Ladies and gentlemen, thank you for standing by, and welcome to the MasterCraft Boat Development Holdings, Inc. Q3 2020 earnings conference call. [Operator instructions] Please be advised that today's conference is being recorded. If you require any further assistance please press star zero.I would now like to hand the conference over to your speaker today, Tim Oxley, CFO. Please go ahead, sir.

Thank you, operator, and welcome, everyone. Thank you for joining us today as we discuss MasterCraft's third-quarter performance for fiscal 2020. As a reminder, today's call is being webcast live and will also be archived on our website for future listening. Joining me on today's call are Fred Brightbill, Chief Executive Officer and Chairman; and George Steinbarger, our Chief Revenue Officer.As you can imagine, we have a lot to cover on today's call. Fred will begin with an overview of the industry landscape and the steps MasterCraft is taking to navigate the COVID-19 pandemic. He will then touch on our operational highlights from the quarter and our preparedness for restarting operations. I will discuss our financial performance, both prior to and following the onset of COVID-19, as well as provide some commentary on how we currently see the rest of fiscal 2020, recognizing that conditions may change.Then I'll turn the call back to Fred for some closing remarks, before we open the call for Q&A. Before we begin, we'd like to remind participants that the information contained in this call is current only as of today, May 6, 2020. 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 third-quarter earnings release which includes a reconciliation of these non-GAAP measures to our GAAP results. We'd also 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.

Thank you, Tim, and good morning, everyone. I appreciate you joining us today, especially during this uncertain time. The world is a very different place than it was when we spoke last [Tech Difficulty] families, our work, our communities and our daily lives. I extend my sincerest wishes that everyone with us today has remained safe and healthy.The near-term impact of the pandemic on the recreational boating industry has been significant, specifically, government-mandated social distancing and stay-at-home restrictions impacted our production, our supply chain, our sales channel and curtailed customer spending after what had been a promising start to the year. While this health crisis has been unique and unprecedented in many ways, this is not the first time that our team has managed through a downturn. We leveraged our collective experience and the lessons learned to help us navigate through this environment. We acted swiftly and decisively while maintaining a level of operational and financial flexibility to adjust as needed.I want to take a moment to thank the MasterCraft team for their hard work and commitment to our company. I know it has been challenging last few weeks, and I'm extremely pleased with how our team has supported one another and continue to serve our customers even as production halted. As the quarter progressed, we monitored the situation, made informed real-time decisions with three key priorities in mind. First, support the health and safety of our employees, dealers and the communities in which we operate.Second, take swift, disciplined action to ensure liquidity and manage the downside risk to our supply chain and dealer inventories. And third, evaluate alternative scenarios and position the company to accelerate growth as we emerge from the pandemic. Now, let me take a moment to discuss each of these priorities in more detail, starting with…

Thank you. As Fred noted, these are difficult times for the boating industry and the broader economy. While we started the quarter off on a strong note, the spread of COVID-19 across the globe and the corresponding economic and production shutdown has had a significant impact on our operations and as a result on our financial performance. Net sales for the third quarter were $102.6 million, a decrease of $25.8 million or 20.1%, compared to $128.4 million for the prior-year period.The decrease was primarily due to a proactive decrease in unit production, given supply chain disruptions and in anticipation of a potential impact to retail demand, both related to COVID-19 pandemic. Our net sales in the quarter were also impacted by the previously planned reduction in unit sales to right size dealer inventory levels caused by last summer's weather impacted selling season, partially offset by the addition of our new Aviara brand. Gross profit decreased $10.1 million or 32.2% to $21.3 million, principally driven by the lower unit sales volumes for each reportable segment, $1.5 million of compensation and employee benefit costs related to our temporary shutdown in response to the COVID-19 pandemic and higher sales discounts. The decrease in consolidated gross margin percentage is primarily attributable to a decrease in overhead absorption due to the lower unit sales volumes across each reportable segment, the transitory $1.5 million of COVID-19 shutdown costs and higher sales discounts.Operating expenses increased $55.6 million for the third quarter, compared to $12.9 million for the prior-year period due to $56.4 million of impairment charges, partially offset by lower incentive compensation cost. Excluding these impairment charges, our operating expenses declined versus the prior year. Given an anticipated lower retail demand for our products in the near term, we have taken certain actions to reduce our operating…

Thanks, Tim. While COVID-19 presented many challenges for MasterCraft in the third quarter, we believe that we have implemented a plan to manage through the near-term headwinds and position the company for success as the economy begins to recover. As we prepare to resume production and send employees back to our facilities, we are focused on maintaining rigorous health and safety standards. We will be following best practices, including health screening certification, temperature scans, use of masks, physical distancing, enhanced personal hygiene and heightened cleaning protocols.We will monitor the sites closely, and we'll continue to consider local and federal government guidelines throughout this transition. In closing, we have a strong foundation of committed employees and dealers, a resilient business model and a long-term plan to grow market share and drive shareholder value. I'm confident that MasterCraft will convert this adversity into a competitive advantage and emerge from this situation stronger than ever. With that, we'll go ahead and open the line for questions.

[Operator Instructions]Your first question comes from the line of Eric Wold with B. Riley.

Thank you. Good morning, guys. I want to make sure I understood a few comments. It sounds like retail demand, at least what you've been seeing in March and April, was at least better than expected and, actually, with regard to Crest moving up in April with inventory levels kind of dipping down, but you're going to be - facing initial production levels, assuming retail is down meaningfully in the June quarter and then ramping from there.Is that a concern around kind of what you're seeing in retail that may not be kind of be able to hold steady? Or that's just taking a conservative view and to kind of continue to manage inventory levels out there in the channel?

Once again, retail was quite good coming pre-COVID. Pre-COVID put a damper. That in conjunction with the fact that we were being extremely careful, as you know, about managing inventories this year to ideal levels at model year-end. It just created this huge uncertainty about where retail is really going to be through this busy selling season.So, initially, we're seeing very encouraging signs. And feel very positive about that. Having said that, we still have a long way to go, as you well know, and the heaviest months are May and June. So, dealers are still opening.Dealers that have access are experiencing success, but it's very much a mixed bag out there. And there's so much uncertainty, that's what's caused us to just want to be very careful to make sure that we achieve optimal inventory levels at the year-end.

Is there a way to frame the decline in inventory levels year over year at the dealer channel, not per se by brand, your overall side? Just trying to get a sense, where they are year over year, and kind of where they need to be [Inaudible]. How you quickly you could ramp production if need be and if demand is there, heading into the May and June period?

Well, a couple of things. One, we feel very good about where the overall absolute levels are. The question is what's demand going to be through the remainder of the year. That's the big issue.And so, we just have to keep our ear to the track closely and be prepared to respond. So, as we ramp up here, and as you well know, the most important thing is to ensure that we produce a high-quality product. So, we're going to be very careful about our ramp up. Having said that, we have flexibility within the quarter, to some extent, but that's essentially a month and a half, six weeks in the quarter of production.And we have significantly more flexibility in Q1 of fiscal '21.

I would agree. I think the - if retail continues to be better than we expect, I think primarily, it's going to be a driver for fiscal '21. By the time you recognize that the quarter is over from a manufacturing point of view. June still represents approximately 20% of the year. So, if June comes in better than expected, then that gives you the tailwind that carries over until July and forward in fiscal '21.

Last for me, just how will you be managing the ramp of production? Is that kind of relative to normal four to eight, 10-hour work week during normal periods, how will it look initially as those plants open in the coming weeks?

Yes, you're spot on. Four-10s is what we normally run. That's what we plan on running. And so, if implicit in your point, if we needed to run another Friday, yes, we could do that.We really want to try and avoid that in the ramp-up. And to the extent possible, stick to the four-10s. Having said that, we'll increment up the count, boat counts as we go through not only the months, but also the quarters.

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

Hey, guys. Good morning. Hopefully, all of you are doing well. I wanted to just delve into retail a bit more in detail. I mean, obviously, March and April, rough months, but was there any major difference by geography, meaning did you see better numbers from rural dealers versus urban dealers, or suburban dealers?

I don't know about rural versus urban so much, even though you certainly think about the pandemic affecting those geographies differently. It was more based on what the regulations were within the states in terms of the ability to open and function right in the boat. I mean, the most extreme case being Michigan, where power boating was prohibited for a period and dealers were not able to operate at all. That was the most extreme situation, if you will, to other states where both dealers were treated along with automotive as essential services and open all along the way.So, it's run the whole gamut and every different geography has been slightly different, but primarily related to what those government regulations were in terms of allowing operation.

Got it. Okay. And then, just secondly, you guys obviously are implementing some protocols here in your plants, social distancing, wearing masks, etc. Those protocols, will they have an impact longer term, do you think, on your manufacturing costs or your manufacturing capacity or really not much of an impact on that perspective?

My personal opinion is I don't believe that they will. And I do believe that this is going to be a way of life for some period of time. So, we've embraced it in terms of this is just going to be part of safe operating. And if we get through COVID, the reality is, something else will probably pop up down the road.We want to be prepared for, and we may need this again. But my view is the biggest impact is going to be if there's a disruption related to it either in the overall economy, or in terms of some widespread containment necessary in our facility. But following these procedures, I believe, is going to allow us to minimize that risk.

Your next question comes from the line of Brett Andress with KeyBanc Capital.

Hey, good morning. So, you mentioned increased interest, I think, at your dealers here recently, but can you just give us any more specifics on April retail trends, what the rate was and I guess more importantly, what the cadence of April was, as the month progressed?

Brett, it's George. So, we took a pretty draconian view on what we thought might happen with retail in the month of April and it significantly outperformed our internal expectations across the three brands. I would say it was roughly down in that 20 to 30% range year over year versus our much higher down expectations. And we have continued to see some strong momentum here early in May.But May - as Fred said, May and June are the two most critical months of this coming selling season. So, while we've certainly been very pleased with the resilience we've seen at retail, we are going to take a very prudent approach to watching retail over the next couple of months as we determine our ultimate wholesale production run rates.

Got it. And then, looking at the fourth quarter looks like it's coming in below what most of us had expected. But given all the actions you've taken here on the cost front, can you just give us some insight on what you think the fixed versus variable cost mix should look like in the quarter?

The - we've reported in the past that we see approximately 90% of our cost of sales is actually variable. What makes this a little bit unusual and why it's going to be a bit less in quarter four is we've continued to bring people in to build mask, we've also continued with some of the improvement processes that we put in place. So, we've invested in the fourth quarter, so that it's not going to be as variable as it could be. And as we could make it in the future, if necessary. So, it would be in the 70s, I think, on the variable side.

Our next question comes from the line of Mike Swartz with SunTrust.

Hey, guys. Good morning. Just want to start out with your comments on Crest and some of the resilience you're seeing there year to date. I think you said retail is actually up for that brand through April. Maybe just give us a sense of why that is? And did you have easier year-over-year comps, it just is a striking trend given everything that's going on?

Yes. Mike, it's George. As you know, the pontoon industry has been probably a little more greatly impacted coming out of the weather downturn that - down retail that we had last year. What we have seen in our - in the pontoon space is that that segment is much more reliant on boat shows.And so, we had a fantastic boat show season with Crest. Retail and orders were up significantly year over year. And I think what we're seeing is as customers have - interest in boating has accelerated, I think the pontoon segment, coupled with the performance during the boat shows, I think, has been a great segment to look into for boaters that have families want to get out on the lake, maybe they don't have a big lake. The price point is much more approachable for a lot more consumers in this environment.So, I think a couple of things have set up well for the pontoon segment overall. But specifically, Crest has just continued to take market share and had a really, really strong boat show season, and I think that's starting to come through in our internal warranty registrations as most of the dealers have been able to deliver those boats as dealer - as customers have asked for them.

Okay, great. And then, just with Aviara, I know a lot has changed since February. So, I guess, one, how much does Aviara contribute to the quarter? And then how should we think about the revenue from that business this year? Is it still in the $10 million to $15 million range? And then just the ramp to profitability, I think you had expected to be profitable around this time, so is that more of a 2021 or maybe even 2022 event now?

I think you're spot on. This has pushed back that profitability a bit. And it's still in a ramp-up mode. We're still, as we said, introducing the 40 and so the 32 has been running through the plant very well. 36, it was the next product and that's ramping up. So, once again, feel very, very good about next year and its level of profitability, as well as overall sales growth. Retail has held up very well for it. And we've actually continued to produce some and ship some, so we continue down that path. But yes, it's probably delayed a quarter from where we had originally anticipated the profitability.

Your next question comes from the line of Tim Conder with Wells Fargo Securities.

Thank you. Good morning, gentlemen. I wanted to circle back on the channel inventory. So, it sounds like all your inventory in the channel is down sequentially, correct me if that's wrong.But then also, if you could give us some color on the aging. And then related to that aging color, just a little confused if you're in cash conservation mode, it would seem potentially that maybe instead of offering rebates and if some customers are waiting on boats, would it be easier to try to say, hey, I know you're waiting on maybe a brand-new boat, but here's a brand-new one that we've already got in inventory, it might not be the current model. But would it be cheaper just to move that boat among different regions rather than to do the rebates across the board. So, I'm just trying to get, again, understanding on the aging color, maybe that's the answer versus instead of doing the rebates, just trying to move those boats around.We're hearing some of that in other areas in the broader boating industry. So, just kind of wondering your approach there.

Just a couple of summary comments, and then I'll turn it over to George for more detail. But yes, to your question in terms of are we using those other tools? Are we moving boats? Yes to all of those as well. So, it's a combination of using all the tools that we have surgically, and we feel very good about the way that's working. Our retail programs have been successful. And yes, we are moving boats among dealers also. And just to clarify on the comments you made earlier, inventories are down, not just sequentially, but year over year too. So, with that, I'll turn it over to George.

Yes. Tim, the thing I would add is, while certainly, retail rebates play a part of our overall strategy, as we've always discussed, we don't peanut butter spread retail rebates across the country. We use them disciplined and strategically in markets where we think we need them, where maybe we have a pocket of heavy inventory or heavy age products. So, it's just one tool in the tool belt.And as Tim said - or I'm sorry, as Fred said, we are absolutely taking advantage of being able to move inventory across our network where possible to get customers into boats today. Our order backlog, as we said, we're prioritizing the building of custom ordered boats when we do come back online to make sure those customers get the boats that they want and are back on the water as quickly as possible. But any new customers walking in, we are helping our dealers make sure that they can get the product they need in their hands to convert that sale. In terms of aged inventory, the percentage is down sequentially.It's a little higher on a percentage basis than this time last year, but that's more of a function of the reduced wholesale shipments for model year '20 product this year versus our wholesale units are going to be down in '20 versus '19. So, as a percentage, aged is higher. But from an absolute number perspective, we feel very good about the health of our aged inventory and the fact that our wholesale will be down so significantly for model year '20 product, that sets us up for future years to have a very clean and very healthy aged inventory heading into '21.

I would - Tim, I'd just add that the retail environment, too, is competitive. And so, some of the programs are a necessary response to competitors.

Okay. Okay. Helpful, gentlemen. And any - again, I know seasonality or Q2 here is just the prime season. So, anything you can say up through, let's just say, April from a color-by-region on a year-over-year basis? Are you seeing certain regions stronger than others? Are you seeing any - in particular, I guess, the real question would be any impact from areas exposed to the oil and gas markets?

Yes. Actually, interestingly, Texas has been a particularly strong market for us. It's been very resilient. It's done very well. So, in spite of what's going on in West Texas, the overall state has been very healthy. Very different story in Western Canada and Alberta. It's very tough going up there. So, with regard to oil and gas, that would be the major color I could provide.In terms of by region, once again, tended to do pretty well overall in the south. The weather has been a little bit better and more favorable. We are in that period between boat shows and between the weather turning in the north. And so, in a way, to the extent that this virus can pass when we can open business and catch the season as the weather warms up.We're hoping that we can minimize the impact in terms of consumers' propensity to purchase, so that's where we think we are right now in terms of those key states in the north opening up, as you well know. And so, we're still looking at half full, but still watching it very close. And once again, we came at this from really trying to protect ourselves from the worst case. And as you all know, there was tremendous diversity of opinion about how bad this was going to be and how long. And we're - virtually, as every day goes by, we feel more optimistic about it.

Your next question comes from the line of Brett Andress with KeyBanc Capital.

Hey. Thanks for the follow up. Just to be more clear around the covenant relief here. I guess, is that more of a precaution? Or do your current internal models have you breaching those? Because I guess if I pencil in negative EBITDA for 4Q, you get close, but if you could just walk me through the thought process there.And then the second question I have is, what should we be modeling for interest expense with some of the debt cost changes?

Sure. First of all, we have a number of different scenarios we've run for fiscal '21. And certainly, it was prudent for us to get this covenant relief, to give us the greatest financial flexibility that's possible.

Let me just add, we didn't have a gun at our head. It wasn't a situation that we expected a near-term issue. So, it was something as we looked out into the future, we wanted to make sure we have the appropriate flexibility.

What we've modeled from an interest perspective is probably another 400,000, give or take, a year in our annual interest cost, obviously, depending on a number of factors, including the production level. But I think, give or take, that's kind of what we estimated it would cost us. Plus, that doesn't include the upfront costs which are probably another 300-ish. So, that's our perspective on that.

There are no questions at this time. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.