Terry McNew - CEO Tim Oxley - CFO.

Jimmy Baker - B. Riley and Company Joe Altobello - Raymond James Craig Kennison - Baird Tim Conder - Wells Fargo Securities Laura Engel - Stonegate Capital Rommel Dionisio - Wunderlich Mike Swartz - SunTrust.

Good day, ladies and gentlemen, and Welcome to the MasterCraft Q3 2017 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instruction will follow at that time. [Operator Instructions] As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference Tim Oxley, Chief Financial Officer. Please go ahead..

Thank you, Operator. And welcome, everyone. Today’s call is being webcast live and also will also be archived on our website for future listening. Joining me on today’s call is Terry McNew, MasterCraft’s President and Chief Executive Officer. Our agenda includes a strategic overview by Terry, followed by my analysis of the financials.

Then Terry will discuss our strategies for growth and expectations for fiscal 2017 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, May 11, 2017. The Company assumes no obligation to update any statements including forward-looking statements.

Statements that are not historical facts are forward-looking statements 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 items not indicative of our ongoing operations.

For each non-GAAP measure, we also provide the most directly comparable GAAP measure. Our fiscal 2017 third quarter earnings release includes a reconciliation of these non-GAAP measures to our GAAP results for the third quarter.

Before turning the call over to Terry, I would like to remind listeners that there is a slide deck, summarizing our financial results in the investors section of our website. With that I will turn the call over to Terry..

Thanks, Tim. I would like to thank everyone for joining us today. As you saw from today’s press release, we we’re pleased to see strong growth in retail demand during the quarter. Market reception for our recently released XT20 and XT21 has been strong and this series continues to set new industry standard and premium features and towboat performance.

For the quarter, and year-to-date we delivered gains in net sales, we did deliver our pipeline inventory as well as continued improve on our already outstanding working capital management. Our winter sales program concluded at the end of the quarter, exceeded our expectations due to several factors.

For the first time we established nationally advertised pricing on selected models which drove traffic to our dealerships. Additional dealer training, enhanced tracking of sales leads improved the dealers closed ratio significantly.

Finally, retail rebate also contributed to the success of retail demand during the quarter, supported in large part by our national advertising and dealer training programs. Strong retail demand improved our dealer pipeline inventory setting the stage for a strong 2018 fiscal year.

during the quarter we recognized again for our leadership and towboat category at the Miami International Boat Show garnering our sixth innovation award in seven years.

The company was recognized by the National Marine Manufacturers Association and Boating Riders International for its ground breaking DockStar Handling System, an exclusive option available on select 2017 MasterCraft boats.

The recently patented Dockstar handling system greatly improves the ability of boat drivers to confidently drive in reverse and more easily navigate tight bocks in crowded marinas. We’re thrilled to receive yet another innovation award from the NMMA recognizing that MasterCraft products are some of the most innovative in our industry.

Our award-winning technologies are why many boat owners choose MasterCraft and the DockStar Handling System is a notable example of how our engineering can benefit consumers. DockStar not only simplifies navigating tight spaces like docks and marinas, it also improves the slow speed handling of MasterCraft boats.

Additionally during the quarter we settled our patent dispute with Malibu boats and are pleased to have this dispute behind us and look forward to building on MasterCraft legacy of award winning products while we felt strongly about our position in this dispute we know there is significant cost and uncertainty associated with the judicial process.

And as a result we view this settlement as a positive outcome for the company. Turning back to our operational and financial performance, we delivered solid performance and we are optimistic about prospects for our fiscal 2017 fourth quarter.

Equally important we continue to deliver best in class working capital management, superior working capital management a force opportunities to enhance shareholder return and a variety of ways and is a whole mark of a well-managed company.

Looking ahead we remain committed to our five-pronged growth strategy; Developing new and innovative products; Further penetrating the entry-level and mid-line segment of the performance sport boat category; Capturing share from adjacent boating categories; Strengthening our dealer network and driving margin expansion through continuous operational excellence.

This combined commitment to operational excellence and innovations teamed with our strong diverse product portfolio positions MasterCraft well for fiscal 2017 and beyond. Lastly, I would like to welcome Patrick Battle to our Board of Directors. Mr. Battle bring significant experience in sales and marketing that will be an asset to MasterCraft.

Now I would like to turn the call back over to Tim to go over our financials..

Thanks, Terry. From a top line perspective, net sales for the third quarter rose 1.5 million or 2.6% to 58.5 million from 57 million for the prior year period.

The increase reflects a rise in unit sales volume of 40 units or 5.7%, and favorite pricing in product mix partially offset by the discounts associated with exceptionally high retail demand in connection with our winter sales program.

Gross profit for the third quarter, decreased $0.9 million, or 5.8%, to $14.9 million, versus $15.8 million in the prior-year period. Gross margin decreased to 25.5% from 27.8% for the prior-year period.

The decrease is resulted from discounts associated with exceptionally high retail demand in connection with our winter sales program, partially offset by price increases and sales of higher content option packages.

On the expense front, selling and marketing expense increased $0.5 million, or 21.2%, to $2.7 million for the third quarter, compared to year-over-year quarter primarily due to the timing of product launch and promotional activities. General and administrative expense totaled $7.9 million versus $6.1 million for the prior-year period.

This increase resulted mainly from an increase the 3.9 million for legal and advisory fees related to our litigation Malibu which includes a 2.5 million charge to settle a Malibu patent case, partially offset by 1.1 million reduction in stock based compensation cost.

Turning to the bottom line, fiscal third quarter net income totaled $2.2 million versus 4.9 million in the year earlier quarter. Adjusted net income was $5.3 million or $0.28 per share on a pro forma fully diluted weighted average share count of 18.7 million shares.

This compares with adjusted net income of $5.8 million or $0.31 per share in the prior year period. EBITDA was 5.1 million compared to 8.4 million in the prior year period, primarily due to increased litigation cost of retail rebates. Adjusted EBITDA margin declined 130 basis points to 16.4% from 17.7% in the prior year period.

Stemming from rebates associated with the exceptionally high retail demand in connection with our winter sales program. Adjusted EBITDA was $9.6 million, a 4.8% decrease from $10.1 million in the prior year period.

See non-GAAP measures below 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.

I’d also like to remind people that in December 2016, we completed two secondary offerings for a total of 2,995,000 shares of common stock held by affiliates of Wayzata Investment Partners. Those shares were sold by the company and either offering and that company we did not receive any proceeds from the sale value of the shares.

Wayzata Investment Partners now has the best of themselves of all outstanding shares for our common stock and they no longer hold any board seats. For a complete review of our nine months results read today's press release. With that, I would like to echo Terry’s comments and reiterate that we are very pleased with our performance.

I’ll be happy to answer any year-to-date questions during the Q&A. I’ll now turn it back to Terry for our outlook..

Thanks, Tim. MasterCraft has delivered a solid nine months performance, and we are optimistic about the future. Across the organization, we remain committed to our five-pronged growth strategy, I outlined earlier.

For the fiscal year ending June 30, 2017, we are reiterating our forecast for net sales growth in the low to mid-single digits and continued growth in adjusted EBITDA margin with the forecast approaching 19%. Net sales growth will continue -- will result in continued growth in net income, EBITDA and adjusted net income.

Despite increase to interest expense due to the refinancing completed in the fourth quarter of fiscal 2016.

More specifically for the fourth quarter, we expect net sales would be up in the 5%to 8% range with increases in gross margin of about 200 basis points, and increases in adjusted EBITDA margin in excess of 100 basis points compared to the prior year periods.

Adjusted earnings per share will be up in the low double-digit range also compared to the prior year period. In conclusion, the fourth quarter will largely make up for the third quarter in spite of the additional royalties. Our plan is operating very efficiently and with the spiking demand for our product we are bullish on fiscal 2018.

At this time, I’d like to turn it over to the operator for questions..

First couple of questions just on the quarter itself. So it sounds like your retail was up quite a bit in the quarter I realized its small from a seasonal perspective, but we are just hoping you could quantify that domestically and globally.

And then the guidance that you gave for fiscal Q4 a bit -- actually quite a bit stronger than what we thought, did you actually going to adding production day or days to the schedule in Q4 to catch more of this demand?.

That’s correct.

We added a couple production price to catch up with the demand, most of which demands that itself for fiscal 2018, as you probably know dealers don’t want to have boats that are going to be, in essence obsolete with the new upcoming models, but we hit the strong demand and we did at a couple of Fridays to our schedule in the fourth quarter.

I would also like to point out that when we say retail was up, it was up 111% for the quarter, that’s extraordinary because that’s as strong as March quarter we've had in the company's history, and it far exceeded to what we were expecting.

We forecasted on our per unit basis retail rebates that were consistent with our first quarter retail rebates, and because we had national advertising we had dealer training, we drove a lot of the traffic into the dealerships, that’s the reason retail was up as strong as it was and so we are very excited about that..

And Jimmy our both shell results were up 26% over the year prior..

Okay that's great. Do you think -- just want to make sure I heard that right or not, 111% globally that was..

111% globally year-over-year, and keep in mind this was a North American promotion..

And then just a couple of points of clarification on the promos. So the winner sales I believe was exclusive to NXT and ProStar each of which at least I thought were diluted to ASP. So can you just help us to understand how that event drove the sales strength.

But I think in the press release you commented that mix was positive?.

Right jimmy we have been working for a few years now to overcome the perception that MasterCraft boats are expensive and so the national advertise pricing was driven and focused as you mentioned on the NXT 20 the NXT 22 and the ProStar to bring awareness of the affordability of MasterCraft.

In conjunction we have been working very hard for about 18 months now with the group dealers to improve retail performance and that seems to have taken traction right at the same time. Tim like described it is a perfect storm we had.

Their training is really starting to take root in terms of lead management retail performance traction their conversion rate for that group of dealers in particular was up slightly over 20%.

So the national advertise pricing was designed to bring awareness and the affordability of the MasterCraft to drive people for traffic not only into the boat shows, but into the dealers their ability to capture those and conversion and close on them at a higher rate just happen to time themselves perfectly, but it wasn’t just those three boats.

Once the customers came dealers reported to us and we can see they were selling other products to offer that.

So the retail incentives were helpful and meaningful but on a per unit basis as Tim mentioned similar to what we have done in the first quarter where we got the expert traction, where we had internally budgeted and thought we might get a 25% increase and we got at 111% increase or due to these other factors I just outlined..

Okay, understood. And then just help me understand as we how that marries up with the spring sales program so unless I missed something, I think everything that was included, the model that were included and the winter sales event are continued into the spring program.

So I'm just trying to I guess understand why not only or you are not assuming this margin pressure continues you are assuming large gross margin gain 200 basis points in Q4 to reach the full-year guidance?.

Right, so the success of the winter campaign with those three models. In conjunction with discussions with our dealers encouraged us to widen that net, so the spring campaign now includes seven models, seven models under $100,000.

They are priced and again that's a retail base program, so still very good margins for the dealers, they'll be able to get people in and our dealers are always successful, you know our strategies, we have very effective and interesting options, so they can sell.

So their margins are still very healthy, off course when we report to you guys on a wholesale basis, so our ability to operate continues and to be very, very successful in the manufacturing facility were continuing to drive margins, improve material margins, to be very efficient with our labor as well..

Also keep in mind Jimmy that because some of the retail rebates I had here mark for Q4, we spend in Q3 and now I don’t have to spend them in Q.

So that's one of the reason that you see on margin improvement in Q4?.

Okay, understood. Just lastly and I'll pass it off. I'm realizing you are not providing fiscal '18 guidance here, but you have made a few references to setting the stage for a strong year next year. So maybe could you just frame that, any of the context in let's say your long-term growth target.

Is it fair to say a strong year would be towards the high-end of that mid to high single-digit long-term growth rate?.

No, Jimmy because of the success of the retail our dealers inventory at the end of March was as high as it's been in the five years that turned here -- the turns, inventory turn are extremely healthy and to why we added a couple of production Friday's in Q4, but we still feel there is still very strong retail demand, we will not get into the specific guidance until our September call, but we are very, very pleased with our worldwide dealer inventory and that gives us comfort and ability to feel very strong about 2018 at this point.

However, May and June are still important, we still have to get through that. May and June make up 30% to 35% of annual retail. So we don’t see any macroeconomic events that or issue that give us concern. But we all know that, we think that is very critical or keeping our eye on that..

Got it, thanks very much..

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

So first question I guess I was curious if you could quantify the impact that the rebates had and the discounts had on the gross margin in the quarter.

Just trying to figure out what the base business did versus the [indiscernible] selling program?.

Sure. What we do when we look at our financial results every month is we strip out the effect of the discounts. So we look at materials, labor overhead, warranty as a percentage of gross sales to strip out all that affect. All those metrics were moving favorably and so the gross margin was due to the discounts..

On the retail number, you guys quoted, up 111% in third quarter, the industry data seems to indicate that there was a bit of a slowdown in the March quarter.

So I am trying to reconcile your statement today with some of the data that’s out there, curious how we can do that?.

One of the things that occurred because we had -- program end that the dealers used to close deals and I suspect some of the retail registrations that occurred late in march have not been reflected in the industry data and in fact some of it may get pushed over into April or could just be when we go from 25 states reporting to all states reporting that we're going to see that the industry data is up significantly..

Trying to get a sense for the magnitude of the Malibu royalty would you expect to see continue margin expansion next year with that royalty?.

We are not providing guidance on next year, we do -- because of our operational focus, we do expect to be able to overcome that and see margin expansion next year as well..

And I want to add on to that Joe, that we don’t feel that and I've been saying this since the beginning of the litigation, that we didn’t feel even in a worst case scenario that it would be material to our business.

We still take that position we feel like our ability to continue to drive margin improvement the settlement as Tim said we do not get into specifics about it but we don’t feel its material to our business and we will be able to continue to drive margin going forward..

It's also worth noting that we've included that in our guidance for fiscal Q4 as well..

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

Obviously very strong retail led to some inventory reduction, are you able to quantify that any further beyond what you have said Terry?.

In terms of inventory turns which we look at, it varies turns, we watch that closely by quarter, I would suggest that, I don’t want to get into the specifics, but I can tell you it is up significantly from where we were a year ago and where we historically are at the end of Q3 on any given year.

I think -- keep in mind that our inventory at the end of the second quarter reflected flat inventory terms year-over-year. and now that is improved to significantly better than that again on a year-over-year basis..

Do you think there is a chance you ran in this and out of stock situations where about your retail might have been better or retailers had just differed from demand that would suggest you might close those deals in the fourth quarter?.

What's being reported from the dealers is that the demand continues to be good. I don’t think we are going have stock out situations.

We are looking at the inventory on a global basis and we will certainly help dealers pick up boats from our adjacent territories if they ran out of particular models, we've done that in the past to get the maximum efficiencies from our pipeline..

And then with respect to the promotion, do you feel like you've kind hit on something, a price point or certain dynamics with your consumer such that you want to continue this promotion on a go forward basis every year, kind of seasonal basis as well?.

Yes, Craig I think and I alluded to it earlier, but I will reiterate. I think the thing we hit on is with the couple of things. I think the national advertised pricing brought such awareness to the affordability of MasterCraft's.

We have been working with our dealers to do this for a couple of years, but by doing that national advertise pricing and we did that in agreement with them months before hand. We executed at the beginning January 1.

We had story-after-story from dealers at boat shows where consumers have put a down payment on a competitive product, walked by our booth saw our POP [ph]. So it's very important to understand, and it was very holistic approach we had signage, and we require the dealers to have it, where they saw, oh my gosh, you guys are -- I can afford it.

They went back, got their deposit back and bought a MasterCraft. Hence why we are expanding the program to seven models for our spring program.

In addition to that the training that we have been doing with our top dealers for 18-months, where we saw, we track this with data, is that we were getting more better lead management overall by that I mean more floor traffic we were getting better lead information and when we dissected that we were clearly talking to people that we are either new to boating, I like to characterize those are probably people they would buy used boat, or were thinking about buying a used boat as their foray into boating.

We were certainly getting people that were already boaters that had and they were not a in our brand, the number of leads were up, so the number of leads we captured with these dealers in particular at boat shows were up about 70%, and then when we looked at the type of leads, believe it or not less than a third were current MasterCraft owners.

So we were casting a wider net driving more people into the dealerships, into the boat shows, but more importantly we were driving new people, significant number of new people into the MasterCraft brand. So I think the answer to your question, yes we will continue that strategy..

Great. And then last question just going back to the very strong retail metric you reported for the quarter. I know you also like to think longer-term whether it's calendar year-to-date or your fiscal year-to-date.

Can you give us a sense for what retail looks like globally in terms of year-to-date kind of metric?.

On a fiscal year-to-date basis through April actually we're up 35% retail globally..

That's great. Thanks a lot guys. .

Thank you. Our next question comes from the line of Tim Conder with Wells Fargo Securities. Your line is now open..

Just wanted to follow up on a couple of more items. Any geographic color that you can give us on the strong retail? It sounds like again it was led by the U.S.

but any geographic color there and then just any color you can give us on Canada and Europe, two other major areas for your international sales?.

Sure, Tim. It's Terry. When we look at the United States, Texas continues to grow in terms of the largest marine trade areas in the United States, now 2x larger than the second state which is California. This is all at the time data.

We have said to you before, over a year now we had specific strategy to grow market share in Texas that continues to work, we are going to continue to execute that we still have a long runway in Texas, but we are gaining market share in California we've had a dealer strategy there and we've seen water return for us, but we've has a strategy in Northern California and add more point to distribution that is also a dealer within detailed performance group that dealer has in most success out of that group and the other dealer and so far calendar year-to-date and were starting to really take route for the California, we have additional dealer strategy in the rest of the California that we continue to execute from this point going forward.

Michigan is the third largest state, we've been very, very successful there, we have about 50% market share and throughout the rest of the United State we're really well represented and we're getting to tracked earns of international, Tim why don’t you?.

It's really have been a pleasant surprise for us in Canada. Wholesale were up strong double-digit, likewise Australia has been a pleasant but for us. So both of those international markets have that a bit of the rebound this year as far as the revenue growth and Europe comes to mind first, it looks flat down a bit.

I think we still have consumer confidence there and South America has distinct [ph] as well and they are going to be flat to down a bit as well. .

I'd like to add a little bit just one little comment Tim, the delayed in the Europe, our largest year outside thought there is an England they definitely saw an impact with Brexit. Specifically it is related to the currency which is pound sterling. That seems to be normalizing and we expect your kind of probably [indiscernible] right now..

Okay, very helpful gentlemen. You touched on California, so it sounds like you are getting somewhat as a whole that was created by the dealer leaving the market there that, how do you feel about.

Where you are suppose getting that fully sort of adjusted? And the same thing with the -- I think you had one of your key dealers in Michigan was taking over the dealer loss territory and Florida that you had, just maybe an update on those two specifics?.

Sure Action Water Sport it's Jerry Browser [ph] is our second largest dealer in the world. He had 3 points distribution and Michigan, is now taking [indiscernible] market for us for a very excited update that a great new location.

And so we feel very confident and he is a superior operator that will continue to win this game and continue to gain a foothold and do very well. Northern California I want to point out the dealer that’s having success there and he is a long time dealer of ours as just added more points to distribute.

You mentioned a hole in central California, we have built that, that a dealer that’s off to a very strong start and we are very pleased there and we will continue to execute additional dealers and point to distribution throughout the State..

If I might add, one reason we mentioned this is a transition year, as bullish as we are about the how Action Water Sports is doing in central Florida. They haven’t got their full facility open yet and so we expect as to get major traction there at fiscal '18 and we are holding our ground fiscal '17 now..

Okay and then just maybe to come back to on earlier question.

So you still see at this point I guess your long term goals of that mid to high single digit revenue growth 19% to 21% EBITDA then the EPS in that mid-single digit to low-double digits, still that frame work is still intact and then maybe again pushing up on the revenue and the EPS side little bit in the fiscal '18 even though again, I know it's [technical difficulty] that you haven’t given a formal guidance yet?.

Everybody wants to trick us into giving guidance of fiscal '18, you are no alone there Tim, but we reiterate a long-term guidance and as we said we are very bullish on fiscal '18..

Okay, gentlemen. Thank you..

Thank you. Our next question comes from the line of Laura Engel from Stonegate Capital. Your line is now open..

I wanted to just based on history if we do see these rising interest rates what concern that causes you in the short-term as far as affecting your top line?.

Sure. We've got we're very lightly levered as we look at our long-term debt our net-debt is down below one turn of adjusted EBITDA, so were very likely to lever there and after that frankly we've got edge from a dealer perspective as dealers we provide floor plan assistance so there is another exposure area and there is plenty of availability there.

We have good working relationships with the floor plan companies. So we're not concerned about that.

As far as the other area where there is interest exposure is on the retail financing side since only about half of our consumers are financing the boats, we're a little less exposed there because we're selling to consumers that have average income of more than 250,000 a year more than a 1 million in that we're -- they are not as prone to cut and run when the interest rates go up a little bit..

Right, well great. And again and thanks for all of the good information and great quarter. I will get back in the queue..

Thank you. Our next question comes from the line of Rommel Dionisio from Wunderlich. Your line is now open..

Just a question on the supply chain, obviously, you guys have done a great job with this over the years. But as we are looking at some retail sales with the value for response looks like unit volumes could be going up.

Can you just give us an update in terms of where you are in terms of your throughput capacity your ability to handling increased volumes, especially of these lower priced boats? It sounds like unit volumes could be going up, and what capital investments may require near term to get to the higher capacity levels? Thanks..

We did mention this before but Tim and I are kind of bricks and motor. We have funding plenty of capacity to handle the demand that we're talking about.

Currently we're at about 65% capacity utilization and that is a scheme of one shift four days a week that would Gartner us about 4,000 units a year on a wholesale basis, to drive above that we would just simply add a second ship, the small second ship to lamination because that drives the cycle time of the overall process.

We can do a light second shift and drive out outlook up to about 5,000 units annually.

So we've got a long runway before we ever have to do any additional capital investment we're generally pretty CapEx light, our cash conversion rate is over 80% and the guidance we've been giving everybody is about 3.5 million to 5 million on an annual basis of capital expenditures most of that's being associated with the tooling related to the three new model releases we have every year.

Operator Our next question comes from the line of Mike Swartz from SunTrust. Your line is now open..

I apologize if I missed this I think you said excluding the rebate than rebate activity in the first quarter gross margin was I guess up year-over-year, did you also say what retail demand, I think you talked about retail demanding up 111% maybe what's that would have been without rebates, is there a way of looking at that?.

Absolutely there is no way of looking at that. Keep in mind we had similar rebates on per model basis versus Q1, for instance Q1 was up 25% retail and we had similar rebates on a model by model basis. It was the national advertising combined with the dealer training, so all that was a perfect storm that drove that retail volume.

But frankly there is no way I would forecast retail to be up 111%, but I am very pleased that the pipeline has shown that improvement..

What are the levels of rebate, maybe just broadly speaking, that you are pursuing for it in the third quarter?.

We are looking on a per model basis 4.5% to 6%..

Average transaction price. And I have a model of constant which is similar to first quarter so they were helpful meaningful, but they were not huge. Again, I think we have enough data to show that the national advertise pricing in conjunction with the retail performance training with those top dealers.

Those for the two variables that didn’t exist in Q1, and as I mentioned earlier on the call to someone, I don’t remember who I was talking to, but we showed that the number of leads throughout in the conversion rate was up over 20% for those dealers. So we really feel like that was kind of the secret sauce in that..

And then just a final question from me.

I think in prior calls you've alluded to some curtailment issues some of your dealers have had, could you maybe update us on what you are seeing, has that improved any as we've gone into the spring?.

Its improved I think that -- keep in mind that Wells Fargo has a curtailment moratorium during the winning months and so it's really a seasonal issue but because the improvement in the pipeline we think that’s going to have very much mitigating effect on that issue..

Thank you. at this time I am not showing any further questions. I would like to turn the call back over to Terry McNew President and Chief Executive Officer..

Thank you, operator. Once again thank you to everyone for joining us. We believe that our success has positioned us well for fiscal 2017 and beyond. We look forward to updating you on our progress and fourth quarter results in September. Thanks again..

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