Wayne Wilson - CFO Jack Springer - CEO.

Tim Conder - Wells Fargo Mike Swartz - SunTrust Joe Altobello - Raymond James Jimmy Baker - B. Riley & Company Rommel Dionisio - Wunderlich Securities Gerrick Johnson - BMO Capital Markets.

Good morning and welcome to Malibu Boats Conference Call to discuss First Quarter Fiscal Year 2017 Results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.

Please be advised that reproduction of this call in whole or in part is not permitted without written authorization of Malibu Boats, and as a reminder, this call is being recorded. On the call today from management are Mr. Jack Springer, Chief Executive Officer; and Mr. Wayne Wilson, Chief Financial Officer. I'll now turn the call over to Mr.

Wilson to get started. Please go ahead sir..

Thank you and good morning, everyone. Ritchie Anderson, the company's Chief Operating Officer is also on the call today. Jack will provide commentary on business, and I will discuss our first quarter financials and outlook for fiscal 2017. We will then open the call for questions.

A press release covering the company's first quarter fiscal year 2017 results was issued this morning and a copy of that press release can be found in the Investor Relations section of the company's website.

I also want to remind everyone that management's remarks on this call may contain certain forward-looking statements, including predictions, expectations, estimates or other information that might be considered forward-looking and that actual results could differ materially from those projected on today's call.

You should not place undue reliance on these forward-looking statements, which speak only as of today and the company undertakes no obligation to update them for any new information or future events.

Factors that might affect future results are discussed in our filings with the SEC and we encourage you to review our SEC filings for a more detailed description of these risk factors.

Please also note that we will be referring to certain non-GAAP financial measures on today's call, such as adjusted EBITDA, adjusted EBITDA margin, and adjusted fully distributed net income. Reconciliations of these non-GAAP financial measures to GAAP financial measures are included in our earnings release.

I'll now turn the call over to Jack Springer..

Thank you, Wayne. Good morning and welcome to our call. Malibu yet again has met our financial objectives. Net sales increased 8.4%, adjusted EBITDA increased to $9.9 million and adjusted full distributed earning increased 4% to $0.26 per share. All three of these metrics represent new fiscal first quarter highs for Malibu.

We continue to meet expectations and operated at a high level to spot international and economic uncertainty. Most importantly since our IPO two and a half years ago, we have consistently met or exceeded what we have said that we will do. Market share is an important primary metric for us and they always will be no matter the trend.

Although, our stated goal is to move market share approximately 30 basis points per year on average. Malibu has experienced much greater market share gain this year. We are very happy with the calendar year 2016 results which show more than 100 basis points share gain for Malibu.

Because of these gains we finish our fiscal 2016 year which was in June with highest share in the company's history. We believe the market share strength of Malibu will continue and we will end the calendar the year with the highest market share in history as well. We believe our market share growth is due to two key factors.

First, our product strategy and introducing products that the customer want. This principle also applies to innovation and features. We bring more products to market and features that work. Not just features that are marketing hot. Malibu is the leader in innovation and we are committed to continuing to be the leader.

The second factor is having solid distribution in all areas with great dealer selling Malibu Boats. We value our dealers. We partner with them and as a result we believe they are more profitable than competitive dealers.

As an example of distribution strength in the latest fully developed SSI data as of June 30th through all markets selling 15 or more boats, our dealers are number one or number two share in 84% of the market. Malibu dealers were the market leaders and control eight out of the top 10 markets in the United States.

Following our dealers are number one share in over 50% of the 48 relevant states and are number one or number two share in over 80% of the 48 relevant states. .

As we have discussed on the last several earnings calls, the U.S. market as a whole remains healthy. After unit growth in the low double-digits in 2013 to 2015, we expected about 7% to 8% for calendar year 2016 after we saw calendar Q2 which our largest retail quarter and it grew about 8%.

We have been positively surprised by the higher growth as calendar three have developed and now believe that the growth rate for calendar 2016 will be greater than 10%. Warm temperatures have lingered into the fall throughout the U.S. buoying the growth rate. Speaking regionally, each major region has influenced by its own set of variables.

Malibu commands the leader position in every region and we have increased our market share lead in every region according to the June SSI data.

Year-to-date when looking at the more impactful state, California units have grown about 25% in the latest 12-month period ended September and Malibu's unit growth have increased about 38% over the same period. Malibu has also captured 50% of the total growth in units as of the latest 12-month as of September in California.

Nor Cal has had a much better year due to El Niño and more available water. The California economy is continuing its recovery and is adding job almost every month. Texas, another key state has also had a healthy growth rate and Malibu has expanded its commanding market share lead in that state.

Malibu has captured almost 60% of the total unit growth in Texas year-to-date resulting in a substantial share growth in Texas. Other areas includes Northwest and it’s been a good growth area for Malibu and has shown strength in the East as well, with growth that we have not seen in the last couple of years.

The international markets continue to be weak due to a verity of factors, particularly the strong U.S. dollar. Low oil prices and foreign valuations along with the severe economic issues for countries in certain areas of the world continue to weigh on the international markets.

We do not see near term relief, although we do believe that the markets have stabilized and will not decrease further. Canada, in particular, has been impacted by both low oil prices and weak exchange rate, and this is the largest of our challenged international market.

Again, we believe Canada has stabilized, but any improvement will be a benefit that we have not counted on in our performance. Other international markets such as South America, Europe and Eurasia continue to be impacted primarily by low currency valuations in poorly performing economy.

Channel inventories are in very good shape and weeks on hand of at our dealers remained meaningfully lower than last year. We feel the Malibu is positioned quite well to benefit from the continued strong domestic retail growth. On our last I spoke of our new products introduction; the Wakesetter 22 MXZ, the Wakesetter 24 MXZ and the Wakesetter 21 VLX.

The reviews from our dealers' assessments have been outstanding. We expect these boats to perform very well during boat show season. The 23 LSV, the 25 LSV and the M235 also continued to be very strong and generated demand. Later this week, we will be introducing our fourth and last new boat for fiscal year 2017. This boat hits the sweet spot in skiing.

It pulled its first competition two weeks ago and athletes had better performances than they have had the entire year. We are also offering this boat in four different flavors so to speak that should hit various customers where they are most interested.

In the Axis brand, the A22 and T23 are stalwarts of the brand and continue to be in demand for their performance, simplicity, and edgy aesthetics. Our new dash for Axis is helping to draw demand for all models and we believe and we are hearing from the customers as well this is being very well accepted.

We believe we are operationally excellent marine manufacturer. Others are also good, but we believe no one can compare with our efficiency, revenue per person, EBITDA per person and direct labor hours per boat based on our own internal research.

Our commitment tool and execution of operational excellence continue to be a driver of our improvement in ongoing consistent performance. In summarizing Malibu marked this morning, Malibu had another great quarter meeting or exceeding our financial and internal metric. During calendar year 2016 Malibu have seen significant growth in market share.

We ended our fiscal year in June and expect to end calendar year 2016 with the highest market share in Malibu's history. The domestic business continued to perform well and we believe that retail registrations will grow greater than 10% for calendar year 2016, slightly better than we had anticipated.

International markets continued to be challenged, but we believe they have bottomed up. We are well-positioned in international markets turnaround. Our new products for Malibu year 2017 has been well-received and is already selling at retail. Lastly, we believe that we are the best operators in the business.

We delivered four new boats every year and take down some fresh effective vertical integration in this such as tower and trailer manufacturing that driver our efficiency and profitability. I will now turn the call back over to Wayne, to take you through the quarterly results in more detail..

Thanks, Jack. Net sales in the first quarter increased 8.4% to $62 million. Unit volume increased 1% to 833 boats, including 77 units from Australia. The Malibu brand represented approximately 69% of units to 577 boats and Axis represented approximately 31% to 256 boats as both continued to perform well.

Consolidated net sales per unit increased 7.3% to approximately $74,450. The increase was primarily driven by a higher mix of Malibu model, lower international discounting, combined with year-over-year price increases across the line. Gross profit in the quarter increased 7.6% to $15.8 million and gross margin decreased 20 basis points to 25.5%.

Selling and marketing expense increase 7.1% to $2.4 million in the first quarter. As a percentage of sales, selling and marketing expense decreased about four basis points to 3.9%. General and administrative expenses, excluding amortization, increased 31.1% or $1.1 million. As a percentage of sales, G&A expenses increased 170 basis points to 9.8%.

The increase was primarily due to professional services including legal expenses related to various litigations. Adjusted EBITDA for the quarter increased 4.4% to $9.9 million, and adjusted EBITDA margin decrease 60 basis points to 15.9%, both were in line with our expectations.

Non-GAAP adjusted fully distributed diluted earnings per share increased 4% to $0.26 per share. This is calculated using a normalized C-Corp tax rate of 35.5% and a fully distributed weighted average share count of approximately 19.3 million shares.

For reconciliation of adjusted EBITDA and adjusted fully distributed net income to GAAP metrics, please see the tables in our earnings release. Our first quarter results were in line with our internal goals and our outlook for fiscal 2017 is unchanged.

As Jack mentioned, we believe our dealer -- our lower dealer inventory levels and strong retail share trends position us well for fiscal 2017. We do not provide detailed earnings guidance, but our outlook for fiscal 2017 is based on the following factors; an increase in unit volume approaching mid-single digits.

With respect to cadence, Q1 will likely be in the mid-single digits, with the remainder of the growth coming in the second half, weighted slightly more to Q3. From a volume mix perspective, Axis is expected to represent a proportion of unit sales slightly lower than fiscal 2016.

Consolidated net sales per unit is still expected to increase in the low single digits for the full year. Gross margin is expected to be slightly up for the full year. As expected margins were down modestly in Q1 year-over-year. Year-over-year margin expansion should begin happening slightly in Q2 and continuing each of the following quarters.

Legal expenses relating to the MasterCraft litigation are expected to be a little more than roughly double that of fiscal 2016. Adjusted EBITDA margin is expected to increase modestly. And finally, regarding capital expenditures. We are currently planning between $8 million and $9 million in capital expenditures.

In closing, let me just say that we are pleased with our first quarter fiscal 2017 results. They were right in line with our plan. We believe the resilient growth in the U.S. market and a strong market share trends have set us up very well for strong fiscal 2017. With that, we would like to open the call to your questions.

Operator?.

[Operator Instructions] And our first question comes from the line of Tim Conder of Wells Fargo Securities. Your line is now open. .

Confusion here..

Tim, we can hear you. .

Okay. Great. Great. A couple of questions. Little color as far as your share gains, gentlemen, as you said year-to-date here and what you are anticipating for calendar 2016 here.

For yourselves and the industry just a little bit more color, is it Axis Malibu brand, which brands are behind that and I guess for the industry also, any commentary you can provide? And then as it relates to Australia, Jack, you mentioned you are seeing the international markets not improving, stabilizing.

Between Australia and Canada which one would you say may be potentially a little bit more on the cusp of hitting that upturn?.

To answer your market share question first, we have seen strengths across of the world and all the regions in the U.S. And Malibu premium, so our Wakesetter M23 all of that from our market share standpoint has grown robustly, driven by the new products that we have introduced. Axis has done quite well.

As you might recall we did not introduce a new model this year, and we only introduce one new Axis last year. But it continues to be at -- about approximately the same level, clearly number one. And so we have been very encouraged by that. We have seen the strength across both of our brands. Largely -- I will divide it into two tiers.

We have by far seen significant market share growth. The first tier which would be our larger competitors, have either dropped in market share or stayed about the same.

And then second tier of competitors, we had a couple of that have pick up a little bit market share and one notably has dropped fairly significantly because I think the loss in distribution. .

Yeah. And just to add a little bit color there, Tim. In terms of the split of that gross market share gain, it really actually mimics it volume, so I would say 65% of those share gains are coming on the Malibu side and 35% of them are coming on the Axis side. .

Going back to your second, Australia versus Canada, Australia because we do manufacture there and we have such a significant market share advantage that really has not been impacted other than from the currency side a little bit. So that has not seen the weakness that the Canada has. It’s been fairly consistent.

So the upside remains on Canada should the currency and the oil and gas situation turnaround. .

Okay. Okay. And then -- it helps gentlemen, thank you.

And then the litigation, just -- any change in the timeline there that we should anticipate here as far as its file? And then the doubling of the expenses, just a little bit more color there and then also as it relates to CapEx, the $8 million to $9 million, Wayne that you mentioned there, just a little color of -- if you guys had another project filter in there or maybe how you are going to redeploying that?.

I will take the first question and Wayne can take the second. On the timing, nothing really has changed. We continue to be in claims construction and some depositions. The first litigation is still schedule for May of 2017. And then attentively the second litigation is schedule for the fall of 2017..

Okay. .

And with respect to the expenses, really -- if you recall last year's guidance expenditures there, we came in on the low side of that by about $0.5 million. So what you really seen there is the impact of a little bit of expenses falling on the other side of that June 30 year-end date and the expense of the trial.

So that's really the function that's going on and little bit of shifting, time variance and the fact we have trial in the period. So that specific to those expenses.

With respect to the capital expenditures, that is primarily driven -- that increase is primarily driven by our investment in the piece of property, we have a building that's under contract that is across from our facility here Loudon, Tennessee. And our work improved the last pieces to close on that property here in the next couple of weeks. .

Okay. Thank you, gentlemen. .

Thank you. .

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

Hey, good morning, guys. .

Good morning. .

Hey, I just wanted to touch on more of a clarification, in terms of Canada, I know it’s been kind of the big drag here for much of the marine industry the past year and a half.

Could you again clarify what -- I guess what's build into your expectations for fiscal year 2017? Are you looking for continued softness? Are you looking for rebound, are you looking for the down double-digits again?.

So at wholesale we are looking at -- looking for it to be, you know, essentially flat which we were in de-inventorying position last year which will lead you to the conclusion or expectation that we have embedded a little bit more softness in the retail environment for the coming year. .

But….

One way to think about that little bit, we think it’s going to be flat and that's what we plan for. To the comments that I made on the call, if the currency change or oil and gas changes and there is upside, we have not built that into our planning. .

Okay. That's perfect. And then just on -- I think you may have mentioned of it in the press release, just to get help, flesh it out little bit more, talking the rebate promotional, it sounds like it’s better year-over-year.

So can you just give us any color around that what's you are seeing there?.

Yeah, I think what we have said pretty consistently since the beginning of the calendar year, around international discounting that we weren’t getting, [indiscernible].

And so what you are seeing is a little bit of that impact on year-over-year basis in the P&L where we are not putting it as many dollars for international discounting to try and help support those volumes. .

And I would assume that just part due to the low inventory level, your dealer inventory in that market. .

On a year-over-year basis more of a stabilization in that -- in the currency, the exchange rate. .

Okay. .

Bridging the gap between a 20% move in the currency for some period of time versus accepting that as a little bit of the new normal. So really that. And so from environment perspective, I think, you are not seeing as much of that type of discounting going on. .

Got you. And then just last question for me. You took your kind of full year expectations for the domestic market up to about 10% from 7% to 8%. I guess just in terms of how you think about the year, maybe even backing this or including this labor commentary here. I think you mentioned in the press release labor costs were bit higher.

I mean, I guess, how do you think of that in terms of just your production plan for the year? Can you handle -- can you bring on board people in I guess efficient manner, where we wouldn't see kind of cost efficiencies running through as you are ramping up the throughput rates?.

Yeah, I think that's very accurate. We have not, to this point, had any problem attracting talent, attracting people to our plant. We started four to five years ago, Mike, really putting together strategies and actions to become employer of choice, and I believe that is paying dividend for us well.

So, whether we need a few people because we are adding boat count or whatever that situation might be, we feel very comfortable that we will have the labor for that. .

And what I would say is in Q1 the labor that we saw, we brought three new models all at the same time. And so, I think what we are seeing in factories, you know, high degree of efficiency today. We have been very stable in our workforce for the past -- going on 15 months now, because our daily throughput, has been pretty stable.

So I think we feel like that labor will -- obviously the labor market globally and in the U.S. is then a bit tight, but we feel like we have a nice stable workforce and we expect to get to more efficiencies out of that labor force in the coming quarters. .

Okay. Great. Thanks, guys..

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

Thanks. Hey, guys, good morning..

Good morning. .

Good morning. .

I guess, first question, I just wanted to clarify in Canada, you mentioned wholesale shipments you expect to be flat in fiscal 2017.

That implies retail flat as well, or do you think retail would be below that?.

That would imply retail probably down modestly in -- our fiscal 2017..

Okay.

But still better than what you saw the trends in fiscal 2016, obviously, so--?.

Yes, correct. .

Okay. Moving onto gross margin, I am a little bit surprised that it wasn't a little better this quarter and I guess the outlook is for up modestly. You have got improving mix with larger boats, obviously, towards the Malibu brand. You talked about less discounting internationally this quarter, a higher pricing, et cetera.

So, why aren't we seeing better margin trends? And I guess part of that goes back to the labor cost comment you made earlier, where in particular are you seeing higher labor costs? Is it healthcare, or things like that?.

It’s a little bit on healthcare in the quarter, but really -- when you look at it, it was driven by -- bringing out three new models in the quarter. And just on year-over-year basis, we didn’t have any real volume. We were up 1% on a volume basis.

So, I think when you see -- like we said on our last call, we were expecting that and it was right on top of our plan in terms of just some margin pressure in Q1. And I think we feel very comfortable with our expectation that it will -- back to our plan in Q2, Q3 and Q4 of this year. I mean, that's where the pressure was there.

But we are seeing positive things on the material side. .

Okay.

So, the gross margin should follow -- beating the trends, basically throughout this year?.

Yeah. And I think the other -- there is one other element. We have modified the way our dealer programs work this year and that had impact as well. So -- and it will adjust -- and the back half will be impacted by those dealer program. So the programs will have more of impact on Q1 and Q2.

And so we change our backend money to our dealers and how that works. And our expectation is that that's going to be more of a drag in Q1 and Q2 versus Q3 and Q4. So net for the year, it shouldn’t be an impact on us. But there is some seasonality that will manifest itself in that program. .

Okay. Great. Thank you, guys..

Thank you. And our next question comes from the line of Jimmy Baker from B. Riley & Company. Your line is now open. .

Thanks. Good morning, guys. Nice quarter..

Good morning. .

Thanks. .

Just hoping you could help us understand the 12% year-over-year unit decline in Axis units during the quarter. I believe that brand skews more towards the U.S. versus the Malibu brand. And then as you mentioned Axis is gaining share against that stronger than expected domestic industry backdrop.

So, just wondering why the destocking, why that was more pronounced in Axis versus Malibu or if there was some sort of timing or comparison issue we should be aware of?.

I mean, really it’s a function of our new models, right? The fact that matter as we brought out three brand new Malibu models, we didn’t have a new Axis model and there is an element of stocking that always goes on -- around new models. And last year we had the impact of a new model on the Axis side.

The Malibu 21 VLX is also shorter side in the Malibu family and probably two-thirds of the way between the Malibu and Axis family. So, it’s really not an issue. Like I said earlier a third of the market share gains that we are seeing are still coming from Axis. So, I think it’s nothing outlaw -- outside of our expectation in the quarter. .

Okay. Understood. The rest of my questions have been answered. I just was hoping -- if you could provide a little commentary on where you are assuming channel inventories to end the fiscal year at.

In other words, should we assume that this decline in weeks on hand domestically would continue, and international units would be down for the full year or is there a change from full year versus this quarter?.

So, you are asking from the point in time -- from where we are at today from inventories? Where they are going to end the fiscal year 2017?.

Where you are at to end the June quarter versus ending fiscal year 2017..

Got it. Look I think we felt very comfortable with there. Channel inventories were existing fiscal 2016. I don’t think -- I think if they went up a little bit, we would be fine. And I think if they dropped a little bit from where they in the fiscal 2016 on weeks basis, we would be fine as well. But I think we feel very comfortable with that level.

And I would say that we would be very happy to end next year at the same place we were at -- we ended fiscal 2016. And, obviously, with 20 -- calendar Q2 or our fiscal Q4 being the largest retail quarter, there is a bit a variability in how that end. So, on a year-over-year basis being flat is a good target.

And depending on what happens at retail in calendar Q2 2017 will drive whether it goes up or down or we hit right in the middle. .

Okay. Got it. That's helpful. Thanks a lot, Wayne..

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

Thanks. Good morning. Just want to inquire a little bit on the granularity of the strength in California. Obviously, there were some weather related factors, but you are dramatically sort of exceeding the market growth there.

How much of that is the strength of distribution as opposed to just the general market share gains you are seeing everywhere else. I know you guys are kind of head and shoulders above everyone in terms of distribution in that market.

And to the extent that your plans for maybe growing that dealer network in that market given the strong growth that you are seeing there as well? Thanks..

Without a doubt, it's distribution. I would point back to besides the economic factors and the environmental factors in California, it comes back to the two things that I have mentioned in my remarks which would be the distribution as well as the product.

The product, we think that, you know, you have some large boat markets to some of the products that we have introduced in the last year have really hit those markets. We also believe that our new MXZ series and the 21 VLX is going to be very strong in California. So product and distribution. You do state correctly that we have a better distribution.

Going back to the IPO, that was one our key areas of potential growth because we did have such strong market share and strong distribution. But what I would point to is that we are always very careful in terms of adding additional distribution and minimizing or diluting our existing dealers.

And what we want to do is we want to have distribution that allow the customer to be able to take their boat for servicing or for winterization, or for storage within a certain radius. We believe that when it gets beyond three to five hours that it becomes a problem for that customer.

So as we are structured right now, we have the right distribution in the right area. There maybe a couple of areas in the southwest that we can make some improvements and we will look to do that. .

Okay. Thanks very much, Jack..

Thank you. .

Thank you. [Operator Instructions] And our next question comes from the line of Gerrick Johnson from BMO Capital Markets. Your line is now open. .

Hi. Good morning, guys. Can you discuss the modified dealer programs mentioned earlier? Thank you..

We don’t want to say too much. I think the short of it is that we recalibrated our programs. Our programs historically had not been as meaningful to say a dealer that's below 40 units per year.

And so, the programs really were affective in terms of our relationship with our larger dealers, but they were less affective with some of the smaller guys, and the smaller guys are majority of the total dealers. So what we did was we recalibrated our programs. So that they would be meaningful to our all dealers. .

Yeah, I think one impact, Gerrick, that's probably important to note is that we had our entire first half book of orders in place for a couple of months now. And so, that's new indication that from a unit wholesale point of view that programs are working, the dealers are excited about it, and then we will be successful. .

So, that was the primary reason for why we change the program is to make it meaningful to all of our dealers. .

But what's the upshot here? Does that mean that your allowances are ticking a little bit higher or how should we think about how this impacts the P&L?.

I think, Wayne probably said it pretty well. It’s -- just from a timing standpoint, it moves some up into that first half. But over the course of the year, we are not looking at anything greater than it’s historically been for the most part. But the upshot on the positive side is that that unit volume will come in exactly as we would want it to be..

Okay. Thank you..

Jack Springer:.

Thank you. And I am showing no further questions over the phone line. .

We at Malibu, thank you for your interest in Malibu and also for joining this call today. We are very happy with our fiscal first quarter performance and we continue to have a positive outlook for Malibu in the second quarter and into the boat show season. Thank you for your support and have a great day. .

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day..