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

Brett Andress - KeyBanc Capital Mike Swartz - SunTrust Tim Conder - Wells Fargo Securities Gerrick Johnson - BMO Capital Joe Altobello - Raymond James Eric Wold - B. Riley.

Good morning. And welcome to Malibu Boats Conference Call to discuss Second 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; and Mr. Wayne Wilson. I will 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 second quarter financials and outlook for fiscal 2018. We will then open the call for questions.

A press release covering the company's second 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..

Canada and Australia. The two Canadian Boat shows that have been already been held were good and in particular the Toronto show saw a significant improvement in unit solds versus last year. We believe if the Canadian currency continues to be at the current level or better then we should see some growth in the near future.

Other international markets remain weak but there are reasons to be optimistic. As I mentioned before, the currency rates are favorable compared to the last few years. The early European Boat shows in London and Dusseldorf have been positive for all of our brands. And the international macro economic factors are moving favorably.

Malibu and Cobalt are well positioned for a return to growth in the international markets when that recovery comes. The Malibu 23 LSV is the best selling performance sport boat in history by very large margin. And the new 23 LSV is no exception. Demand is high and orders continue to come in rapidly.

Customer enthusiasm abounds and many are customizing and ordering their new 23 LSV. Our two new Axis models are the A24 and the T22. Both boats offer high level performance at an entry level price. The new T22, it is a new boat and it has completely new styling, is performing better than we anticipated.

The new A24 has been a surprise for Axis well with both customer acceptance and order. Usually a 24 foot boat has a shallower pool of customers and it is slower to gain acceptance. This boat has sold like hot cake since day one. And finally a boat for model year 2018 was introduced in Q2. So it is just now being seen at boat shows.

The brand new Malibu 21 MLX is in the same family as the 21 BLX introduced last model year. It has all of the key features that makes Malibu special and comes well equipped for a retail price of $82,995. We introduced three new Cobalt boats for model year 2018 as well including two new Cobalt outboards. The 23 SC and the 30 SC.

We are excited about these boats as they help us to address the growth in the outboards market. The third new Cobalt is the A36. This 36 foot boat has a luxurious cutting edge design and is generating excitement everywhere it goes. It was a hit and sold well in Fort Lauderdale and Tampa. Orders for this boat are definitely ahead of plan.

Lastly and continuing to advance the surf selection at Cobalt, we've added the surf package to the C23. Within sterndrive, Cobalt owns the majority shares of customers. Surfing continues to grow with Cobalt customers and we will continue to invest in surfing for Cobalt. A key foundation to our Axis at MBUU is our operational excellence.

While it allows us to produce excellent margins, engage highly profitable vertical integration and provide quality product to our dealers and retail customers. There is another critical result of being operationally excellent. It allows Malibu to be consistent and deliver quarter-over-quarter results.

We have not experiencing ups and downs caused by new product introduction or issues in manufacturing that many companies have. The marine industry is very open in terms of knowledge about other manufacturers. It is a well known fact that most are struggling with their supply chain and cannot meet that demand that they have.

Malibu is one of the very few that has the operational excellence foundation to meet the demand we are seeing and we manufacture to that demand consistently. While others are telling their dealers that they cannot supply their boats that they need or they have production issues in getting boats to dealers.

Combining operational excellence with our constant monitoring of the market allows us to ensure our dealers have the right product on the floor to satisfy retail customers.

We consistently review our processes and look for ways to improve efficiency, expand margins and drive shareholder value through initiatives such as lean manufacturing principles and vertical integration.

Our vertical integration of the engine is successfully proceeding as dealer vertical integration of towers, trailers and many of the stainless and billet components of our boats. Our engine monetization project is moving along as outlined in November of 2016. And our timelines, our objectives and our financial return goals remain the same.

We expect to produce Malibu marinized engines for our boat sometime during fiscal 2019.And the payback will be realized over three years period. Through the first half of fiscal year 2018, MBUU has experienced strong performance and we are excited about the prime retail season in the second half.

Our new product is performing well for Malibu and Cobalt. And operations are running smoothly. Cobalt is progressing ahead of schedule and our channel inventories are healthy for both Malibu and Cobalt. This should continue in the Q3 and Q4 with solid growth and financial performance.

In summary today, Malibu had another historic quarter and we are looking forward to the rest of the year. The assimilation and enhancement of Cobalt is moving faster and better than planned. The domestic marine market continues to grow. The performance sports boat category is healthy and growing.

Cobalt is a clear leader and growing in the sterndrive segment, we are adding models in the high growth outboard segment. We believe the strong retail momentum across all of our brands has left inventory at near optimum levels.

Early boat show results have been strong with buyers rather than observers' presence and shows have seen significant increases over last year. There are positive signs in some international markets but it is too soon to say when we will see a full recovery. Operationally, we can continue to excel and are operating in high efficiency.

That efficiency is being extended to Cobalt. And lastly, our engine initiative is progressing on schedule and on budget. I'll now turn the call over to Wayne to take you through the quarterly results in more detail. .

Thank Jack. All fiscal year 2018 consolidated financial results include Cobalt, which we completed the acquisition of in early July 2017. In the second quarter, net sales increased 69% to $114.4 million. And unit volume increased 61.1% to 1,489 boats. The Malibu brand represented approximately 46% of unit sales or 688 boats.

Axis represented approximately 20% or 291 boats, and Cobalt represented approximately 34% or 510 boats as all of our brands performed well. Consolidated net sales per unit increased 4.9% to approximately $76,800. The increase was primarily driven by year-over-year price increases and higher mix of our new models such as the Malibu 23 LSV and Axis A24.

Gross profit increased 54.5% to $27.5 million, and gross margin decreased from 26.3% to 24.1% due to the acquisition and consolidation of Cobalt. Selling and marketing expense increased 45.2% or $1 million in the second quarter. The increase was driven by the acquisition of Cobalt.

As a percentage of sales, selling and marketing expense decreased about 50 basis points. General and administrative expenses, excluding amortization increased 115% or $4 million. The increase is driven by additional spend related acquisition of cobalt, our engine vertical integration expenses and litigation expenses.

Excluding the impact of these items, G&A increased $3 million in the quarter. As a percentage of sales, G&A expenses, excluding amortization increase 140 basis points to 6.5%. Net income for the quarter decreased 172% to net loss of $5.6 million, due to the impact of the Tax Cuts and Jobs Act.

There were two large adjustments related to tax reform legislation that impacted net income in the quarter. First of all, we recognized $30.3 million of other income recorded due to the reduction in the tax receivable agreement liability. This is a significant reduction in future liability that will positively impact our future cash flow.

Secondly, there was a tax charge of $47 million related to the re-measurement of deferred tax assets and taxes related to the reduction in the TRA. These entries while not in the same line on income statement, both are derivative of the recently passed tax reform legislation. Excluding their impact, net income would have been $11.1 million.

Adjusted EBITDA for the quarter increased 51.3% to $20.6 million. And adjusted EBITDA margin decreased about 210 basis points to 18%. Non-GAAP adjusted fully distributed diluted earnings per share increased 39.5% to $0.53 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 21.7 million shares. Please note, one of the big benefits of tax reform is a lower future tax rate for the company going forward.

Our assumptions related to long term tax rate for the business is expected to be between 23% and 24%. We believe corporate tax reform will positively impact our financial performance both from a cash and earnings perspective.

We believe that pro forma for our long -- our lower long-term tax rate adjusted fully distributed net income per share would increase approximately $0.30 annually. Importantly, the lower tax rate and lower payments under our tax receivable agreement are expected to increase future annual cash flows by approximately $7 million per year.

We will continue to be disciplined with our cash and focus on adding value to shareholders by concentrating on high return investment and operational improvements, vertical integration and strategic acquisitions. For reconciliation of adjusted EBITDA and adjusted fully distributed net income to GAAP metric, please see the tables in earnings release.

We do not provide detail earnings guidance. But our outlook for fiscal 2018 is based on the following factors. An increase in unit volume of 55% to 60%. With respect to cadence, Q2 and Q3 will be the highest quarters. From a volume mix perspective, Cobalt is expected to represent approximately one third of volume.

Consolidated net sales per unit are 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 a year-over-year decrease 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 assets 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.

That includes expenditures of approximately $5 million related to our engine vertical integration initiative. The lower tax rate to be used in the second half of fiscal 2018 will add over $0.15 to adjusted fully distributed net income per share versus our prior estimate. In closing, our second quarter results were strong.

Our Malibu business continues to perform very well. And we are pleased with the progress at Cobalt. There are many opportunities that give us optimism for the future and provide strong platform for earnings growth going forward. With that we would like to open the call to your questions.

Operator?.

[Operator Instructions] Our first question comes from Brett Andress with KeyBanc Capital Markets. Your line is now open..

Hey, good morning, guys. Just to start off, Wayne, is there anyway you can breakout for us what the core Malibu gross margin if you back out Cobalt, would have been in the quarter and also for the first quarter, if you have it. .

Yes. I mean the Malibu gross margin performance on a year-over-year basis is up triple digits. So up over 100 basis points. .

Got it.

And that's true for 1Q too?.

Both..

Both okay. And then you stated Cobalt is a better opportunity than you guys have originally thought. So is there any update you have on that $7.5 million synergy target, because I mean it feels like it's probably going higher.

And then how much synergy, I guess if you realized so far this year, and I guess could you remind us maybe how much you expect to realize by the end of the year?.

Yes. What we've said with respect to synergy, so we haven't gone back and done an additional calculation to up the $7.85 million. But what we can say -- what we said before was that we expect it to be about 25% accretive by the second year.

I think in the financial performance that you are seeing out of the business, with year-over-year earnings growth being what it has so far, with no impact from tax reform, you can see that 25% is likely being achieved already.

And so in the current period we are probably approaching a $1 million of annualized synergies that we are at a run rate of, but that was before we realized in a year. We are picking them off one at a time operationally with respect to various contracts et cetera.

So we continue to plug away and I don't know what the upside is but you're seeing it in the earnings already. And I think we are just ahead of schedule and will be able to drive past that 25% target that we originally put up..

Got it. And then last one just I guess some clarity. I think year-to-date you are tracking almost 6% growth in ASPs and you still kept that low to mid-single guidance intact.

So I guess what should we expect in the back half in terms of ASPs? So they have anything to do with Cobalt seasonality, is it product mix, is it less option uptick, just anything you kind of have for the back half on ASPs..

I think it's really just driven by the seasonality and a little bit of the mix impact. You will probably see a little more of the Malibu's in there. And we may pull that number down a little bit relative to the Cobalt business in the back half of the year. Not to mention we saw some really strong uptake in the first six months on the Malibu side.

And our expectation is that it gets a little bit softer in the back half, that's why it's -- we are showing a little bit of softness in the second half on the ASP relative to what it has been..

Thank you. Our next question comes from Michael Swartz with SunTrust. Your line is now open..

Hey, guys. Just want to pick a guidance a little bit. Just given some of the commentary on the call.

From a unit volume perspective, I mean you said retail for both brand is up I think mid-teen year-to-date, your little light inventory in the channel on Cobalt improving economy, improving emerging market, FX, all the stuff seems to be going in your favor.

But it looks like guidance would imply about mid to high single digit unit volume growth for both of those brands.

So I guess -- I just wanted to -- is that number right and then I guess maybe what am I missing?.

Yes. So the mid-teens number is kind of the back half of last year. And so it includes Q3 and Q4. Now Q3 has a bit of registration but Q4 is pretty small. And I think we've been pretty prudent over time with the market for PSPs growing last calendar year at 7%.

We have some strong momentum but I don't think we believe that that business, Malibu core business is going to maximally out index that segment into the mid-teens for a full calendar year. So we feel good about where we are at. I think your number is probably about right, I haven't done the math here real quickly.

But I think we feel good about how we are positioned. And look, moving our guidance started from 55% to almost up 55% to 60% is meaningful move on a unit volume perspective.

And I think we are just being cautious and understand that over a longer duration of time that number isn't going to be a mid-teen number for a year in our businesses that represents two thirds of our volume. .

Understood. And then another question on guidance relating to margin. I mean you held margins flat but you talked about, obviously you are raising the volume guidance. You are seeing early synergies from Cobalt. And we’ve had positive mix in option uptake thus far through the year.

So I am trying to understand maybe what the offsets are as to why margin guidance didn't go higher. .

Yes, and look I think that's probably impact of last quarter where we actually took margin guidance higher. So we kind of move margin guidance entire last quarter. And so I think we were already probably anticipating that a little bit. .

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

Thank you. Gentlemen, so little bit more detail color, the channel inventories Malibu, Axis brands. Jack you alluded to the Cobalt played and talked about already but just light sort of where you want it on the Malibu and Axis brands.

And particular in Canada, how are your channel inventory, how do you feel there? Is that tracking where it should be or could that also maybe an area of where inventories could go up?.

So I'll break that apart a little bit, Tim. In terms of Malibu and Axis, we feel that those channel inventories are really at an optimum level, less at this point in time than in previous years about a week or so. So we feel very comfortable with where the channel inventories are at.

On the Cobalt side, the statement that I made is that they might be slightly lower. I think that's accurate. One of the struggles that Cobalt had initially had prior to and just after the acquisition was getting their product out in the field and giving enough inventories to dealers. That has recovered substantially at this point.

But I do feel like that there still upside. And we can pick up a little bit more channel inventory on the Cobalt. As it related Canada, Canadian inventories are in great shape. We have our dealers that two things are in play. Number one, versus say two years ago they moved through a lot of that channel inventory.

But also secondly, just due to the way that the shipping patterns took place last year, the inventory that they do have is at lower currency rate.

So think about it in terms of our dealers who have inventory and currency rate of call it $1.25 to $1.28, whereas other people out there may have a currency rate $1.35 to $1.40 depending when the shipments were made. We think that we are seeing some signs from Canada that if they continue that does generate potential inventory uplift for us. .

Okay, great. Wayne, you call out a little bit and part of the SG&A commentary, legal expense. Anything changing, different there, anything new that maybe you guys are spending a little bit more on or ongoing state of affairs, how should we -- a little more color on that..

Yes, no. That's really year-over-year comparison issue where there was a small seven figure number flowing through as a contrary expense in that category because of the movement related to Marine Power litigation, where we had won some post trial motions. So it just creates a little bit noise in that number.

So, no, nothing with respect to our business and current expenses. Just a point of clarification to trying to people some better clarity on year-over-year numbers. .

Okay. And then finally gentlemen, capital deployment just any change, update, I mean you call that Wayne $7 million total benefit here from the tax reform. But as we -- especially as we start to look into 2019 and maybe start winding down some of the investments related to the engine side, and then folding in the tax benefits.

How are you maybe looking forward to capital deployment outlook here?.

Yes, it's a great question. As we have said and been pretty consistent. Look, we are looking to deploy the capital in things there are opportunities that are unique to Malibu that whether those be vertical integration like our engine initiative or trailer initiative or strategic acquisition like Australia or Cobalt.

And those are where we are looking to do things first and foremost. So we are constantly evaluating and continued evaluate vertical integration initiatives, as well as some strategic acquisitions. So that's first and foremost. Secondly, we are going to look to pay down debt.

Our net debt position is sub turn adjusted EBITDA and we will continue de-lever there. And thirdly, we would sit there and make sure we are able to support our stock. But I think the first two are our primary objectives right now. .

Thank you. Our next question comes from Gerrick Johnson with BMO Capital Markets. Your line is now open..

Hey, good morning. Jack you touched on Cobalt throughput, dealers seems happy about getting product faster. So can you quantify the throughput? Can you seeing there -- and then, Wayne, inventory on your own balance sheet looks up about 90%.

Why is that growing faster than sales? And if you can talk about a little bit on the input cost side what you are seeing in materials and labor? Thank you. .

On the Cobalt side, Gerrick, it's really consistency of delivery of product and where we are looking at increasing the count through additional days, they are -- week and so we have add some salaries through boat show season. And in addition to that we are look at potentially going up in count.

So largely to this point, it's just been reducing the sporadic nature of production and shipping. And making it much more consistent in getting product out to the dealers quicker as it relates to Cobalt..

Yes, Gerrick, in terms of inventory, the primary driver there is going to be Cobalt. That's a number one driver of it from an inventory perspective, they have some inventory and that sitting on their books that we will be looking to move through and make that a little bit more efficient. But the primary driver is addition of Cobalt. .

Okay. And then on input cost.

What are you seeing in labor and materials?.

On the material side, we haven't seen major movements and don’t or not feeling a big pressure there. With respect to labor, in this type of economy, look, labor is always a challenge.

I think it's a challenge for everybody and we are thankfully the labor content in our boats isn't so high that small movement in those wages meaningfully impact our margins. So we are trying to stay as competitive as we possibly can to maintain our great workforce and but we are seeing some pressure there. .

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

Thanks. Hey, guys. Good morning. So first question I want to go back to margin for a second.

How quickly you think you can close the gap between Malibu margins and the Cobalt margins given that they have similar ASP? And what's the major structural impediment that's keeping you from getting there?.

I think there are number of things. We from a labor perspective we need to get into the plant and make it more efficient vertical integration is going to be a key.

And potentially additional optional features and high margin optional features that we can add to that brand or the types of things that are really going to move the needle and put that margin closer to where the Malibu number is.

Now structurally from sterndrive perspective and its business overall today, does that number -- is that number ever going to get all the way to Malibu, there is a long way for us to go to get there. .

Okay. But there is a plan or it seems like there is a -- least a run way to get there over the next call two three years, get close. .

Absolutely..

Okay. And then secondly, in terms of acquisition. As you guys have now I guess we are seven months into the acquisition of Cobalt. Any thought to additional M&A going forward. .

We remain looking at potential candidates but again similar to what we did with Cobalt. It does have to be the right fit. They have to be the right brand image. They have to be the right accretiveness that we are looking for. So we remain active. We are looking for that next acquisition that makes a lot of sales per MBUU.

And there is potential capital deployment in the future. .

Thank you. Our next question comes from Eric Wold with B. Riley FBR. Your line is now open. .

Thank you and good morning. Couple questions if I may. One, on the vertical integration for the engine, I guess how pervasive could that be in the year one year, two year, three, is the goal to get to 100% penetration of your engines throughout the product offering over the three year period or is that separate from the kind of three year payback.

And then is the plan to price boats with your engines versus none your engines comparable or they are planned to be some delta there in the pricing as well. .

Well, to the first question, the way structure Malibu will be -- Malibu and Axis I should say, will be 100% all our engines. That's not one day one. Well, we have maintained from the beginning is that at some point in 2019, we will begin putting Malibu engines in our boat.

So that will occur at some point in Malibu 2019 or 2020 that 100% of the engines are made by Malibu.

As it relates to the processing strategies, I won't go into a great deal of details but one thing that you can take to the bank similar to other vertical integration opportunities and trailers come to mind as an example, is we do believe it is important to share the opportunities with our dealers.

So one of the key factors in vertical integration and one of the key factors at Malibu and Axis, such value is we are eliminating that middleman market. That there can be a huge component of what we are doing.

So the likelihood of just on apple-to-apple basis engines being hired because we are manufacturing our own engines really doesn't make a lot of sense. Because we are eliminating a lot of market in that regard. So as we go through this we will come up with right pricing structure for our dealers to put the retailer customer. .

And last question. If I look back to the Q1 call, there are some kind of towards quarter end delays in shipments. They are going to move into early Q2, it is on timing basis.

So we kind of look at apples-to-apples combined, Q1 and Q2 this year, Q1and Q2 last year for Malibu and Axis and get to a combined about 3.5% unit growth rate for the first half year-over-year.

Is that the right way to think about it? Is there anything else to consider there?.

Yes. I think its --4% on a year-over-year basis. And I think what we had said originally in the guidance was that Q3 is going to be where we popped at a bit..

And that's really was -- that's really what gives us a great deal of confidence and saying that our channel inventories are at optimum level. .

Thank you. I am showing no further questions. I would now like to turn the call back to Mr. Jack Springer, Chief Executive Officer for any further remarks. .

Thank you very much. Obviously, we are very pleased with the great quarter for MBUU. And we want to thank you for joining our call this morning. Have a fantastic day. .

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