Good day, ladies and gentlemen, and welcome to the Q2 Fiscal 2019 MasterCraft Boat Holdings, Inc. Earnings Conference Call. [Operator Instructions] As a reminder, today’s conference is being recorded. I would now like to turn the call over the Mr. Tim Oxley, Chief Financial Officer. Sir, please begin.

Thank you, operator and welcome everyone. Today’s call is being webcast live and will also be archived in our website for future listening. Joining me on today’s call is Terry McNew, MasterCraft Boat Holdings’ President and Chief Executive Officer. Our agenda includes the strategic overview by Terry, followed by my analysis of the financials and Terry will discuss our updated expectations for fiscal 2019 followed by the Q&A session. Before we begin, we would like to remind participants that the information contained in this call is current only as of today, February 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 are subject to the Safe Harbor disclaimer in today’s press release. Additionally, on this conference call, we will discuss non-GAAP measures that include or exclude special or one-time items not indicative of our ongoing operations. For each non-GAAP measure, we will also provide the most directly comparable GAAP measure in our fiscal 2019 second quarter earnings release, which 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 Investor section of our website. With that, I will turn the call over to Terry.

Thanks, Tim. I would also like to thank everyone for joining us today. As you saw from today’s press release, during our fiscal second quarter, we continued our track record of delivering record-setting levels of net sales, adjusted EBITDA and adjusted net income, reflecting the successful execution of our growth strategy. For the quarter, net sales increased 55% to $121.5 million. Adjusted EBITDA increased 35.6% to $18.6 million and fully diluted adjusted net income per share grew 45.5% to $0.64 per share. We couldn’t be more pleased with the performance of our employees during the quarter across all of our brands, and we’d like to especially welcome and congratulate the Crest employees, whose performance during the quarter exceeded our already lofty expectations for the brand in their first quarter under our ownership. At MasterCraft, we continue to see strong momentum in the performance of sport boat segment from a retail perspective, with internal registration up significantly year-over-year, which is driving our wholesale demand. Our dealer inventory turns are at optimal level of entering the boat show season, and we’re already seeing growth in orders from some of the early shows. While still early, we are encouraged by what we are seeing on the retail front at MasterCraft heading into the heavy selling season. We attribute this strong retail performance to our best-in-class product development, expanding dealer network and continued U.S. economic growth. From a new model perspective, the introductions of our X24 and X22 have been extremely well received. Launched in September of 2018, the X22 uses the industry’s most advanced wake-making technology to surf up perfect, customizable waves for everyone on the boat. Launched in June of 2018, the X24 utilizes a new surf-specific haul design, and when equipped with up to 4,300 pounds of ballast, and the Gen…

Thanks, Terry. From a top line perspective, net sales for the second quarter ended December 30, 2018 rose 55% or $43.1 million to $121.5 million compared to $78.4 million for the year ago second quarter. The inclusion of Crest represented $25.9 million or 33% of the overall increase. MasterCraft’s net sales grew $18.2 million or 31.2%, driven by a favorable product mix, price increases and an increase in unit volume, partially due to an extra week of production in the fiscal second quarter, given the timing of the planned holiday shutdown compared to the prior year shutdown. This increase in net sales was partially mitigated by increased retail rebate expense due to the timing impact from the new revenue recognition standard, as well as by higher sales discounts given to Canadian, European dealers impacted by the retaliatory import tariffs. As Terry mentioned in his remarks, we made the strategic decision to partially offset the import tariffs for our Canadian and European dealers, which we believe provides us with a competitive advantage heading into the boat show season. NauticStar’s net sales decreased by 5% or $1 million due to lower wholesale units, driven by the scheduled pullback in production as NauticStar’s facility is retrofitted to handle new larger boat models being introduced throughout calendar year 2019, offset by an increase in average selling prices, driven by a favorable model mix and price increases. Second quarter gross profit increased $7.1 million or 35.8% to $27.1 million compared to $19.9 million for the prior year period. The inclusion of Crest accounted for $4.5 million of the increase, while MasterCraft contributed $3.2 million to the increase in gross profit. NauticStar’s gross profits declined $0.5 million. On a consolidated basis, gross margin decreased to 22.3% for the fiscal second quarter compared to 25.4% for the…

Thanks, Tim. Looking ahead to the second half of fiscal 2019 and beyond, we continue to expect strong top line and bottom line growth along with record levels of cash flow generation. These will be driven by the Crest acquisition, continued strong demand for our core Mastercraft products, healthy dealer inventory levels across all our segments, product development initiatives at NauticStar and the realization of operational improvement initiatives at NauticStar and Crest. We believe we are executing our growth strategy on all fronts, and coupled with the continued strong economy, we remain well positioned to drive sustainable profitable growth going forward. For the full fiscal year-end June 30, 2019, we are revising our previously provided guidance given expected higher contribution from our Crest brand. On a fully consolidated basis, we expect net sales percentage growth to be up in the low 40% range. Adjusted EBITDA margins are expected to be in the mid- to high-16% range, driven by the higher net sales contribution from Crest, which is dilutive to margins. Adjusted EPS percentage growth is expected to be in the low-30% range. For the fiscal third quarter ending in March, net sales percentage growth is expected to be in the low-30% range, reflecting lower growth at Mastercraft compared to our fiscal second quarter due to one less production week, given the timing of our fiscal 2019 planned holiday shutdown compared to fiscal 2018. This will be partially offset by a higher net sales contribution margin from – or contribution from Crest. Adjusted EBITDA margins will be in the 16% range driven by the dilutive effect of Crest. Adjusted EPS percentage growth is expected to be in the high-teens percentage range. Now I’d like to turn it over to the operator for questions.

Thank you. [Operator Instructions] And our first question comes from the line of Joe Altobello of Raymond James. Your line is now open.

Thanks. Hey, guys. Good afternoon. Just a couple of questions. And obviously I wanted to focus in here on the margins this quarter. You guys noted a number of margin pressures in terms of supporting your Canadian, European dealers, the timing of revenue recognition, accounting, etcetera, which one of those I guess was the biggest contributor and which one of those was the most surprising to you in the quarter?

The biggest contributor is the tariff support, followed by revenue recognition standard changes, Joe and then other changes that we are pointing out in our MD&A.

Okay. And were those larger than you anticipated coming into the quarter?

Perhaps. I know that some of the dealers took advantage of trying to get some boats on the ground by 12/31, so maybe a little bit larger than we were expecting, a lot more timing than it was anything, maybe some of it got pulled in from Q3. But on a full year basis, not surprising.

Okay. And I get that Crest is dilutive to margins, and I see, obviously, you raised your sales guidance this afternoon, but you lowered your EPS growth guidance. Is there something else going on beyond the overperformance at Crest?

No Joe, actually Crest does great. And as we said in my prepared comments, NauticStar gross margins were up 460 basis points in Q2. As I mentioned in the last quarter’s call, we expect that to increase in Q3 and in Q4. No, as they change, and it’s a pretty significant change, mixing and changing to larger products, we have yet one more product released later this fiscal year at NauticStar, but we continue to do well at MasterCraft. So really, I think, all things are good. Probably just a little bit less because of the additional anticipated contribution from Crest on a net sales basis. They’re performing extremely well.

Okay thank you guys.

And our next question comes from the line of Craig Kennison from Baird. Your line is now open.

Hi good afternoon. Thanks for taking my question. Just to follow up on what Joe had asked. Again, your EPS growth guidance is just a little bit lower. Would you say it’s the tariff issue that’s incremental? And maybe an unforeseen, costs as of last quarter?

We the tariff cost and contribution is, certainly the biggest drag and headwind, as I mentioned in the prepared comments. So, I think it’s small, but we’ve extended that a bit longer than we had anticipated, but that’s probably it. Just revenue recognition standard is known and predictable, and there’s just a host of other small items. But probably, just the incremental extension through boat shows for the Canadian and European tariffs.

Thanks. And then shifting to Aviara, the MarineMax win is just a major endorsement of that product line. Is that an exclusive relationship? Or might you eventually distribute through other dealers? Or could you?

Well, right now and for the foreseeable future, really, it’s going to be MarineMax. There is a possibility to look at other dealers, but I don’t anticipate that anytime soon. They are absolutely a premier dealer. As you know, Tim and I are at Brunswick for a number of years. We’ve got a long relationship with them. And this is an [open rec tape-out], and they are absolutely the best dealer to represent us with this. They’re equally as excited about it. And as I mentioned, it builds up white space in their portfolio, really encourage everybody to come by the slips at Pier 8 during the show to see it, the testing and it’s been done by third-party riders, and some of our dealers who have seen it just been off the charts, we think it’s going to be an exceptionally well-received product.

And from a modeling perspective, how would you expect shipments for that product line to ramp throughout the year? And what would it contribute in terms of volume and revenue?

As we’ve mentioned before, we will not start to book revenue until July, that’s at the beginning of our 2020 model year, and we’re just not providing guidance on 2020 yet. We will fill you guys in on future calls.

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

Thank you, good afternoon couple of questions. I guess, one, on the tariffs, can you give us a sense of what the year-to-date margin impacts from those tariffs have been?

It’s in the $0.09 per share range on a year-to-date basis.

Okay. And then on Aviara, what is your plan, I guess, the initial capacity production capacity for that? And is there kind of a breakeven level you can point to in terms of number of units to get to for that brand?

Right. So, we’ve got available capacity here. As I mentioned in the prepared remarks, and as you guys know, IndustryWeek Magazine 2 years ago recognized us as the best manufacturer in North America. So, we’ve got the capacity. We’ve got the know-how. Remember, we used to build Hydra-Sports here. We’ve built product up to 42 feet, so we have that capability. We will release 3 models over the course of this calendar year. I’ve mentioned that before. The first one is our 32, we offered in an outboard and a sterndrive. So, this will not impact capacity growth – future growth for MasterCraft at all. We’ve got plenty of capacity to do that. We think it’s, as I mentioned, it’s about $10 million in total investment, G&A and CapEx, to do this. The payback is going to be within the first year.

Okay. And then lastly on Crest, now you’ve got under your belt for a little over a quarter, update us on where you are in terms of driving more production out of that facility and where do you think you could get it to over the next 12 months, both in terms of the increased production and possibly margin expansion?

Yes. Great people there. They’re taking to our processes in engineering and manufacturing and working capital material control, in particular, extremely well. Keep in mind, aluminum boats, obviously, are fabricated. You don’t need the tooling. So, they are able to change and they are changing. They’re probably 3 quarters of the way through the initiatives that we’ve laid out for material control, and we are putting in synchronous flow manufacturing in their assembly process, which is already showing some benefits. That will have the effect within this second half of the year of increasing capacity and throughput and improving margins. So very short in process time. And that aluminum boat Company fabrication in process is probably 2.5 to 3 days, really, really quick. So, no problem. They’re going to have plenty of capacity, they’re growing, they’re taking market share, we’re very, very positive about Crest.

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

Hi good afternoon guys. Just wanted to touch on Aviara quickly, I don’t know how much you’re going to give us, Terry, before you laid out maybe your 2020 view. But I guess, just in terms of could you frame the size of how big of an opportunity do you think Aviara is? Maybe how big that actual unit market is in unit volume? And maybe what you think your fair share would be there over a couple years?

Well, we’ve mentioned before we’ll release 3 new models this calendar year, but other 2 models will be released at the Fort Lauderdale boat show, their 3 models with 2 different platforms, both outboard and sterndrive for each of the models from 30 feet to 40 feet. It’s not only going to fill light space for our MasterCraft Boat Holdings customers who tend to do consumer insight studies. We know that they tend to leave the brand and their boating preferences change as they become empty nesters. They will clearly stay into this brand. We also think it’s going to do well and capture market share from adjacent categories, sterndrive and outboard. Once you see the styling of the boat, and you’re able to ride it one day, the performance is exceptional. The styling is clearly European. We think it’s a home run, so we’ll give you those specific numbers and what we think the addressable market in the upcoming calls.

Okay. And just more of a technical question with regard to how to think about Aviara in 2020 and beyond? I mean, would you be including Aviara in the MasterCraft segment as you report it today? Or would you be breaking out a new kind of line item for Aviara?

No. It will be included in the MasterCraft P&L. We will not do segment reporting. There will not be a Brand President that will all report in to myself here at MasterCraft.

Okay, okay. Fantastic. And then maybe, Tim, could you just give us a sense, I know you said you had an extra, I think, production week relative to last year, which was part of the reason the core Mastercraft volumes, I think, were up like 32%, 33%. If, One, how much of that increase does that extra week add? And should we think about maybe that being pulled from the third quarter, is that how that would flow?

Exactly, Mike. When I take the effect down, it’s around $6 million for that extra week of production. MasterCraft’s net sales for the Q2 was still up 21% even when you take that out. So, I want to make sure you guys understand that MasterCraft’s growing over, above the effect of that week. And so yes, we have embedded that in our guidance for Q3 and moving to $6 million between quarters.

Got you, that’s helpful. And then, I guess, the other question on MasterCraft and with regard to tariffs. I mean, was MasterCraft the only brand or the primary brand that was impacted by the funding of the tariffs, that activity you did? I’m just kind of surprised given the 30% growth in unit volume that margins on that business weren’t a little better than it was, I mean, is there a way of looking at how much you spent during the quarter? Or and again, was most of that attributable to MasterCraft?

It is de minimis at the other 2 brands, so it is almost a 100% attributable to MasterCraft and for the quarter, it’s in the $0.06 per share range.

And our next question comes from the line of Brett Andress of KeyBanc Capital Markets.

Hi guys. This is Dan Charrow on for Brett. Thanks for taking my questions. So, I just wanted to touch on some of the core MasterCraft demand. It looks like the restated registrations data was up well in the double digits for the quarter. I know that can be variable, but can you talk about how the demand has been at retail? And which product lines have been driving that?

I want to talk about MasterCraft, first of all. Our Q1 of this fiscal year was the highest Q1 retail in the company’s history and the same thing for Q2. So that is what is driving the improved terms at MasterCraft and the demand for Mastercraft as well is in our segment has been outstanding.

Yes, for Crest, it’s good. I think, I’d characterize it this way, we’re holding share at all 3 brands increasing a bit at Crest. And as Tim said, Mastercraft in Q1 and Q2 experience the highest retail sales in the company’s history. And Crest is just doing an exceptional job. It had great 3-year double-digit growth as well. And we’re seeing NauticStar, as they shift to the larger boats, because that larger than 25-foot category center consoles is clearly growing.

Got it. Got it. That’s helpful. And touching on the core MasterCraft brand, some of the ASPs came in a bit lighter than we’ve seen recently. Was some of that just due to product mix? Can you talk about some of the dynamics within that?

Yes. We typically see that in Q2. This is a little bit darker. It’s a slower retail quarter of the year. And so, dealers would generally bring boats in a little lightly lighter contented, and we’ve also been helping with different packages with the dealers that they appropriately content their inventory and segregate into 3 or 4 different classifications. So that was understood and expected.

And don’t forget we booked the tariff support as a reduction in sales. And so, I think, that’s a pretty significant reason for the change of the net sales per unit also.

Got it, got it. Okay, that’s helpful. And one more, I may have missed this earlier, but for NauticStar, it looks like we may have underappreciated the production dynamic there. How much longer are you planning on that impacting your schedules, and should we expect a similar impact to the year-over-year unit growth going forward?

So again, as we switch to larger models, unit growth units will change, we’ll guide you on that going forward. So, they and they’re hitting to their internal plan. Q2 was up 460 basis points over Q1. Q3 will be up over Q2. Q4 will be up over Q3. So, they will get back to expected gross margin levels by the end of this fiscal year.

And in Terry’s comment, which was regarding net sales, so again once again, as they switch to larger product, they might see a decline in units, I’m not worried about that. I’m most concerned about obviously, net sales.

[Operator Instructions] Our next question comes from the line of Tim Conder of Wells Fargo Securities.

This is actually Marc Torrente on for Tim. Just a few follow-up questions for us. Last week, one of your peers called out some recent brand value brand weakness in aluminum fishing and pontoons. Just wanted to hear your take on what you’re seeing more recently across the industry, maybe more specifically, out of NXT and Crest?

Yes. We saw that comment as well, but for aluminum pontoons, Crest in particular, boat show sales are up year-to-date compared to last year, same time frame year-to-date. They’re increasing market share. Sell-through is great, we’re rationalizing the portfolio. We’re actually not seeing any negative impact at Crest at all. NXT sales are continuing to be strong, our NXT22, that is selling off the charts, and it’s been, at some point, over the last year, sold out for periods of time.

Yes. And I would point out that our NXT is not a value brand. It’s our entry-level part of the Mastercraft lineup. It comes with the same quality and warranty and everything else. And so that maybe one reason that we don’t see that extra.

Okay, great. And then on the tariff support, $0.09 year-to-date impact about how much are you expecting the back half of the year? I know you said that it’s going to drop off. And then if the tariffs are lifted, is there any pent-up demand that you would expect to start coming through?

Yes, if the tariffs are lifted, yes, we could see some pent-up demand. But the good news for us is part of our strategy of having the dealers with these tariff-free boats in their inventories, we can take advantage of the pent-up demand. There’s not enough time to produce the boats, to satisfy pent-up demand if that occurs, at least not and get it in, in this fiscal year.

Well, might I add to that, Tim. Marc, we intentionally decided to support the Canadian-European dealers, and I’ll talk about Canada in particular, to make sure they have the proper levels of inventory. In our competitive checks that we do throughout every region of the world, but I’ll talk about North America, we think we’ve got a competitive advantage. We did help offset that tariff in Canada, but our dealers have proper inventory. We don’t necessarily see that everywhere else. And so, to Tim’s point, we have products on the ground, we’re seeing strong wholesale and retail in Canada, and we know that we will be able to fulfill that demand come the boating season and the ever important Q4 April, May and June. If other manufacturers don’t have their dealers properly stocked, they may miss that season in large part.

And in regard to the quantity in the second half, it’s going to be in the $0.03 to $0.04 range. So significantly less than what it was in the first half on a per share basis.

Correct.

Okay. And then also in the international front, could you provide any more color on other major regions in terms of retail that you’re seeing, maybe Australia, Europe?

Yes, Australia continues to be strong for us. Europe with the 25% tariff we anticipated and put in our full year guidance and plans that there would be some reduction in wholesale volume. It’s actually a little bit less then, we had planned for. We’re not fully supporting that tariff. We are partially supporting dealer incentives to offset a portion of that tariff, but Europe is probably seeing the largest decline, but still, we think we’re probably stronger, stronger than most other brands in all the areas, especially in Europe.

When I was looking at the dealer inventory at the end of December, I’m seeing turns up, not only in the U.S., but in Canada and the rest of the world, which includes Europe and Australia. So, we’re very pleased with how our products positioned.

That’s a great point, Tim. Marc, I would just want to reemphasize, as you know, we watch dealer pipeline inventory every single week. We do not push product out to our dealers, we definitely want retail demand at the end of Q2, the model year, the first half, global retail, was up in the high 20%.

Also, important to note, the $0.03 per share, the $0.03 to $0.04 I mentioned earlier has been contemplated in our guidance.

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

Thank you, operator. And once again, thanks for everyone for joining us this afternoon. Across the organization, we continue to be well positioned for fiscal 2019 and beyond. We look forward to updating you on our progress and third quarter results in May. Thank you.

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