 on today's call is Fred Brightbill, MasterCraft Boat Holdings' Interim Chief Executive Officer and Board Chair; along with George Steinbarger, our Vice President of Strategy and Business Development.

Our agenda includes a strategic overview of the business by Fred -- Fred and George, followed by my analysis of the financials and our expectations for fiscal 2020; 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 7, 2019. 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 in our fiscal 2020 first quarter earnings release, which includes a reconciliation of these non-GAAP measures to our GAAP results.

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 Fred.

--------------------------------------------------------------------------------

Frederick A. Brightbill, MasterCraft Boat Holdings, Inc. - Chairman of the Board & Interim CEO [3]

--------------------------------------------------------------------------------

Thanks, Tim. I'd also like to thank everyone for joining us today. Before we dive into the first quarter results and our financial highlights, as you likely saw in a separate announcement last week, Terry McNew resigned as President, CEO and Director of MasterCraft Boat Holdings, Inc., effective October 30 to pursue another opportunity outside the marine space. Terry has been instrumental in cultivating a best-in-class product portfolio and driving a culture of innovation and operational excellence. On behalf of the board and the entire organization, I would like to thank Terry for his leadership, steadfast dedication and service to MasterCraft over the past 7 years, and we wish him well in his future endeavors.

Moving forward, I'm excited to take on the role of interim CEO. I look forward to working alongside MasterCraft's long-tenured industry veteran leadership team as well as our seasoned and dedicated employees, while the Board manages the process of finding a new CEO to drive the company into the future. We are in the beginning stages of the CEO recruitment process, and we'll share more information with investors on the status of that process in future calls.

With that, I'd like to turn the call over to George to discuss our first quarter highlights.

--------------------------------------------------------------------------------

George Steinbarger, MasterCraft Boat Holdings, Inc. - VP of Business Development [4]

--------------------------------------------------------------------------------

Thanks, Fred. As you saw from today's press release, during our first quarter, we delivered record results in net sales and adjusted earnings. This performance was driven by the inclusion of Crest, which celebrated its 1-year anniversary as part of MasterCraft Boat Holdings in October, and the successful execution of our operational excellence and product development initiatives across all our brands. Throughout the quarter, we experienced an improved retail demand environment, which, combined with our decision to pull back wholesale production across our MasterCraft, NauticStar and Crest brands, led to improved dealer pipelines. Encouragingly, we've seen this retail momentum extend into the early part of our fiscal second quarter.

At our MasterCraft brand, we saw a 50% improvement in our excess dealer inventory at the end of the quarter compared to fiscal 2019 year-end levels. This dealer inventory reduction was in line with our internal plan but will remain a key area of focus for us as we progress through the balance of the year. Importantly, we accomplished this dealer pipeline improvement, while expanding our MasterCraft brand gross margins versus prior year. This gross margin expansion was driven by 2 major factors: first, as we discussed on our last call, our low fixed cost, high-variable cost model allowed us to efficiently flex down our wholesale unit production by nearly 13% in the first quarter, while minimizing the impact of lost overhead absorption; second, our highly strategic and disciplined approach to retail discounts allowed us to make meaningful improvements to our dealer pipeline, while maintaining our focus on growing market share in a sustainable, profitable manner. We caution investors to not focus too greatly on near-term market share data as elevated discounting by competitors across all voting segments may lead to short-term market share gains and fluctuations, which we believe are neither sustainable nor profitable in the long term.

Regarding the impact of the GM strike, recall that our exclusive engine supplier, Ilmor Marine, utilizes a GM block in the production of our marinized inboard engines. Given Ilmor's long-standing relationship with GM and its safety stock of GM engines, MasterCraft production was not impacted by the strike in the first quarter. However, to allow for GM, its supply chain and Ilmor Marine to get production back online, we will be shifting several production days out of the second quarter and into the second half of fiscal 2020. This production timing shift will have no impact to our forecasted MasterCraft financial performance for the year.

Transitioning to Crest, we saw excess dealer inventory levels improve sequentially from June to September, which will remain a key focus area for the brand as the year progresses. The pontoon segment has been one of the most impacted segments from an excess dealer inventory standpoint. Utilizing the same strategic and disciplined approach we employ at MasterCraft and NauticStar, the Crest team made meaningful improvements to its dealer pipeline year-to-date. As we prepare for the all-important boat show season, we believe Crest is poised to continue the strong retail growth and market share gains the brand has experienced over the past several years. Operationally, we continue to drive the integration initiatives already underway and are confident we are on track to meet our long-term gross margin target of low-20% over the next couple of years.

At NauticStar, our strategy to pivot the product portfolio to a greater mix of larger models and the continued execution of our operating improvement initiatives are beginning to pay dividends. In the first quarter, we saw a nearly 10% increase in average selling price, driven in part by a higher mix of units larger than 24 feet in length. Additionally, we realized expanded gross margins year-over-year despite a decrease in wholesale unit production of 7% and an elevated retail discount environment. We are pleased with the progress we're making at NauticStar, despite the broader slowdown in the saltwater fishing segment. We remain bullish on this segment over the long term and are confident that the product development and operational improvements we're making at NauticStar will position the brand for future success. Recall that NauticStar ended fiscal 2019 with healthy dealer pipeline levels, which we've been able to maintain through the first quarter. We will remain disciplined with NauticStar's dealer pipeline as we prepare for the upcoming boat show season.

Regarding Aviara. We began shipping our first model, the AV32, in July and could not be more pleased with the reception of the brand by both our dealer partner, MarineMax, and consumers alike. Aviara's European styling and open water performance are driving consumers to the brand and leading to retail sales trends ahead of even our already lofty expectations. This past weekend, Aviara's newest model, the AV36, was released to the public at the Fort Lauderdale International Boat Show. The AV36 is a 36-foot luxury bowrider that takes Aviara's progressive luxury to a grander scale, aiming to further elevate the consumers' experience on the water. The AV36 started production in our second quarter, with shipments beginning late in our second quarter. We will be releasing the flagship model of the Aviara lineup, the AV40, at the Miami International Boat Show in February of 2020. As previously disclosed, the Aviara brand will ultimately have gross margins that are slightly accretive to our MasterCraft brand gross margins. The integration of the Aviara production line into our MasterCraft facility is going smoothly, and we remain on track to realize this gross margin expansion as we achieve full production run rates across all 3 models by fiscal 2021.

As we enter the slowest quarter of the retail boat selling season, we continue to anticipate retail growth in 2020 across all of our segments, albeit at more modest levels than experienced in previous years. The combination of elevated dealer inventories across the industry, coupled with continued economic and political uncertainty, including fears of a slowing economy in the upcoming 2020 presidential election, result in us taking a measured view in the near term. Our short-term focus on prudently rightsizing our dealer pipeline across all brands and hyper focus on operational excellence initiatives will allow us to successfully manage the business for the long term through all business cycles.

Now I'd like to turn the call back over to Tim to go over our financial results.

--------------------------------------------------------------------------------

Timothy M. Oxley, MasterCraft Boat Holdings, Inc. - VP, CFO, Treasurer & Secretary [5]

--------------------------------------------------------------------------------

Thanks, George. From a top line perspective, net sales for the first quarter ended September 29, 2019, rose 17.2% or $16.1 million to $109.8 million compared to $93.6 million for the year-ago first quarter. The inclusion of Crest, which was acquired during the second fiscal quarter of 2019, represented $18.9 million of the overall increase. NauticStar contributed $0.6 million over the overall increase, driven by higher wholesale average selling prices due to a greater mix of larger products and price increases, partially offset by lower unit sales volumes. As George mentioned, we will continue to prudently manage our dealer pipeline in the face of slowing saltwater fish segment retail sales and the challenging weather conditions experienced during last summer's selling season.

At our MasterCraft segment, net sales decreased by $3.3 million, primarily due to lower unit sales volumes for our MasterCraft brand as we work to rightsize our dealer inventory levels, partially offset by a richer mix of higher-priced and higher content models. The decrease for the MasterCraft segment was partially offset by the start of sales for the new Aviara brand, which began shipping to MarineMax dealers across the country in July of this year. First quarter gross profit increased $2.3 million or 10% to $25.5 million compared to $23.2 million for the prior year period. The increase was primarily due to the inclusion of Crest, which grew gross profit by $2.6 million.

On a consolidated basis, gross margin decreased to 23.3% for the first quarter compared to 24.8% for the prior year period. This decrease was primarily due to dilutive effect from the inclusion of Crest. Gross margin percentage dilution was partially offset by margin improvement at our MasterCraft segment, driven by price increases, lower discounts and higher material margins at our MasterCraft brand as well as price increases and operational efficiencies at our NauticStar brand.

Operating expenses increased $1.2 million to $12.8 million for the first quarter compared to $11.6 million for the prior year period. This increase resulted mainly from the inclusion of Crest, which added $2.2 million, partially offset by a $1.1 million decrease in our MasterCraft segment due to lower acquisition-related costs and lower selling and marketing cost. Operating expenses as a percentage of sales decreased 70 basis points to 11.7% for the first quarter compared to 12.4% for the prior year period.

Turning to the bottom line. Adjusted net income for the first quarter decreased 1% to $10.1 million or $0.53 per share on a fully diluted weighted average share count of 19 million shares, computed using the company's estimated annual effective tax rate of approximately 23%, up from 22.5% in the prior year period. This compares to adjusted net income of $10.2 million or $0.54 per fully diluted share in the prior period.

Adjusted EBITDA was $15.9 million for the first quarter, up 5.7% compared to $15 million in the prior year period. Adjusted EBITDA margin was 14.5%, down from 16% in the prior year period, principally due to the dilutive effect of Crest. Please see the non-GAAP measures section of our press release and 10-Q 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. We believe we have a healthy balance sheet, with a pro forma net leverage ratio of 1.3x adjusted EBITDA at the end of the quarter. We will continue to emphasize the payment of debt in the near term and investments in high ROI organic growth initiatives.

Regarding our view for fiscal 2020, we maintained our previously provided guidance of net sales down in the low single-digit percent range, adjusted EBITDA margin down in the 50 to 100 basis point range and adjusted earnings per share down in the high single-digit percent range. Our updated cadence for net sales and adjusted earnings guidance in the first and second half of fiscal 2020 now anticipates net sales to be split approximately 40%-60%, with adjusted earnings to be split approximately 35%-65%, respectively. The back-end loaded nature of our guidance is driven in part by the shift in several production days at our MasterCraft brand from the second quarter to the second half of the year due to the GM strike impact, the increased contribution of Aviara as we roll out Aviara 36 and Aviara 40 models in our third and fourth quarters, as well as the planned pullback in wholesale production across all brands in the second quarter to help support our dealers during the slowest retail quarter of the year.

In summary, we are very pleased with our start to fiscal 2020 and believe we are well positioned to execute our plan for the balance of the year.

With that, I'll turn it back to Fred for closing remarks.

--------------------------------------------------------------------------------

Frederick A. Brightbill, MasterCraft Boat Holdings, Inc. - Chairman of the Board & Interim CEO [6]

--------------------------------------------------------------------------------

Thanks, Tim. As we begin the process of finding the next leader for MasterCraft Boat Holdings, we remain bullish on the long-term prospects, both the markets we serve and the brands we own despite any short-term fluctuations. We will continue to navigate the challenges ahead, including the economic trade and political uncertainty, and we remain focused on prudently managing the company and positioning it for long-term success.

In closing, we will not stand still during this transition period. We will maintain our focus on 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 across all brands. We will continue to emphasize dealer pipeline correction, working in a disciplined, strategic manner to position the company for new growth in fiscal 2021 and beyond.

Now I'd like to turn it over to the operator for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Brett Andress of KeyBanc Capital Markets.

--------------------------------------------------------------------------------

Brett Richard Andress, KeyBanc Capital Markets Inc., Research Division - Associate VP [2]

--------------------------------------------------------------------------------

So I guess, just help me out with your earlier comments around the market share data, and I think not putting too much focus on that. I guess specifically, how did your retail track during the quarter? So any color on the cadence there? And then also, if you have any comments on October or any of the recent boat shows?

--------------------------------------------------------------------------------

Timothy M. Oxley, MasterCraft Boat Holdings, Inc. - VP, CFO, Treasurer & Secretary [3]

--------------------------------------------------------------------------------

Yes, I'll start out. Our market share, we think it's important to look at it on a trailing 12 basis. All states reporting in for June, we were up almost 50 basis points in MasterCraft. We had market share improvement at Crest, and I think NauticStar was flattish. Our Q1 retail for MasterCraft was up over the highest Q1 retail in the company's history. So we're very pleased with our retail results in Q1. We've maintained a healthy pipeline, as we mentioned in our remarks, at NauticStar, and Crest was up as well. As far as boat show results go, George, why don't you cover the...

--------------------------------------------------------------------------------

George Steinbarger, MasterCraft Boat Holdings, Inc. - VP of Business Development [4]

--------------------------------------------------------------------------------

Brett, it's George. Yes. So some of these fall shows are much more geared towards some of the larger products, as you know. So certainly, more meaningful for Aviara and now NauticStar as we continue our product development initiatives there. So great results. I'll start with NauticStar. Year-over-year performance at both the Fort Lauderdale International Boat Show, which just happened this week as well as the Tampa Boat show, which, as you know, was delayed this year due to weather. But strong improvement there, not only from a unit growth perspective at those shows, but also seeing a higher mix of the larger products. So our 32, which we launched last year, this was the first time that boat was shown at both of those shows and performed very well as well as the new 251 Hybrid that we introduced last year. So very pleased with that. As we mentioned in the prepared remarks, starting to see the impact of those larger models flowing through, especially at these early shows. So very pleased there.

On the Aviara front, I couldn't be more happy with the way that, that product is being received, from both consumers and MarineMax. We sold several units at the Fort Lauderdale Boat Show, and actually, we've retailed, sold an Aviara at every boat show, we've shown it at this season. So it's being extremely well received. Obviously, the 32 has had the longest time in the market, but the 36 was well received, and we're excited for what that model is going to do for the brand, and we're excited to launch the AV40 at the Miami Show in February.

--------------------------------------------------------------------------------

Brett Richard Andress, KeyBanc Capital Markets Inc., Research Division - Associate VP [5]

--------------------------------------------------------------------------------

Understood. And sorry if I missed this, but how many Aviara units did you ship in the quarter? And then if I look at MasterCraft ASPs ex Aviara, any color on what that would have been on a comparable basis?

--------------------------------------------------------------------------------

George Steinbarger, MasterCraft Boat Holdings, Inc. - VP of Business Development [6]

--------------------------------------------------------------------------------

Yes. So Brad, as you know -- this is George. We're not providing a breakout of units for the MasterCraft segment. So -- but what I will say is our MasterCraft brand ASPs were up year-over-year. So that was driven in part by some of the higher uptake that we're seeing and some of the newer models that we introduced late last year, which continued to be well received in the marketplace, like the X24 as an example. So very pleased with our product portfolio and the innovation we continue to drive. Consumers continue to uptake options and that's driving up ASPs at our MasterCraft brand. So we're very encouraged by that.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

Our next question comes from Michael Swartz of SunTrust.

--------------------------------------------------------------------------------

Michael Arlington Swartz, SunTrust Robinson Humphrey, Inc., Research Division - Senior Analyst [8]

--------------------------------------------------------------------------------

Maybe just help us with a little bit of color on the, I guess, the auto strike and how that's impacting timing this year. Were there any costs related to that in the quarter? Are there any costs embedded in your guidance? Just try to help us out a little bit there.

--------------------------------------------------------------------------------

George Steinbarger, MasterCraft Boat Holdings, Inc. - VP of Business Development [9]

--------------------------------------------------------------------------------

Yes, Mike, this is George. I'm happy to provide some more color. Yes. So as we stated, we've had a very long-term relationship with Ilmor. They've been our exclusive inboard marine supplier for several years now. And as you may or may not know, that's a Roger Penske-backed business, so there' a long-tenured relationship between that entity and GM. So one, Ilmor was appropriately stocked from an inventory perspective, which allowed us to have 0 impact to our production in the first quarter; and secondly, just given their relationship, we were one of the first ones to start getting engines once the GM strike ended. So we have 0 financial impact to our full year results as a result of the GM strike other than just from a timing perspective, we are giving Ilmor and the GM supply chain a couple of days in our second quarter to kind of get everything back flowing again. But that's really more of a timing shift, and we'll have minimal or 0 impact from a financial perspective for the year.

--------------------------------------------------------------------------------

Michael Arlington Swartz, SunTrust Robinson Humphrey, Inc., Research Division - Senior Analyst [10]

--------------------------------------------------------------------------------

Okay, great. And then just with your market share commentary, George, I think you had mentioned kind of disregard your near-term market share trends. Just be choppy, I guess, with some of the things going on in the market. I guess I'm just trying to understand, is the implication that your competitors are being more maybe irrational or aggressive on pricing? Or is it maybe that your inventory levels, are your -- you assume your inventory levels are in better shape than the rest of the market? I'm just trying to figure if there's anything to read through from your comments there?

--------------------------------------------------------------------------------

George Steinbarger, MasterCraft Boat Holdings, Inc. - VP of Business Development [11]

--------------------------------------------------------------------------------

No, I think what we're trying to impress upon investors is we're going to go about clearing our channel maybe differently than other competitors are. As other companies have reported, we're certainly seeing an elevated competitive environment out in the retail landscape. So we anticipated that. But we're very strategic with how we deploy our retail rebates, and it's not just going to be an environment where we throw retail rebates at it. We're also, we believe, prudently pulling back wholesale production as evidenced by the pullback in units at MasterCraft and NauticStar. So it's really just -- it's how do you accomplish the goal? We're taking a more long-term profitable view in how do we accomplish that to get our inventories where we want them to be by the end of the year, but in the short term, other competitors may try to attack it more aggressively early on in the year versus our approach, which is to try to consistently bring it down throughout the year and try to keep our margins as high as possible. So given that dynamic, you may see some fluctuations in the near term.

The SSI data certainly is less meaningful in these next couple of quarters, given the lower percentage of annual retail that they represent. And with some of the -- this most recent data being only around 24, 25 states, without having all states reporting, the data just can look suspect. So we just caution people to take a more long-term view on the market share, but not trying to imply anything other than you will see some fluctuations here as competitors go about it differently.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

Our next question comes from Joe Altobello of Raymond James.

--------------------------------------------------------------------------------

Joseph Nicholas Altobello, Raymond James & Associates, Inc., Research Division - MD & Senior Analyst [13]

--------------------------------------------------------------------------------

Just a follow-up on that last point you made, George, regarding promotional activity. It seemed to be pretty heavy in August, September. Are you seeing that continue into October? And is that primarily saltwater fish? Or is it also on the ski, wake side as well?

--------------------------------------------------------------------------------

George Steinbarger, MasterCraft Boat Holdings, Inc. - VP of Business Development [14]

--------------------------------------------------------------------------------

Yes, Joe, this is George. I'll say that it's been pretty consistent, starting even as early as July. We've seen heavy competitor discounting, and I would say, it's been pretty much across all segments. Certainly, all segments that we're in today. Pontoon, as we mentioned in our remarks, is a segment that's been pretty impacted by inventories, and we've seen competitor discounting there. We continue to see it in the saltwater fishing segment. Certainly, a lot in the smaller portion of the segment, that 24-foot-and-smaller, given the difficulties and challenges that segment is having there. And then also in -- certainly in ski, wake. But I wouldn't say it's any one segment more than the other. It's been pretty consistent and broad, and we have seen that continue here into our second quarter, which is -- given that this is the slowest retail quarter of the year for retail demand, that's not to be unexpected, but we're managing through that. We have a good sense of our plan of attack, and we feel appropriately that we've got the right discounts and plan in place to continue to improve our inventory situation and put us in a position for renewed growth in 2021.

--------------------------------------------------------------------------------

Timothy M. Oxley, MasterCraft Boat Holdings, Inc. - VP, CFO, Treasurer & Secretary [15]

--------------------------------------------------------------------------------

And I would add, Joe, this is Tim, that, that was embedded in our budget, and embedded in our -- certainly in our guidance as well.

--------------------------------------------------------------------------------

Joseph Nicholas Altobello, Raymond James & Associates, Inc., Research Division - MD & Senior Analyst [16]

--------------------------------------------------------------------------------

Got it. Okay. And then secondly, in terms of the outlook for this year, obviously, no change. Are you guys still assuming that dealers take turns up next year?

--------------------------------------------------------------------------------

George Steinbarger, MasterCraft Boat Holdings, Inc. - VP of Business Development [17]

--------------------------------------------------------------------------------

Yes, Joe, this is George. So yes, I think our view on the next 9 months isn't very different than our view last quarter when we reported full year results. So our experience tells us that dealers and consumers alike will continue to approach the next 9 months conservatively, dealers, given the elevated inventory levels, but from the consumers, with the upcoming election in particular, we think there's a strong chance that dealers and consumers both take a pause. And so given that, we think there will be continued conservatism on behalf of the dealers to ensure, once they've -- the mentality is once they've kind of entered an environment where they've got excess dealer inventory, that can take a little while to clear that mental hurdle. So yes, our view is consistent from what we said last earnings call, and that's reflective in our -- maintaining our outlook for the year, as we still got about 3/4 of the year to get through.

--------------------------------------------------------------------------------

Timothy M. Oxley, MasterCraft Boat Holdings, Inc. - VP, CFO, Treasurer & Secretary [18]

--------------------------------------------------------------------------------

And Joe, I'd like to add. This is Tim. That because we're a flexible manufacturing, we'd love to be wrong here, and have some pent-up demand occur in the spring and we can take advantage of that pent-up retail demand if it occurs.

--------------------------------------------------------------------------------

Joseph Nicholas Altobello, Raymond James & Associates, Inc., Research Division - MD & Senior Analyst [19]

--------------------------------------------------------------------------------

Got it. Okay. And if I could just squeeze in one more. Is there a timetable for a new CEO? Is that a 3-month process? Or a 6-month process?

--------------------------------------------------------------------------------

Frederick A. Brightbill, MasterCraft Boat Holdings, Inc. - Chairman of the Board & Interim CEO [20]

--------------------------------------------------------------------------------

Joe, this is Fred Brightbill. Let me answer that question. There's a CEO succession policy that was implemented by the Board who's been in place. And Search Committee is going to be formed. The next steps include retaining an executive search consultant, creating a profile, establishing the criteria, interviewing candidates, presenting them to -- the finalists to the Board. And I've been associated with MasterCraft and with the Board since 2009. I brought Terry to MasterCraft. So he was the right person at that time, and at this point, we have the luxury of having me be able to step in here, being familiar with the team, having long-standing relationships and knowledge of the company and the industry, and we're going to be very careful to make absolutely certain that we selected the best candidate that's possible to lead this company forward and is the best match for the exact needs of the company at this point in time.

Terry was the perfect match at the time he entered, and we'll make sure we have the same thing this time around. In terms of timing, we're going to move diligently forward on the process. If we're fortunate to find the exact right person, it will be quick. If not, we'll take as long as we need to make sure it's right. We're not just going to be on a forced march in an accelerated time frame.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

Our next question comes from Craig Kennison of Baird.

--------------------------------------------------------------------------------

Craig R. Kennison, Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst [22]

--------------------------------------------------------------------------------

Well, maybe I'll follow-up on the CEO search question. But in NauticStar and Crest, they were acquired under this premise that the team had some operational expertise to bring to bear on those acquisitions. Do you feel like you still have that with Terry gone, first of all? And second, does this put any M&A on hold until you identify the next candidate?

--------------------------------------------------------------------------------

Frederick A. Brightbill, MasterCraft Boat Holdings, Inc. - Chairman of the Board & Interim CEO [23]

--------------------------------------------------------------------------------

Let me take the last question first because that's the simplest. Our focus now is on organic growth and improving the businesses we have. And so our heads are down. We have good plans in place, and those plans are going to continue to evolve as we see additional opportunities. But I do not expect any M&A in the near future. As we see the results we're looking for in those businesses, and as we have a better insight into the economic climate, we'll make that decision about any inorganic growth.

With regard to operating expertise, remember that Terry's mantra was operational excellence and performance is about processing, about the organization, not about any one individual, and I think that's a legacy that's been left. We have a very capable team that he brought in and trained, and those people are performing very well. So with respect to the concern about operational expertise and the loss, believe we're in good shape there. Having said that, rest assured that we will thoroughly examine every element of the business in our CEO selection and recruiting process and make sure that we have the right skill set and/or that we're supplementing that skill set as necessary throughout the senior leadership team.

--------------------------------------------------------------------------------

Craig R. Kennison, Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst [24]

--------------------------------------------------------------------------------

And then with respect to dealer inventory, I'm trying to frame the progress you've made to reduce inventory in the channel. It sounds like -- through your words, it sounds like you've made progress. But the stock reflects a lot of skepticism, frankly, about earnings expectations for next year, trading around 7x earnings. So I'm wondering if you could put some numbers around the progress you've made on inventory to get us confident that, that destocking process is well underway.

--------------------------------------------------------------------------------

Frederick A. Brightbill, MasterCraft Boat Holdings, Inc. - Chairman of the Board & Interim CEO [25]

--------------------------------------------------------------------------------

This is Fred. The other fellows here will fill in further, but once again, just to reiterate, out of what we estimated to be the level we would prefer not to have, we've taken at least half of that out. So we've made really good progress in the initial part of the year. And then the notion is, we'll continue to make progress as we go along, but big progress ends up in the months where there's higher sales activity. So it's really looking into the third quarter when the next big bite will come out to put ourselves exactly where we want to be for the heavy selling season. So that's what we expected. We did not expect to, in the first quarter, be able to put ourselves 100% where we wanted to be. But once again, there are marginal amounts in the overall picture. Gentlemen?

--------------------------------------------------------------------------------

George Steinbarger, MasterCraft Boat Holdings, Inc. - VP of Business Development [26]

--------------------------------------------------------------------------------

Yes, Craig, it's George. As you know, we look at dealer inventory turns, it's the, by far, the most important metric that we track, and we do that across all of our brands. And as Fred mentioned, I mean, we feel very good about the progress we've made. We've seen sequential improvements at MasterCraft and Crest. Obviously, that's part of pulling back wholesale, but also the strategic use of the retail rebates and remaining competitive. But we're not there. We still have work to do. We tried to make that very clear, but we're going to be very strategic there. But we are on plan for where we wanted to be in terms of getting those turns back to appropriate levels.

We've made fantastic progress at MasterCraft, good progress at Crest and with NauticStar, we've been able to maintain our turns, which, as we commented at the end of last year, that those turns were actually the healthiest of all 3 of the brands. So we don't actually provide our turns, as you know, but hopefully, that's helpful and just framing that we are very encouraged by the progress we saw and see no reason that we can't continue to make progress on that front and be where we want to be to set us up for renewed growth next year.

--------------------------------------------------------------------------------

Craig R. Kennison, Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst [27]

--------------------------------------------------------------------------------

And finally, on Aviara. I'm curious, now that you've sold units at retail, have you learned anything about the customer profile? To what extent does that customer match what you expected? Or is that customer different than who you expected to purchase that boat?

--------------------------------------------------------------------------------

George Steinbarger, MasterCraft Boat Holdings, Inc. - VP of Business Development [28]

--------------------------------------------------------------------------------

Yes, Craig, this is George. Yes, I would say that, overall, it's -- the consumer, the demographic that we had targeted with that product, specifically building a luxury bowrider within that 30- to 40-foot segment, is exactly what we've seen from a consumer perspective. That's, in large part, why we partnered with the MarineMax because that is their core customer, and knew that they would be the best set up from day 1 to be able to attract that customer into their showrooms and really sell the competitive features and value proposition of the brand.

So I will say, just given the concentration of some of the early shows, along more of that coastline, we have seen a higher percentage of outboards sold at retail, but we expect that to more normalize to outboard and stern drive as we get into the more boat show season early next year, where you've got a better mix of inland and outboard shows. We think the stern drive is going to be a great product for a lot of those inland lakes, those large-bodied inland lakes. And so once we get that product out there and show that, we fully expect that side of the engine selection to increase in mix. But other than that, I would say, it's really hit the mark for what we expected from the brand and are very pleased with the retail performance to date.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from Tim Conder of Wells Fargo.

--------------------------------------------------------------------------------

Marc J. Torrente, Wells Fargo Securities, LLC, Research Division - Associate Analyst [30]

--------------------------------------------------------------------------------

This is actually Marc Torrente on for Tim. Just a few we had. You had gross margin improvement, both in the core MasterCraft segment and then NauticStar despite the lower volumes. Could you maybe quantify some of the puts and takes here? You called out lower discounts year-over-year on the MasterCraft side?

--------------------------------------------------------------------------------

Timothy M. Oxley, MasterCraft Boat Holdings, Inc. - VP, CFO, Treasurer & Secretary [31]

--------------------------------------------------------------------------------

Yes, the -- certainly, we had a lot more international discounts at the MasterCraft side in Q1 of last year. That was probably about $0.02 -- worth about $0.02, the improvement year-over-year there. The headwind that we're having certainly is overhead absorption. When you look at a decrease in our volume, but Aviara was instrumental in assisting us there. So that -- that's one of the reasons that we've -- that we're diversified in really 4 different segments now. So that's certainly a headwind. You know the other headwind that you experienced when you introduce a new larger product like this is certainly some labor variances. Again, pleased to note that we have overcome these headwinds to show the year-over-year improvement in gross profit margin at MasterCraft. And overhead absorption, frankly, is a headwind at both NauticStar and Crest.

--------------------------------------------------------------------------------

George Steinbarger, MasterCraft Boat Holdings, Inc. - VP of Business Development [32]

--------------------------------------------------------------------------------

Yes, Marc, this is George. I would also add, we did see, as I mentioned, we did see an increase year-over-year in ASPs at our MasterCraft brand, driven by the acceptance of our new products, our model 2-year 2020 product and some of the innovation that we brought to market there has helped drive that. We've seen -- we saw a good mix in our first quarter at our MasterCraft brands. We expect that mix to kind of mix down in the second quarter as the new NXTs that we released and we redesigned both the NXT20 and the 22 that we launched to start the model year, we expect those to continue to gain as an overall percentage of our production. So that will kind of mix back down a little bit in Q2. But in Q1, we did see favorable mix with some of our larger, higher priced products. So those -- that factor contributed to what Tim described on the lack of Canadian tariff and the overhead absorption are kind of the puts and takes that allowed us to, as we think pretty impressively, improved our margins there. And then at NauticStar, we just point out that where we are starting to see the benefits of those operational improvements that we've been working on since we acquired it and certainly seeing the benefit from seeing some larger product flow through the facility there as well. So all of those factors helped to drive the margins higher at NauticStar year-over-year.

--------------------------------------------------------------------------------

Timothy M. Oxley, MasterCraft Boat Holdings, Inc. - VP, CFO, Treasurer & Secretary [33]

--------------------------------------------------------------------------------

Yes, one thing I want to kind of reiterate in this retail selling environment, where competitors are discounting the boats, and in some cases, pretty heavily, I think it makes it even more impressive we deliver on the margin that we have.

--------------------------------------------------------------------------------

Marc J. Torrente, Wells Fargo Securities, LLC, Research Division - Associate Analyst [34]

--------------------------------------------------------------------------------

Okay. And then just to clarify on the expectations for Aviara margin contribution. Did that change at all from your prior outlook?

--------------------------------------------------------------------------------

George Steinbarger, MasterCraft Boat Holdings, Inc. - VP of Business Development [35]

--------------------------------------------------------------------------------

No, as we previously -- this is George, Marc. As we've previously discussed, we expect Aviara to be slightly accretive to our overall MasterCraft brand margins. As we've stated, there will be a ramp-up period in terms of -- as we launch the -- we launched the AV32, there's some production inefficiencies as you get the line accustomed to running that boat through. We've made significant improvement there. But we'll experience that with the AV36, which just started production this quarter, and we'll see it again with the AV40 when we start production of that model in our second half. So as we get to full run rate across all 3 of those models beginning in 2021, that's where we would expect to see that full year run rate up higher margin. But we are seeing improvements and we're very pleased with the operational progress we've made on the Aviara line and integrating that into our MasterCraft facility.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

Our next question comes from Eric Wold of B. Riley.

--------------------------------------------------------------------------------

Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [37]

--------------------------------------------------------------------------------

A few questions. I guess first of all, on Aviara, how much inventory, how many units in general are you seeing the MarineMax dealers take on site? And how is that kind of varied by geography and mix?

--------------------------------------------------------------------------------

George Steinbarger, MasterCraft Boat Holdings, Inc. - VP of Business Development [38]

--------------------------------------------------------------------------------

Eric, it's George. So we obviously just started production of the 32 this quarter. MarineMax has 60, 65-plus locations. As we've indicated before, we expect around 1/3 of those to be "stocking" locations, although the brand will be available at all of their locations. So we're -- it's a good problem, but we're actually struggling to keep inventory in stock at the location. So they've been retailing through very well, which we're very pleased with, but we're very focused on getting inventory into those stocking dealers.

From a geography standpoint, as I mentioned earlier, we are seeing a higher mix towards the coastal areas just given some of the early season boat shows and MarineMax's desire to have models available for shows like Annapolis, Norwalk, Fort Lauderdale, obviously. So that's directionally what we're seeing. But we're still early on in the production and shipping and getting those out to all of the MarineMax dealers that want to have a stocking unit, and again, high-class problem, but we're working extremely hard, and the team is doing a great job of getting those models out. But we're going to be very focused on -- it's a new brand, it's a luxury brand. We're going to be very focused on quality, making sure the fit and finish is where it needs to be to really hit the mark with that high-end customer. So we're going to be much more focused on making sure the product that leaves here, leaves here in the best condition possible. But very pleased with the take rate that MarineMax has and how those are retailing through.

--------------------------------------------------------------------------------

Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [39]

--------------------------------------------------------------------------------

Okay. And then on the -- on MasterCraft, you noted that ASPs were higher again, excluding Aviara from the mix. I guess in somewhat of a cautious environment, how should we think about your desire to continue to push ASPs higher or possibly moderate that growth? Any sense from dealers to want to take a different model or kind of price mix in this environment?

And then kind of the last kind of sub-question on that, how much of that ASP movement is going to push versus pull in a sense that it kind of consumers are taking what's on the floor versus them kind of -- getting a push to them versus them kind of pulling it higher themselves by choosing the option to kind of moving it proactively higher?

--------------------------------------------------------------------------------

Timothy M. Oxley, MasterCraft Boat Holdings, Inc. - VP, CFO, Treasurer & Secretary [40]

--------------------------------------------------------------------------------

Yes. As you know -- this is Tim, we've been judicious in our price increases and remained so over the last several years. So it's primarily a higher option uptake and that's very encouraging because it tells us that, that high-end consumer is still out there, that the malaise we saw in the industry was largely driven by the weather. And so the economy is in good shape. And we are a pull system rather than push. So that's the reason we have these options and somebody checks the box. It's better for them.

--------------------------------------------------------------------------------

George Steinbarger, MasterCraft Boat Holdings, Inc. - VP of Business Development [41]

--------------------------------------------------------------------------------

Yes, this is George, Eric. What I would add, I think given the pent-up demand that we saw this first quarter given the weather delays last summer, I think what we saw was a higher mix of custom or retail sold boats, which tend to have a higher option uptake. So we maybe saw a little bit of that fall into our first quarter, which normally may have hit more in our fourth quarter of last year. So that was really, to Tim's point, it was really more of a pull. Customers -- the customer that waited till July to get their custom-order boat, that certainly benefited the quarter.

As we move forward, as I mentioned earlier, we'll see that mix come back down as dealers take more, what we call, stocking boats, which are more lightly contented as well as you see a greater mix impact from some of the new products that we've introduced, especially around the NXT20 and the 22. So I think there was a little bit of uplift there in that Q1 due to those factors. But much more pull than us pushing price, which we've been very judicious about.

--------------------------------------------------------------------------------

Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [42]

--------------------------------------------------------------------------------

Okay. And final question. As you kind of work production levels lower, any risk on -- were you seeing risk on retaining the workforce, especially some of the higher value guys in the line? And your thoughts on wage pressures heading into next year?

--------------------------------------------------------------------------------

George Steinbarger, MasterCraft Boat Holdings, Inc. - VP of Business Development [43]

--------------------------------------------------------------------------------

Yes, Eric, this is George. So our -- the several days that we're pushing out of our production in our second quarter are pretty minimal, and those have been communicated to our workforce and are appropriately timed. So we don't anticipate any drop-off in employee workforce due to that. And then it's really just, like I said, several days in our second quarter, and the rest is just our normal holiday shutdowns, which we have every year. So we're not taking off an excessive amount of production days out of Q2 that we believe would have any negative impact from a workforce perspective. So we don't have any risk around that at all -- we don't believe we have any risk around that.

--------------------------------------------------------------------------------

Timothy M. Oxley, MasterCraft Boat Holdings, Inc. - VP, CFO, Treasurer & Secretary [44]

--------------------------------------------------------------------------------

Eric, I would add that, when we do these -- when we take some days out, we do it in conjunction with a holiday because it's very well received by employees. And so for instance, we'll be shut down Thanksgiving week as an example of doing it in conjunction with a holiday.

--------------------------------------------------------------------------------

Operator [45]

--------------------------------------------------------------------------------

There are no further questions. I'd like to turn the call back over to Fred Brightbill for any closing remarks.

--------------------------------------------------------------------------------

Frederick A. Brightbill, MasterCraft Boat Holdings, Inc. - Chairman of the Board & Interim CEO [46]

--------------------------------------------------------------------------------

Well, thank you again for joining us. We look forward to updating you on our progress in the second quarter results in February.

--------------------------------------------------------------------------------

George Steinbarger, MasterCraft Boat Holdings, Inc. - VP of Business Development [47]

--------------------------------------------------------------------------------

Thanks, everyone.

--------------------------------------------------------------------------------

Timothy M. Oxley, MasterCraft Boat Holdings, Inc. - VP, CFO, Treasurer & Secretary [48]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Operator [49]

--------------------------------------------------------------------------------

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