Wayne Wilson - Chief Financial Officer Jack Springer - Chief Executive Officer.

Mike Swartz - SunTrust Tim Conder - Wells Fargo Securities Joe Altobello - Raymond James.

Good day ladies and gentlemen, and welcome to Malibu Boats Conference Call to discuss our First Quarter Fiscal Year 2018 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 afternoon everyone. On the call, Jack will provide commentary on the business and I will discuss our first quarter financials and outlook for fiscal 2018. We will then open the call for questions.

A press release covering the company's first quarter fiscal year 2018 results was issued today 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 will now turn the call over to Jack Springer..

Thank you, Wayne, and thank you for everyone for joining the call. Malibu had the best first quarter in company history with just the Malibu and Axis performance.

This makes the 16th consecutive quarter that we have had our best quarter in history for net revenue, adjusted EBITDA, and AFDNI per share when compared to the same quarters in all previous years. Cobalt in our first quarter was additive to our performance. As this is our first quarter with Cobalt in the fold.

We were pleased with each of the brands performance and our financial results exceeded our own expectations. Net sales increased 66.9% or $103.5 million, adjusted EBITDA increased $17.7 million or 79.2%, and adjusted fully distributed earnings increased 61.5% to $0.42 per share.

Fiscal year 2018 is off to a great start and we are positive about this year. The core Malibu business continues to perform well and lead the performance sports boat segment. Cobalt is performing as we expected, and our plan to apply the Malibu playbook to improve the business is on track.

It is very early in the cobalt integration process, but we are satisfied with our progress in the first quarter. Cobalt is exactly what we thought it would be. One of the strongest brands in the industry, a leader in its segment, both that are built with quality, and a cash profile that is complementary to Malibu’s outstanding performance.

We also know that with Malibu’s focus on innovation, operational excellence, building strong distribution, and aggressive product development it will allow us to drive substantial year-over-year results in the business for many quarters to come.

There has been a lot of discussion in the industry about the shrinking sterndrive markets since the recession, as well as their lack of recovery. We want to provide some important color on this subject as it relates to Cobalt.

Year to date in 2017, the sterndrive segment is down 6.4%, but the decrease is all in the 20-foot and under category, which is down 21% and 30 to 40-foot category, which is down 5%. At Cobalt, we only have one boat in the 20-foot and under segment.

In the 30 to 40-foot segment, we have four boats, but very interestingly Cobalt has seen growth of 6% in this category. In the critical categories of 21 to 23-feet and 24 to 29 feet-which represents 62% of all sterndrive sales, the combined categories are up by nearly 3.5% total market and Cobalt is up about 9% year-to-date.

This is where we have 8 boats well positioned and winning. Comprehensively, Cobalt has grown retail registrations of fiber glass boats, almost 5% in 2017 as of year-to-date SSI data according to what we have.

The primary segment where Cobalt competes 22 to 40-foot fiber glass sterndrive boats have grown about 3.4% year-to-date and Cobalt has leading market share in that segment. Combining this performance with what we view as low inventory levels at Cobalt dealers, we see this as a great opportunity going forward.

In addition, we have just begun the interest into the outboard market, which has been strong and growing. The U.S. marine market is healthy and continues to grow. We expect the performance sports boat segment to grow mid-to-high digits in calendar year 2017.

Consumer confidence is at a 17-year high and there are potential industry benefits coming in tax reform, continuing environmental policy easing and the energy policy. At Malibu, we will focus on innovation and new product introductions across all brands to drive existing boat owners to upgrade and entice new customers into the market.

We expect healthy growth in the domestic marine industry as a whole and in performance sports boats into the foreseeable future. Almost all areas of the US market continue to perform. There has been much discussion about the impact of hurricanes on the Gulf Coast, specifically in Texas and Florida.

There was little to no impact on wholesale shipments for us. As far as retail, the impact on registrations in the Gulf states for September was not significant to either performance sports boats that Malibu Axis serves or the sterndrive market that Cobalt serves.

Recent performance and commentary by other public marine manufacturers has also been positive, which leads us to believe that the potential impacts have been overblown. As you know, Texas is the largest state for performance sports boat registrations in the nation.

Since 2015, Texas is grown by 14.8%, and Malibu has excelled in leading that growth at nearly 23%. Texas is up 5.2% year to date in 2017 over 2016 registration. In addition to the growth, only the Houston area has been affected by the hurricane and our dealer there has recovered very nicely from slight damage.

While the Houston market is down versus 2016, the impact on Malibu and Axis is less than five boats. Overall, we believe any short-term negative impact will be offset in the long run by an accelerated replacement cycle driven by damaged boats. The Western US continues to be a bright spot for the marine industry.

The recovery from drought conditions experienced in previous years has led to significant growth in western states, including California, Utah, Nevada, and Arizona among others. California is always a topic since it was once the largest state for registrations and presents a large upside.

Compared to year-to-date 2015, 2017 is up 51% in California over those two years. And given Malibu's 40% market share, our participation in that growth has been significant. I will also point out that California is a relatively weaker state for Cobalt and represents an opportunity for growth over time.

The sport to growth in the narrow and south-west area that region's remains well below 3% reservation peak volumes. The international markets have begun to recover, but we believe that it will continue to be a slow process.

We are optimistic that the relative strength in the currencies of our two largest international markets, Canada and Australia will help to assist in that recovery. Canada in particular has a long way to get back to the volumes of three years ago, but we are seeing signs heading in the right direction.

The majority of the first quarter saw Canadian currency at about $1.25 to the US dollar. International wholesale shipments have not seen a substantial change at this point, but the strength of the US market continues to more than offset this stagnancy.

At Malibu, we are well equipped to participate in and drive the International Marine recovery moving forward. Our focus on a fast paced and aggressive new product introduction cycle has continued to pay off. The best top selling performance sports boat in our history and in marine industry history the new Malibu 23 LSV has taken off.

Dealers and customers are excited about this boat, the new look, the features, and the design details will make it special. Our two new Axis models, the A24 and the T22 have been well-received and are performing well heading into the boat show season. Both boats are all new for 2018 and feature edgy designs and excellent performance.

Fiscal year 2018 is the first year in three years that we have introduced two Axis models and this should drive growth in that brand. We still have one more new Malibu to be introduced this month. We are introducing three new Cobalt models for calendar year 2018. Last week at the Fort Lauderdale show, we introduced two new outboard Cobalt boats.

The 23 SC and the 30 Sand we took orders for them. We also introduced a new A36, which was very well received and also generated orders. In the two Florida shows thus far, Tampa and Fort Lauderdale orders have significantly increased over last year for Cobalt.

We have already started the process of putting the Malibu process on Cobalt's product development. And although it will take time, we are excited about what will be brought to market in the coming years. We are proud of our operational excellence capability and it continues to sustain consistent quarterly performance and growth.

As we always look for ways to improve Malibu operations, we have taken our operational excellence philosophy to Cobalt. We are already beginning to see expected results, but the majority of results will be seen over the medium term. However, we are very pleased with our initial progress.

Not only will Cobalt benefit from our operating prowess, but the key strategies are bringing out more new product every year engaging vertical integration and leading innovation in the industry will also be new found advantages for Cobalt.

Our engine marinization project is moving along nicely and our timeline's, objectives, and financial return goals remain the same. We expect to produce Malibu Mariners' engines for our boats sometime during fiscal 2019 and the payback will be realized over a three-year period. Fiscal year 2018 is off to a strong start.

Dealer inventories are at a healthy level for Malibu and Cobalt, and we believe those inventory levels are in better position than our competition in both companies. Malibu orders for the first half came in strong and we are well into calendar year 2018 with orders. Cobalt orders are also well ahead of last year.

Assuming this continues into the boat show season, fiscal year 2018 should be a very good year. We continue to be bullish on our expectations for fiscal year 2018. In summary, Malibu had a record first quarter and exceeded our internal targets. Our second fiscal quarter will also be a strong performing quarter.

We are pleased with our initial progress at Cobalt where there is substantial opportunity, but it is in the early stages so there is much more to be realized over time. The domestic marine market continues to grow and the performance sports boat category is healthy. Cobalt has grown US registrations 5% year-to-date.

We have seen very little of any impact from the hurricanes that affected the east coast and Gulf states. We have not seen a significant increase in the international wholesale shipments, but there are positive early signs of a recovery. Our new product for Malibu, Axis, and Cobalt is generating excitement and performing well.

Operationally, we continue to excel in our operating at high efficiency. That efficiency will be extended to Cobalt over time. Our engine initiative is progressing and on schedule and on budget. And lastly, 2018 has started strong and we expect another good year.

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

Thanks Jack. In the first quarter, our acquisition of Cobalt was completed and their results are included in our consolidated financials. Net sales in the first quarter increased 66.9% to $103.5 million. Unit volume increased 57.1% to 1,309 boats. Malibu brand represented approximately 46% of unit sales or 601 boats.

Axis represented approximately 18% or 239 boats, and Cobalt represented approximately 36% or 469 boats as all of our brands performed well. Consolidated net sales per unit increased 6.2% to approximately $79,000.

The increase is primarily driven by year-over-year price increases and higher mix of our new models that Malibu 23 LSV and Axis A24, as well as the Malibu 22 MXZ and 24 MXZ that were introduced last year.

Gross profit increased 44.9% to $22.9 million, and gross margin decreased from 25.5% to 22.1%, driven in part by the impact of $1.5 million from a purchase accounting step-up of inventory at Cobalt. Selling and marketing expense increased 48.1% or $1.2 million in the quarter. The increase was driven by the acquisition of Cobalt.

As a percentage of sales, selling and marketing expense decreased about 40 basis points. General and administrative expenses, excluding amortization increased 16.7% or $1 million. The increase was due to the acquisition of cobalt boats and engine vertical integration initiatives, offset by reduced litigation expense.

As a percentage of sales, G&A expenses, excluding amortization decreased about 300 basis points to 6.8%. Adjusted EBITDA for the quarter increased 79.2% to $17.7 million and adjusted EBITDA margin increased about 120 basis points to 17.1%.

Net income for the quarter increased 51.8% to $6.4 million, while net income margin decreased about 60 basis points to 6.2%. Net income was impacted negatively by purchase accounting for the Cobalt acquisition, including $1.5 million and inventory step-up that was expensed in the quarter.

Furthermore, subsequent to the close of the Cobalt acquisition, we increased the balance of our estimated TRA liability by $2.6 million related to adjustments in our estimated future state tax exposure. Non-GAAP adjusted fully distributed diluted earnings per share increased 61.5% to $0.42 per share.

This is calculated using a normalized C Corp tax rate of 33.3% and a fully distributed weighted average share count of approximately 20.6 million shares. Please note, we have updated our assumptions related to long term tax rate for the business based on state tax changes in Tennessee and the acquisition of Cobalt.

For a reconciliation of adjusted EBITDA and adjusted fully distributed net income to GAAP metrics, please see the tables in our earnings release. We do not provide detailed earnings guidance, but our out outlook for fiscal 2018 is based on the following factors. An increase in unit volume of approximately 55%.

With respect to cadence, it should be fairly consistent throughout the year with the exception of Q3 where it will be a little higher. From a volume mix perspective, Cobalt is expected to represent approximately one-third of unit volume. Consolidated net sales per unit is expected to increase in the low-to-mid single digits for the full year.

It will be the highest in Q1 then be fairly consistent throughout the rest of the year. 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 and engine expenses are expected to be approximately $5 million to $6 million not including purchase accounting adjustments for asset step-ups. Adjusted EBITDA margin is expected to be about 18%.

Finally, regarding capital expenditures, we are currently planning approximately $13 million to $14 million in capital expenditures, including $5 million for our engine project. In closing, our first quarter results were outstanding and exceeded our expectations.

Our Malibu business has performed very well and we believe there is significant opportunity in our Cobalt acquisition. We are excited about the rest of the year and believe we are set up to continue to provide strong financial performance. With that, we’d like to open it the call to your questions.

Operator?.

Yes sir. [Operator Instructions] Our first question comes from the line of Mike Swartz from SunTrust. You may begin..

Hi guys good evening..

Good evening..

Good evening..

I just wanted to - quickly on the guidance range, I think you said, adjusted EBITDA, 18%, I think previously that was at 17%, it looks like you are maintaining pretty much everything else in the guidance, is that just better operating leverage then you had initially expected or I guess what’s really behind that change?.

Yes, I think if you’re looking at the various ranges that we talk about where we say approximately 55% on unit net volume or really net sales per unit that was very strong this quarter, so when we say low to mid, you can see those just pushing up a number of those items pushing towards the top of those ranges a little bit, and so when you take into account us not moving that language, but knowing that it might be a little bit higher in that range that’s provided, as well as some more operating leverage that’s how you get to your - about 18%..

Okay, great.

And then it looks like in the quarter, the core business just talking about the Malibu Axis brands, unit volume would have been up around 1% year-over-year and I think you previously had some pretty strong commentary and I think you reiterate [indiscernible] in terms of your order books and what you had seen thus far with some of the new products, can you help split those for us, is that just a timing or production or how should we think about that?.

Yes, Mike, it is a timing of production. You always have at the end of the quarter where you have multiple shipments that are going out and you're having boatloads and it’s just really dependent upon when the trucks come for the dealers and how we can package the loads together.

And so, in [indiscernible] like this we did have probably a few extra loads that had just not gone out of the door yet that went out in the first week of the second quarter..

Okay that’s helpful and then….

And further I would just point out that in terms of the cadence, how many boats per day we are building is pretty consistent on a year-over-year basis.

So, I think how we manage that production in our annual plan and we've talked about this in years past, we’re working to that annual plan and so we’re right on top of that annual plan from a volume perspective. So, we - it is really how we are just managing that operating cadence..

Okay great, and then final question from me, I think you said there is a $1.5 million charge from the inventory step-up relating to Cobalt in the quarter, I think you've adjusted and backed that out in EPS and adjusted EBITDA, but excluding that in the gross margin line, with the gross margin, I think around 23.5% is that right?.

Yes..

Okay, great, thanks..

Thank you. And our next question comes from the line of Tim Conder from Wells Fargo Securities. You may begin..

Thank you, gentlemen, and congrats.

Just a couple here, any color on the Malibu Axis combined wholesale international shipments in Q1, where those fairly flat, selectively just want to make sure Jack you alluded to that the wholesale shipments for Canada were - haven't really picked up that much, but Australia was doing well, but collectively just wanted to get a little color there? And then on a global basis, just to maybe back into up here, are we looking at again the Malibu Axis, ex-Cobalt, units up roughly in the mid-single digits is that still a fair range?.

Yes. To the first question, Tim, the wholesale international shipments were up a little bit slightly. I think we had a little bit of performance on the Europe and the Asian side. I think Canada continues to remain flattish to up slightly. We will see what happens with the currency as we approach the boat show season in the first quarter.

As I said, we saw around $1.25 to a $1, it has increased that variance since then, so we will see what happens at the end of the quarter. And I’ll let Wayne answer the second question..

Yes, so the - Time your question is essentially that the implied retail activity for Malibu in coming years is going to be up mid-single digits?.

Yes, Wayne.

I mean assuming retail equals wholesale, so up mid-single digits is that sort of a fair way to think about it?.

Yes, I think our expectations is that the inboards for boat markets domestically in the US from a registration perspective is in that 5%, 6% range give or take a little bit, maybe a little bit up from their 6.5%, and our goal would be to matching that pretty closely, yet our inventories at attractive levels, and so if we shipped a little bit more in versus that retail number that would be more than acceptable..

Okay.

And then maybe that gets to 20 bips or so of share again combined Malibu and Axis together for FY 2018 was that still in the reasonable range?.

I think, over the long term we would like to see an annual - share increase that averages about 20 bips that would be a good outcome..

Okay.

And then Wayne to review your tax comment, if you could just go back through that and pass through that again, greatly appreciate it, and then pending tax reform we’ll see if it gets done or not, but just then how that would change if you assume that 20% corporate effective rate?.

So, I think, again the commentary that I made with respect to the normalized tax rate on adjusted fully distributed net income is specific to looking at our effective tax rate and the impact of taxes to various states.

In April, Tennessee passed a provision that allowed Tennessee-based manufacturers to elect a various attribution methodology to potentially lower their taxes, and we’re making that election and that makes us a lower tax payer in Tennessee and reduces that state tax exposure.

We reflected that in the TRA in fiscal 2017 Q4 with over $8 million coming into the P&L reduction in that TRA liability, as well the DTA was impacted at that time.

Subsequent to closing fiscal 2017, we obviously closed to Cobalt acquisition and we needed to readjust those tax rates based off of the portion in various states, specifically, obviously we now have operations in Kansas.

So, as we have worked through all of that we couldn’t book that into Q4, we needed to book that into Q1 because that is the quarter in which the acquisition closed and so we needed to add little over $2.5 million to that TRA liability based on the adjustment to those tax rates.

In teams of the corporate tax reform question and 20% tax rate, we haven’t spent a lot of time modelling the specifics of whether or not there is going to be state-level deductions for before that federal tax or not, but it would be generally pretty linear between our assumptions on a reduction of 35% down to 20% and you would see an amount brought into income in the income statement that would reduce the TRA liability proportionately..

Okay, thank you very much and then one last one related to the potential tax reform, anything as it relates to depreciation that you ought to take some advantages should of be passed as proposed?.

We have not identified anything specific at this time..

Okay. Gentlemen, thank you..

And our next question comes from the line of Joe Altobello from Raymond James. You may begin..

Hi guys, good afternoon.

So, first question, I wanted to go back to ASP a little bit, obviously a little bit stronger and we’re looking for this quarter, I think in the past you guys had expected ASP to be up stronger in the second half versus the first half, so I’m just curious, obviously you had a little bit of a mix shift here in the quarter, but how are you guys feeling about ASP's first half versus second this year?.

I think ASP growth in the Q1, it was just very, very strong. I mean the mix that we saw come in on the Malibu side with the 22 and 24 MXZ was a little bit stronger than we thought, but actually meaningfully stronger than we thought, and as well as optional feature uptake on the new 23 LSV.

There is some new options on that boat that came in a lot stronger.

So, I think, we also on a year-over-year basis had an easier comp here in Q1 that we didn't think we would be as strongly as we did, but I also think that means for the rest of the year we still think we are within the range of what we’ve guided to or be it from my earlier comment with Mike and that it’s probably moving up towards the higher end of that..

Joe, just a little bit of additional color on that as well to supplement Wayne, we have a 23 LSV, it is the bestselling boat of all-time that commands a good ASP and it has been very strong out the gate. Wayne mentioned a 22 and 24 MXZ which were new last year, and we have seen that continual strengthening.

The M235 has been surprising in the first quarter. That boat as you know is the most premium boat in the entire market and the demand has been higher than we expected on that board.

And then lastly, from a product standpoint, I would point out on the boat side is that A24 on Axis is the only 24-foot boat under $100,000 and it is grabbing customers without a doubt.

And then when you look at the innovation in the feature side, we did the decide to put our Power Wedge on Axis this year and is generating substantial uptake in that regard..

Great. Thanks guys.

And then just secondly, big picture, obviously we are a few months into the Cobalt integration, it sounds like it’s going very well and as you mentioned Jack it is exactly what you thought it was, anything surprised you at all, positive or negative so far?.

You know, when you make acquisitions you always have the concern about the culture fit and how employees and dealers will react to that. I have been overly positively surprised just by the acceptance of the employees.

A remarkable thing when we had our employee meeting happen, we passed out T-shirts that morning in over 70% of them are wearing the shirts in the meeting and you do not see that in most acquisitions. So, just the acceptance and the excitement by the employees at Cobalt has been heartwarming.

And then the dealers had naturally a lot of questions, but the acquisition of Cobalt by Malibu has been very well accepted by that dealer base as well..

Okay that’s helpful.

Just one last one for Wayne, for modelling purposes, where there any engine development cost in cost of goods this quarter?.

Yes. There is about $300,000 of - in development cost in cost of goods..

Okay. Great. Thank you, guys..

Thank you..

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

All right, thank you very much. As you have heard, we are very happy with our fiscal first quarter and we’re bullish on our outlook for the second quarter and the remainder of the fiscal year 2018 year. We want to thank you for joining the call and supporting Malibu. Have a very nice evening..

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..