Jack Springer - CEO Wayne Wilson - CFO.

Tim Conder - Wells Fargo Securities Michael Swartz - SunTrust Joe Altobello - Raymond James Gerrick Johnson - BMO Capital Markets.

Good morning and welcome to Malibu Boats Conference Call to discuss the Fourth 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; Mr. Wayne Wilson, Chief Financial Officer; and Mr. Ritchie Anderson, Chief Operating Officer.

I will now turn the call over to Mr. Wilson to get started. Please go ahead, sir..

Thank you, and good morning, everyone. On the call Jack will provide commentary on the business and I will discuss our fourth quarter financials and outlook for fiscal 2017. We will then open the call for questions.

A press release covering the company's fourth 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 the 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 measures are included in our earnings release. I will now turn the call over to Jack Springer..

Thank you, Wayne. Good morning and welcome to our call. Malibu had our best fourth quarter in Company history exceeding our own expectations. Net sales increased 12.6% to $75.1 million, adjusted EBITDA increased $15.5 million or 14.4% and adjusted fully distributed earnings increased 13.2% to $0.43 per share.

Fiscal year 2017 was a great year, a record year for Malibu. We surpassed our financial goals and we delivered on our strategy to leading product innovation in the industry having the strongest dealer network, leveraging vertical integration as a competitive advantage and being a best-in-class operator.

We continue to stay focused on delivering quarter-over-quarter and year-over-year results and improved the number of our shareholders. As we consistently say, we will always make long-term strategic decisions to strengthen Malibu and build value. In July we closed the acquisition of Cobalt Boats.

This acquisition is consistent with our long-term growth strategy, allows us to diversify our product portfolio with sterndrive boats, outboard boats and additional wakesurfing portfolio boats. It is important to point out that we found the right asset for what we believe is a reasonable price. The brand of Cobalt is second to none.

Cobalt has a solid foundation and is the leader in their primary segment. In addition, we have discovered that Cobalt is a leader by very large margin in the sale of surf boats in the sterndrive segment. This is highly complementary to Malibu being the leader by a large margin in the sale of surf boats in the performance boats sports segment.

Most importantly, Cobalt has a bright future and we believe Malibu leadership will be able to complement and accelerate Cobalt. Like Malibu, Cobalt has an extensive, exceptional dealer network and they build high quality luxurious boats.

Combining Cobalt's core strengths with Malibu's operating, product development and innovation focus should produce results that all stakeholders will benefit from. The U.S. marine remains healthy and the performance of sports boat segment continues to grow.

For the sixth year in a row, the performance sports boat segment had a good growth yet the segment is still 30% plus off the peak which signifies an additional upside. We believe that there are many reasons to be optimistic about the future of the U.S. market.

Consumer confidence with both our dealers and the retail customer remains high and they are showing confidence in the state of the economy and planning for their future. New product and innovation is driving existing boat owners to upgrade and new customers to enter the market.

Wakesurfing continues to disseminate into the mainstream but remains relatively unknown to many potential consumers. Interest rates remain low, businesses are growing and adding employees at a rate that we have not seen in 10 years. We expect that these factors among others will continue to drive the healthy growth of the U.S. market.

Regionally we are seeing every region grow. The United States is by far the largest market in the performance sports boat segment and almost all areas continue to perform well. Specifically there have been some questions around the Gulf Coast and Texas which I will address.

The recent hurricane can be expected to have some impact but that impact will largely be in segments outside of ours. The impact for our boats will be minimal. Houston is not a large performance sports boat market compared to the DFW and South Texas corridor and the hurricane occurred at the end of the season.

If anything, any minimal impact should be raised, the demand should strong next spring with destroyed boats being replaced. Meaningful improvement continues in the southwest. California has grown, and both Arizona and Nevada have had double-digit growth rates in 2017 with significant upside to reach pre-recession unit sales levels.

Internationally, most international markets are still weak but we are seeing improvement. Some of the most important currencies for our segment have appreciated to a [indiscernible] level and have stayed there over the last few months.

In particular, our two largest international markets, Australia and Canada have both seen their currency stabilize and [indiscernible] have not been seen for about two years.

Canada's unit volumes have fallen double-digit growth with three previous years and there is some customers who have been holding out for the currency to become more favorable before making a boat purchase. In addition, the Euro which represents most of our third largest international market is near a calendar year high for 2017.

While we have not seen a significant uptick in international home sale shipments at this point, we believe the strength of these currencies will go a long way in helping the international economies to recover from the sluggishness of the last two to three years.

We are very focused on bringing the right new product to market each model year; now that includes Cobalt. In fiscal year 2018 we are normalizing our new product cycle by introducing two new Malibu models and two new Axis models. The boat we will always discuss first is the Wakesetter 23 LSV.

The 23 LSV is the bestselling boat in the history of towboats and has lead an annual unit sales for the last eight years in a row. Being a new boat again, this year it will lead Malibu in the performance sports boat segment again. For Axis, the A24 has a sleek new design for 2018 that updates the largest model in the Axis line up.

The A24 is big enough for the whole family yet has the agility of the small boat and what we believe is the lowest prosper 24 foot boat in our segment. The Axis T22 has been reimagined with an edgy design that is unlike anything that we've done before. The T22 offers precision handling and an extraordinary on the water experience at an amazing price.

There is one more new Malibu that's coming for model year 2018, as well as three new Cobalt models that we will be announcing in the coming months. We have demonstrated quarter-by-quarter that we are the best operator in the marine business.

We will be using our proven approach at Cobalt where we will be applying the processes and fundamentals that have made Malibu operationally excellent. Our engineering team is second to none in the industry as we continue to release four all new boats every single year and scale our processes to accommodate growth.

We had a singular focus to look for ways to give better and improve the value of our products for our dealers and our customers. Our marine engine marinization project was announced in November of 2016 and it has continued to progress. We have been testing engines in our boats and the results have been very impressive.

Our stated timeline to begin using our own engines as early as fiscal year 2019 is on-track and the project is on budget. Recently we announced the licensing of our surf IP to Wake Worx. With this agreement we now have five of the seven largest performance sports boat companies and almost all sterndrive companies under license.

Our surf technology is something that we work very hard to develop and we will continue to vigorously defend our intellectual property moving forward. We expect fiscal year 2018 to be another very good year. Inventories are reasonably low, our first and second quarter order book is strong and the U.S.

has tailwinds right now that actually propel growth again in 2018. We are bullish in our expectations for fiscal year 2018. In summary, Malibu had a record fourth quarter and a record fiscal year exceeding our financial targets. The acquisition of Cobalt allows us to grow, diversify and leverage our operational expertise.

The domestic market continues to grow and the performance sports boat category is healthy. International market should benefit from the strengthening of foreign currency such as the Australian and Canadian dollars and Euro but we have not seen a market increase in wholesale shipments yet.

Our new product for model year '18 includes two access, the bestselling wakeboard boat of all-time and the Malibu Wakesetter 23LSV and a to-be-introduced Malibu new boat [indiscernible]. Our engine initiative is progressing on-schedule and on budget. Ultimately 2018 is set up well and we expect it to be another good year.

I will now turn the call over to Wayne to take you through the quarterly results in more detail..

Thanks, Jack. Net sales in fourth quarter increased 12.6% to $75.1 million. Unit volume increased 8.9% to 1,004 boats including 81 units from Australia. The Malibu brand represented approximately 70% of units or 699 boats, and Axis represented approximately 30% or 305 units as both continue to perform well.

Consolidated net sales per unit increased 3.4% to approximately $74,800; the increase was primarily driven by year-over-year price increases and a shift to the Malibu brand offset by mix shift within Malibu to the RESPONSE TXi and 21VLX models.

Including the impact of $60,000 from our engine vertical integration initiative, gross profit increased 12.4% to $20 million, and gross margin was essentially flat.

Selling and marketing expense increased 52.8% to $2.3 million in the fourth quarter, the increase was primarily due to the timing of our annual photo-shoot in various marketing initiatives. General and administrative expenses excluding amortization increased 16.2% or $1.3 million.

As a percentage of sales G&A expenses increased about 40 basis points to 12.3%. The increase was due to expenses related to our acquisition of Cobalt Boats, engine vertical integration initiative -- expenses, and offset by reduced litigation expenses.

Excluding amortization, litigation expenses in our engine project, general and administrative expenses were flat year-over-year in the fourth quarter. Adjusted EBITDA for the quarter increased 14.4% to $15.5 million, and adjusted EBITDA margin increased about 30 basis points to 20.6%.

Net income for the quarter increased 151% to $10.3 million, while net income margin increased about 760 basis points to 13.7%. Two elements driving the substantial increase in that income were our settlement with Master Craft related to IP litigation and then $8.1 million adjustment to the balance of our estimated TRA liability.

In the quarter, the State of Tennessee passed new legislation that will materially lower the Company's income tax rate. Accordingly we adjusted our TRA liability given the lower expected tax rate and therefore lower expected future payments under our TRA agreement.

Non GAAP adjusted fully distribute diluted earnings per share increased 13.2% to $0.43 per share, this is calculated using a normalized C-Corp [ph] tax rate of 35.5% and a fully distributed weighted average share count of approximately 19.3 million shares.

Touching on the full year numbers quickly; unit volumes increased 6.9% and net sales increased 11.5%. Net sales per unit increased 4.3% on a consolidated basis. Gross profit increased 12.3% to $75 million and adjusted EBITDA increased 15.5% to $55.7 million for the year.

For the year non-GAAP adjusted fully diluted earnings per share increased 18.2% to $1.56 per share. For a reconciliation of adjusted EBITDA and adjusted fully distributed net income to GAAP metrics, please see the tables in our earnings release.

Since the end of fiscal year 2017 fourth quarter, we have completed two transactions that will have an impact on our financials going forward.

First, the acquisition of Cobalt Boats provide us with a world-class brand where we can deploy our core competencies to improve financial performance throughout rational improvements, as well as through innovation and product management. We believe this acquisition will have a meaningful impact on our per share results this year.

Our recent offering of 2.3 million primary shares will modestly dilutive per share deleveraged the balance sheet a little to provide us optimal flexibility as we continue to grow. We think the combined impact of these two transactions will result in an acceleration in adjusted fully diluted earnings per share growth.

We do not provide detailed earnings guidance but our outlook for fiscal 2018 is based on the following factors. An increase in unit volumes of approximately 55%, with respect to cadence this should be pretty consistent throughout the year with the exception of Q3 will be a little higher.

From a volume mix perspective, Cobalt is expected to represent approximately one-third of unit volumes. Consolidated net sales per unit is expected to increase in the low to mid-single digits for the full year with the second half outpacing the first half slightly.

Gross margin is expected to approach 24% with year-over-year decreases from the inclusion of Cobalt to be felt pretty evenly throughout the year. Acquisition of engine expenses are expected to be approximately $5 million. Adjusted EBITDA margin is expected to exceed 17%.

Finally, regarding capital expenditures, we are currently planning approximately $13 million to $14 million in capital expenditures, that includes expenditures of approximately $5 million related to our engine vertical integration initiative. In closing, our fourth quarter results were outstanding and exceeded our expectations.

We are excited about acquisitions of Cobalt and believe that it is a unique opportunity to drive shareholder values. From what we have seen thus far during fiscal 2018, we are set up for continued strong growth. With that, we would like to open the call to your questions, operator..

[Operator Instructions] The first question is from Tom Conder of Wells Fargo Securities. Your line is open..

Good morning, gentlemen, Tim Conder here. A couple of clarifications. Wayne, on the Master Craft litigation year-over-year decline; I apologize if I missed it there.

Did you give the number -- just a approximate number of that? And then Jack, on the four boats per year clarify there too; does that include Cobalt or is that of the -- just Malibu and Axis brands alone?.

Tim we didn't give the specifics of that expense. You can potentially back into it looking through the add-backs in the table -- in the non-GAAP measures.

But what we are trying to just get at is, what is going on with our underlying G&A expenses and so potentially excluding amortization, those litigations expenses and our engine project G&A expenses were flat on a year-over-year basis in the fourth quarter..

And in regard to the question on new product, Malibu has the four new boats; that would be two Malibu and two Axis. In addition to that we have three new Cobalt Boats that will be announced in model year 2018..

Okay, that's what we thought. Okay, thanks Jack. And then Jack, as it relates to the Southwest market; where are we now? I think that obviously given the lack of waters last couple of years that is substantially lagged and you alluded to there remains a nice upside.

Where are we now; is that percentage of the prior peak for that geographic area for you or for the towboat industry?.

I think that overall we're -- we've made progress. I can't give you the exact number, we certainly made progress in that Southwest region and we think that we rather maintained or taken market share as it's come back. There is still a substantial amount of ground that we can gain though..

Okay. And then one more, I guess housekeeping Wayne; just the underlying tax rate.

Again, going forward here given -- I thought you alluded to with the State of Tennessee tax watching just there, the -- what should we anticipate looking into fiscal '18 here and beyond?.

Yes, we haven't -- we'll provide a little bit more color on that on the next call but it will be down over 100 basis points just given that portion that's after that we're going to be able to achieve in Tennessee..

Okay. And lastly, Jack, the shows and when should we get some more visibility related to Canada and some of the international markets? It looks like again the currencies as the movements that you mentioned there and we've noticed in the markets, especially over the last week or so the additional pop in the Canadian dollar.

When should we start to -- you guys start to see a little bit even further firming in the dealer orders flow?.

I think it will see a little bit now but we're yet to consider that we're entering the off-season. So in reality, the -- if the currency stays where it's at, we'll see probably a big impact, a bigger impact; I'll put it that way. Once the boat show season begins in January..

Okay. Great, gentlemen, thank you and congrats on a great year..

Thank you very much. Appreciate it, Tim..

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

Good morning.

Just wanted to touch on guidance; if I do the math and assuming my math is right, it looks like you are calling for about 4% to 5% unit volume growth on the core business for '18 and I just want to tie that to Jack's comments which sounded pretty upbeat with what your expectations for the year ahead; that would be acceleration from the unit volume growth you saw in fiscal '17 which came in I think around 7% or 8%.

Do you -- maybe just fit your comments with your guidance?.

Yes, look I think -- Mike, the market -- everybody is looking at the same data, right. And the market is not growing as fast as it was but it's still growing and our dealers are still positive and we feel good about the market. I think our guidance is pretty consistent with where we've been kind of historically.

And so I think your numbers aren't far off, you might be a little bit on the lower side but not much. And so I think part of that's conservatism, part of its -- you know, we're looking at the same kind of environment that everybody else is looking at but we still feel positive about it but it's not a 12% grower right now.

Now that being said, to Jack's answer, to complement to Tim; we're seeing some more orders out of the international already early in the season and we would expect to see more yet later in the fiscal year..

Okay. And I guess the flipside to that is, it looks like you're calling through Cobalt volume to be closer to 2,000 units in the share, I think as we did the math, as we announced the transaction it looked like it was closer to 1,700 units based on the ASP and revenue numbers.

So how to think about that? That just seems a little better than I would have guessed..

Look, I think the ASP kind of guidance was based off of -- there is a little bit of apples and oranges potentially in terms of the historical financial -- good comparison versus how we present our financials on a prospective basis.

So I don't think you can rely on that too much and in terms of trying to back into the number but it's going to be pretty close..

Mike, I commented we've gotten more and more comfortable with Cobalt and put the budget together, etcetera. We believe that the product that we're going to be bringing out for Cobalt this year is going to be pretty impactful.

We also see Cobalt as I said in my comments, they -- in that sterndrive market are leading surf; and that was very pleasant discovery for us, and so it just further emboldens us to believe that not only can we own surf in the performance sports boat segment as we have but we'll own it in that sterndrive segment as well.

And I think the other thing Mike that supports that is that the inventory levels at Cobalt are down substantially year-over-year and versus historical levels on a week's basis. So we feel very good that there is a bit of demand that's pent up there with the dealers..

Okay. And then just final question; given the number of license and agreements you now have for your surf technology [indiscernible] five of the seven largest towboat to [indiscernible] brands.

Is there a way to think about the total of licensing revenue going forward?.

I don't think we plan to disclose every -- we continue to explore options and try and maximize that revenue and we don't want to put any element of risk into those conversations..

Okay, thanks..

The next question is from Joe Altobello of Raymond James. Your line is open..

Thanks, good morning.

First question, I want to go back to the ASP outlook for fiscal '18, the low to mid-single digit increase; how is that being impacted by the acquisition at Cobalt for example? And what is the outlook for the base Malibu business given the greater emphasis on Axis this year in terms of new boats?.

Look, I think it begets [ph] not -- the outlooks are strikingly similar, frankly.

And so I think we didn't specifically call it out just because I think that the similarities are pretty striking and yet -- and so -- the access business; the access mix will go up, it will go up a little bit this year but we also have the benefit that one of those models is the A24 which is on the higher price point with respect to Axis.

This past year two of our Malibu introductions were the TXi or the RESPONSE TXi and the 21VLX, both of which are priced lower than the A24. So I think all in all, you're seeing not major impact on mix within the core Malibu business..

Okay, got it. In terms of the international market, you guys now live in more constructive this morning; can you run us where dealer inventories are and if we do see some improvement in retail outside the U.S.

would you expect the rebuild?.

Yes. I think we have the currency improvement across the world and we have some oil and gas help in Western Canada, we will absolutely see a rebuild. Over what period of time, I'm not sure it will be continued upon; the depth the currencies drop and how quickly the oil and gas market come to back in Western Canada.

We are more positive and hopefully that didn't come across, I've just been in Europe and things are going better in Europe than they have been over the last two or three years and the demand and uptake seems to be higher from an inventory standpoint and I'll break it down a little bit for you Joe; inventories in Canada, we feel very comfortable with, they are down significantly over what they have been the last couple of years.

The inventories in Europe are relatively modern, they normally are for us; unlike some of our competitors we don't flush a lot of boats into Europe at [indiscernible] warehouse.

Then Australia, our dealers are pretty -- in good shape as it relates to their inventories there and of course, they are going to be entering into their heavier selling season in the next couple of months..

Got it.

And I guess there is one last one for Wayne, in terms of modeling this year given the changes to your capital structure; what you're expecting for D&A and interest expense for fiscal '18?.

Let us circle back with you on that. I think what you should be able to get back into it, we'll give you some direction on it..

Okay, great. Thank you, guys..

Thank you. And the next question is from Gerrick Johnson of BMO Capital Markets. Your line is now open..

Good morning. I have three questions here. First, if you could give us the retail growth of Malibu/Axis in the quarter? Second, Brunswick's called out weakness in the high end which is exactly where you guys play but it doesn't sound like you're seeing that and fact check. You're probably the most bullish about the U.S.

economy of all the conference calls I've been on this quarter.

So maybe if you could talk about that, why you guys are seeing something different? And then third question, backing out the cost of engine buildout, that's about $0.05 a share; what's the inflexion point? When are we no longer excluding these costs; is that when you start using these engines or is there a certain milestone we need to hit there?.

I'll answer your first two questions Gerrick and then turn it over to Wayne for the second question. In terms of the question or the comment around Brunswick's commentary on weakness; if you look at that I think there is one really predominant thing going on. What they and MarineMax are referring to are larger boats.

The larger boat segment has slowed and fairly significantly for them, that does not impact us. I think also if you look at the product that Brunswick brought out, they brought out a lot of product two years ago, they've slowed that pace down somewhat; so that's going to have an impact on that market as well.

But I would largely put it on that large boat segment has slowed down and that's not anything that being that we have 25/26 foot boats as our largest boats out there, it's not going to have that impact.

On the bullishness side, it's kind of interesting and this is something that we watch very carefully and one thing I'll point out; since we've gone public in '14 with the economy and with the bullishness or the variation is, when the market as the retail level is going down, we've been able to see and predict it.

And I think that we're right in this regard, all of the data that we look at in terms of consumer confidence, what Garvy [ph] industry is doing, homebuilding, the currencies; all of that is positive right now.

Now that's not say that there cannot be some macroeconomic event that would have an impact but we don't see that and what I can very clearly say is that the first six months of our fiscal 2018 are going to be strong, we have the orders, we have the orders earlier than we've had them in three or four years, Cobalt has orders, their inventory levels are low and so we know at least to the visible point that we have today that through December of 2017 we're going to have a strong year..

And to the third question Gerrick, the inflexion point is really going to be when we start putting those engines in boats, these are expenses that are part of the investment and how we look at the ROI.

So we've said it's about $18 million in investment prior to -- and at that point in time you'll start to see that kind of three-year payback flow through the P&L..

One question I did not answer, you had asked about the retail data for Q4; do you want to come back to that Gerrick and answer that. The data for Q4 has been pretty slow to be developed and it's been somewhat inconsistent at this point I think over the next couple of weeks or so we'll hopefully get more stable and fully developed data.

But I will tell you what we know at this point, our dealers across the entire United States are telling us that they are selling boats and in many cases selling boats at a higher rate.

Secondly, we know that the inventory in the channel is low -- reasonably low, certainly not at a high level and we can also tell you that our current inventory levels are higher than our competition, meaning that, the inventory that is in the field is very current.

And then the third thing that I'll point to that gives us color is that our registrations are significantly higher in the fourth quarter this year than they were last year. Now whether those registrations will transcend into the fourth quarter or the first fiscal quarter right now I don't think is known.

On the Cobalt side the indications that we're seeing there is that in a market that continues to struggle little bit, we're still picking up share, exactly one of the reasons that we purchased this company to begin with.

And so ultimately we expect market share to grow but it's not going to be at the huge rate that we saw in fiscal year 2018 but it will probably be more in that realm of what we've said all along which is pinned to 30 basis points per year..

Okay, great, thanks..

One quick follow-up on Joe Altobello's question; Joe, I'm getting back to real-time here. D&A excluding amortization related to Cobalt acquisition will be about $10 million for the year and interest expense will be about $3.5 million..

Thank you. And at this time I would like to turn the call back over to Mr. Jack Springer for closing remarks..

Thank you very much. Malibu had a record setting year in fiscal year 2017. Given our vision into the first half of the 2018 fiscal year we believe that Malibu is extremely well positioned and that Cobalt further adds to that positioning. Thank you again for joining the call and we hope you have a great day..

Thank you. Ladies and gentlemen, this does conclude today's conference. You may now disconnect. Good day..