Wayne Wilson - Chief Financial Officer Jack Springer - Chief Executive Officer Ritchie Anderson - Chief Operating Officer.

Joseph Altobello - Raymond James & Associates, Inc. Michael Swartz - SunTrust Robinson Humphrey, Inc..

Good morning, and welcome to the Malibu Boats’ Conference Call to discuss Fourth 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 are 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’d like to 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 and full-year 2018 financials and our initial outlook for fiscal 2019. We will then open the call for questions.

A press release covering the Company's fourth 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 all for joining the call this morning. Fiscal year 2018 was a record year for Malibu, and our fiscal fourth quarter was a record quarter as well. We delivered outstanding financial and operational performance exceeding our own expectations. This does not just happened because the economy is very good.

This is a direct result of the Malibu and Cobalt team of people. From product development, to human resources, to sales and marketing, to operations, to engineering, to finance, the passion, skill, and desire to be the best is what generates record results quarter-after-quarter. Thank you to the Malibu team.

Net sales for the quarter increased 84.6% to $138.7 million. Adjusted EBITDA increased to $25.9 million or 67.5%, and adjusted fully distributed earnings increased 76.7% to $0.76 per share. We continue to perform exceptionally well with strong results each quarter driven by both Malibu and Cobalt.

In August, we announced that we entered into a definitive agreement to purchase Pursuit Boats, subject to certain closing conditions. It is expected to be accretive immediately. We expect this transaction to close in the second quarter of fiscal year 2019, but our planning for this premium brand began in earnest during the due diligence process.

Pursuit builds high-quality products in the large and fast growing saltwater outboard fishing boat category. The saltwater outboard fishing boat segment is a passioned segment just like Performance Sports Boats. This is exciting to us because the customer is passionate and they use their boats extensively.

Given that this customer is a different customer, this provides Malibu with a whole new base of consumers. The acquisition further diversifies our product portfolio and puts us in a position to capitalize on the strength of Malibu that have allowed us to capture leadership positions in the Performance Sport Boat and sterndrive categories.

We will focus on leveraging our core principles of being the best operator, bringing new compelling product to market, leading an innovation and having the best dealer network. These are the ingredients at Malibu and Cobalt that drive profit and shareholder value. The U.S.

marine market remains healthy and Performance Sports Boat segment continues to grow. In calendar 2018, we expect the total PSB market to grow at about 7%, which is equivalent to the market growth in 2017.

While this would translate to more than 10,000 units sold at retail in 2018, it will still be well below the peak of over 13,000 units giving us additional room to grow. Cobalt has continued to outperform the broader sterndrive market in the U.S.

As we have said on past calls, Cobalt primarily competes in the 21 to 23-foot range and the 24 to 29-foot sterndrive markets, which now represents about two-thirds of the total retail unit sales in that sterndrive market. In a competitive market, Cobalt is exceeding our expectations and taking share.

We expect Cobalt to continue to outpace market growth. As you also know, Cobalt entered the Outboard segment shortly before we acquired the Company. On a trailing 12-month basis, our outboard growth at Cobalt is 244% through March and we expect that to be maintained or even grow when final June numbers are released from SSI.

Going forward, we have several new models planned for introduction over the next one to two years, which should continue to grow the Cobalt presence in the outboard market. Another indicator that we watch closely are channel inventories.

Channel inventories across all of our brands are at a healthy level which furthers our continued optimism that the marine environment is healthy and growing. Speaking for a moment regionally, we are seeing a broad range of states with strong growth in calendar 2018.

Texas, the largest state for Performance Sports Boats sales, continues to grow at a healthy rate and has outpaced the market this year. In the West, California's growth has slowed this year, but that should be expected given 50% growth over the previous two years.

Other Western high-volume states have performed very well and grown double-digits year-over-year, including Washington, Colorado, Idaho, and Montana. As I have said in recent quarters though, the strength we are seeing is not isolated to one or two regions. We are seeing this strength across every region of the United States.

Since our last earnings call in May, most of the discussion surrounding international markets has been focused on the impact of tariffs. Internally, we have been planning for all scenarios to best manage the tariff situation. The current tariffs for both shipping into Canada and Europe are 10% and 25%, respectively.

However, I would point out that one of the large markets for both Malibu and Cobalt, Switzerland, does not have tariffs since they are not a part of the European Union.

We are reviewing both Europe and Canada on a quarterly basis and we are participating with our dealers as needed to make sure they have stock and can sell boats to interested customers.

While we would prefer not to have the tariff situation, a positive event is that dealer inventory has been a pre-tariff dealer costs resulting in very strong retail sales for those dealers. The future benefit is once the tariffs are reversed; there will be pent-up wholesale demand that can be immediately realized.

Further, we continue to believe the tariff situation will be resolved this model year and potentially by the end of the calendar year. I would also caution everyone not to place too much emphasis or concern on the tariff situation related to Malibu for two reasons. First, the U.S. market is so strong that it is largely mitigating the tariff impact.

Secondly, Europe and Canada combined are considerably less than 10% of our total business and this will lessen further with the addition of Pursuit. Another result of the tariffs is an inflationary cost environment, driving up the costs of a variety of materials used to build our boats.

Our fiscal year 2019 plan factored in the impact of increases in material costs and we price our product accordingly. However, we have continued to see the additional increases from certain areas of our supply chain. We have and will aggressively pushback on increases and will evaluate all available options to minimize the impact on our customers.

We believe we have positioned ourselves with enough opportunities for margin enhancement through increased vertical integration and operating efficiencies to more than overcome any tariff-related margin pressures. Our model year 2018 product performed very well at retail and we have another great lineup for model year 2019.

Again, for the fifth straight year, we are introducing four Malibu and Axis models for model year 2019. There are two new Malibu models, the all-new 22 LSV and the 25 LSV, and there are two new Axis models, the best-selling A22 and the new T23.

For Cobalt, we have new models coming later in the year, but we will see the benefit of outboard and sterndrive models introduced in the second half of last year just now reaching the consumers' attention. One boat that was introduced late last fall is the A36. The popularity and demand for this boat has been very positive and better than expected.

This year is also a very strong year for new features. New features for model year 2019 include updated luxurious vinyl on all Axis and Malibu models and our all-new G10 power tower. The G10 power tower is the latest example of our history of innovation and vertical integration.

The G10 comes in a variety of color options, features, and features an all-new design and is fully powered for raising and lowering. This tower will be built in our California facility like other towers and is exclusive to Malibu model.

The new Power Wedge III provides our customer with more adjustable positions giving them an even bigger and more customizable wave or wake than ever before. In addition, it gets the boat on plane even quicker than the previous Power Wedge. Of course, the new Malibu engines will be very compelling.

The first Malibu engines will be in our boats beginning this fall and will continue to be rolled out to more models throughout the year. We continue to be optimistic about the marine industry. Both Malibu and Cobalt are the leaders in their segment.

Malibu has leading share in the Performance Sports Boats segment by a very wide margin and Cobalt is growing market share in the largest and most important segments of the sterndrive market. We also are at the forefront of the wakesurfing phenomenon.

We believe wakesurfing is the most popular and fastest growing watersport in the world, yet many people have not yet been exposed to the fun and the convenience of the sports. This is the primary focus of Performance Sports Boats and our Malibu and Axis brands are the clear leader with our patented ISP featuring Surf Gate in our leading market share.

The fact that 19 other companies directly or indirectly license our IP is an overwhelming confirmation that Malibu is synonymous with wakesurfing. Everyone else continues to try to catch up.

Cobalt also has a vast lead in the Sterndrive segment for surf capable boats and will only get better as we apply Malibu’s industry-leading experience to enhance our surf boats at Cobalt. As mentioned, Cobalt is just beginning to gain traction in the outboard market and now has three models.

When the Pursuit transaction is closed, we will add another premium brand that allows us to leverage their larger boat design and outboard engineering expertise. This will give us strategic opportunities to add value across the organization. Our product development and engineering teams set the standard for innovation in the industry.

We released the most new products and features year after year. This is one of the reasons why we continue to lead in market share. Customers want the newest products with features that provide the latest enhancements to the user experience and no one does it better than us.

We have extended this strategy to Cobalt and we will begin seeing the results of that soon. Pursuit will again give us an opportunity to put the Malibu Touch on another product segments and drive shareholder value. Another area where Malibu set apart is operational excellence.

Operational excellence means building the highest quality products in the most efficient manner to produce the best margins. We focused on developing processes that allow us to build boats timely, but don't sacrifice the quality that we are known for. This strategy allows us to provide an unmatched value to our dealers and our customers.

We also prioritize vertical integration opportunities that give us more control of our supply chain and quality, resulting in Malibu building about 15% more of our boats in-house versus our competition. The latest example of this is our engine marinization project, which goes live this year.

The engine project is going well and we will be putting our engines into Malibu Boats during fiscal 2019. Our plan to fully incorporate our engines into all Malibu and Axis boats in model year 2020 remains on track. Additionally, our financial target of providing 100 basis points of margin improvement once we are in full production has not changed.

The engines, however, are not the end of our vertical integration strategy. We continue to look for ways to use our expertise and improve the consumer experience. The integration of Cobalt has gone smoothly and exceeded our expectations.

There is still work to be done, but we are very pleased with the progress and the ability of everyone involved to drive improvement in the Company. This is clearly shown up in our financial performance. We will do it again with our impending acquisition of Pursuit. I am also proud to announce two achievements from this recent quarter.

First, safety is a key metric we measure at Malibu. The Malibu manufacturing plant in Tennessee recorded over 2 million hours without a lost-time accident. This is an incredible achievement that many companies never made and there's another prime example of operational excellence.

Also Malibu is named number 77 on Fortune's 2018 list of 100 fastest-growing companies. This is a distinctive accomplishment and is further confirmation of our business model and success. We expect to perform very well again in fiscal year 2019. Channel inventories are healthy. Orders have been strong and we are confident in our new products.

With the strong U.S. economy and a healthy marine environment, we are optimistic about the business going forward. In summary, Malibu had a record quarter and finished the fiscal year with a record year that overwhelmed all previous years.

The acquisition of Pursuit will further diversify our product portfolio and give us numerous opportunities to enhance our business. The domestic marine market continues to show healthy growth, which we believe will continue for the foreseeable future. The U.S. economy is performing well, providing confidence to dealers and consumers.

Channel inventories are very healthy for Malibu and Cobalt. While the international tariffs or reality, we believe we have the right strategies in place to mitigate the impact and the countries impacted are not a significant portion of our business in total. Operationally, we continue to excel and are operating at a very high efficiency.

The Cobalt integration is ahead of schedule and showing clear convincing results. And lastly, our engine initiative is progressing on schedule and on budget. I will now turn the call over to Wayne to take you through the financial results in more detail..

Thanks, Jack. As a reminder, our fiscal year 2018 consolidated financial results include Cobalt, an acquisition we closed in early July 2017. In the fourth quarter, net sales increased 84.6% to $138.7 million and unit volume increased 70.1% to 1,708 boats. The Malibu brand represented approximately 42% of unit sales or 723 boats.

Axis represented approximately 20% or 347 boats, and Cobalt represented the remaining 638 boats. Consolidated net sales per unit increased 8.5% to approximately $81,200. The increase was primarily driven by the inclusion of Cobalt, year-over-year price increases and higher mix of larger models and optional features.

Gross profit increased 67.4% to $33.5 million, and gross margin decreased from 26.7% to 24.2% due to the acquisition and consolidation of Cobalt. As Jack mentioned, we are making solid progress integrating Cobalt and that has led to improved year-over-year margins in excess of our expectations.

We expect favorable operational initiatives at Cobalt and vertical integration initiatives at Malibu and Axis to continue driving better margins over the coming years. Selling and marketing expense increased 65.9% or $1.5 million in the fourth quarter. The increase was driven by the acquisition of Cobalt.

As a percentage of sales, selling and marketing expense decreased about 30 basis points year-over-year. General and administrative expenses decreased 3% or $300,000. The decrease was driven by lower litigation and acquisition and integration related expenses offset by the inclusion of Cobalt.

As a percentage of sales, G&A expenses decreased about 580 basis points to 6.5%. Excluding litigation expenses, engine vertical integration expenses and acquisition related expenses, general and administrative expenses increased approximately $1 million primarily driven by the inclusion of Cobalt.

Net income for the quarter increased 30% to $13.3 million. Adjusted EBITDA for the quarter increased 67.5% to $25.9 million and adjusted EBITDA margin decreased about 150 basis points to 20.3%. Non-GAAP adjusted fully distributed diluted earnings per share increased 76.7% to $0.76 per share.

This is calculated using a normalized C Corp tax rate of 23.2% and a fully distributed weighted-average share count of approximately 21.8 million shares. Touching on full-year numbers quickly, unit volumes increased 64.9% and net sales increased 76.3%. Net sales per unit increased 6.9% on a consolidated basis.

Gross profit increased 60.4% to $120.3 million and adjusted EBITDA increased 66.4% to $92.7 million for the full-year. For the year, non-GAAP adjusted fully distributed diluted earnings per share increased 66.7% to $2.60 per share.

For a reconciliation of adjusted EBITDA and adjusted fully distributed net income to GAAP metrics, please see the table in our earnings release.

As Jack said, the pending Pursuit acquisition provides us with a premium brand in the fast growing saltwater outboard category where we can deploy our core competencies to improve financial performance through operational improvements, innovation and product development.

We think the deal is extraordinarily attractive and provide us a great avenue to deploy capital for robust earnings growth, our expected closing during the second quarter of fiscal 2019.

Although, we cannot definitively state the Pursuit contribution to adjusted EPS in fiscal 2019 until we have a firm close date, we do expect estimated annual accretion in excess of $0.35 per share excluding purchase accounting adjustments. After we close the transaction, we will provide guidance as we have in the past for the consolidated company.

However, until then, the following outlook for fiscal 2019 excludes any contribution from Pursuit; an increase in unit volume in the mid single-digits weighted more towards the first half of the fiscal year. Consolidated net sales is expected to increase approaching high single-digit growth rates. Gross margin is expected to increase modestly.

Acquisition, integration and engine expenses are expected to be approximately $6 million, not including purchase accounting adjustments for assets step ups. Adjusted EBITDA margin is expected to modestly expand. Capital expenditures are planned at approximately $15 million.

And finally, our forward-looking normalized annual C Corp tax rate is expected to increase for the year and our current estimate is 24.1%, but it will be further updated after closing the Pursuit acquisition. In closing, Malibu's 2018 fiscal year was superb.

We believe fiscal 2019 sets up well with attractive inventory levels, a strong economy and our Pursuit acquisition. With that, we would like to open the call to your questions.

Operator?.

[Operator Instructions] And our first question comes from the line of Joe Altobello from Raymond James. You may begin..

Hi, guys. Good morning..

Good morning..

So I guess, first a couple of questions on Pursuit. I know you guys have mentioned when you announced the acquisition, including this morning, that you expect a Q2 – fiscal Q2 closing.

Any sense for – is that going to be early in the quarter or late in the quarter at this point?.

Our hope is going to be earlier in the quarter rather than later. But obviously, we can't wholly predict it. But for modeling purposes, I think you’re probably – best assumption is conservative and say middle of the quarter..

Okay, great.

And then in terms of capacity today at Pursuit, could you remind us where they are at or where you guys are at in terms of manufacturing capacity?.

From a manufacturing capacity standpoint, they do work in one shift. They’re at pretty much full capacity today, and over the next 12 to 18 months, I believe is what I've said previously, we're going to expand that footprint.

And so we’ll be able to build that capacity and then over time, probably build a distribution network to accumulate to that capacity that we're going to build..

Okay. And I guess one last one. You're obviously expecting another good year on the U.S. Performance Sports Boat market.

What about next year? Is there any meaningful change in terms of the outlook? How are dealers and consumers feeling about 2019 with tax reform behind us, midterm elections coming up? Is there any concern that some of the optimism we’ve seen in the last few years including this year kind of dissipates next year?.

No, Joe, I remain very positive that we're not approaching anywhere at the end of the cycle. If you look at what's going on and our government doesn't screw it up, frankly we are at a position where I think that this can continue into the future. GDP, they're talking about 4.1%. Employment is at a great state at this point in time.

If you look at the state GDPs, all 50 states are up over the previous year. So I think all of the factors that are really going to continue to drive growth are there and will continue to do so. I'm not concerned about the midterm elections at all. So I think we still have a good runway..

Okay, great. Thank you, guys..

Thank you.

Thanks..

And our next question comes from the line of Michael Swartz from SunTrust. You may begin..

Hey. Good morning, everyone..

Good morning..

Just wanted to touch on, I guess Cobalt and how we should think about that business for the upcoming year. If I’m doing my math correctly, it looks like Cobalt unit volumes were up about 24% year-over-year, I guess versus when you acquired it. Obviously, that's outstripping the pace of market growth pretty considerably.

So just trying to understand how to think about that going forward? And then as we try to lay some, maybe parameters around Pursuit, we know there's some capacity constraints there.

Is that a similar rate of growth we should be thinking about for that brand going forward?.

Yes, I'd like to address Cobalt first. What we discovered as we got into the Cobalt situation is the operations and the ability to improve operations was greater than we thought it was. You combine that with the scenario in which channel inventories were significantly below historical trends.

We felt like, and it's been proven correct, that we needed to build that operation arm more quickly than what we had initially anticipated. And so we did that and the result is the 24% that you see.

What I will tell you is we expect to have growth in 2019 from Cobalt, certainly not at the 24% because we were making up for a decreased channel inventory situation with the dealers, but we do expect it to continue to grow both on the stern side, and of course, mentioning the 244% increase on outboard. We think outboard will continue to grow as well.

On Pursuit, we have to put a little bit shade of color on that and that is we do have that opportunity for growth by – and it's more of an expansion of the footprint of the plant, but that's going to take a longer period of time than it did at Cobalt. So again, I think that's going to come back to a 12-month to 18-month time frame..

And just following-up there, Mike, that 24% is a little bit high relative to the actual numbers. I think you're doing a good job of estimating. It's just a touch higher, one.

Two, on the 2019 growth, in terms of how we're thinking about that, what the growth rate that we're seeing and what we would identify as, Cobalt’s addressable market is kind of mid – is essentially mid single-digits and they are growing faster than its addressable market at retail. So we had a little bit of that channel loading.

We still believe that there's some nice attractive volume growth to be had there..

Okay. That's extremely helpful. And maybe just give us an update of where we ended, I think, the first 12 months since acquisition on the Cobalt synergy front. I think when you had acquired it, you had laid out kind of $7.5 million, I believe, was the number. $7.5 million in synergies by, I think, it was fiscal year 2021.

So maybe where are we at the one-year anniversary?.

Yes, the $7.5 million was over a four-year period of time and we ended up the first year slightly ahead of our projections..

Yes. And from a quantification perspective just to make sure everybody is clear on that. It's not a pure cost synergy number. In terms of that $7.5 million, some of that is driven by synergies related to our ability to generate additional sales.

And so on the cost synergy side, we're seeing a number that's on the annualized basis in a low seven figure number already. Not to mention – we think that a lot of those revenue synergies are a little bit longer in terms of coming because of the nature of our product development cycle and our ability to speed that up.

We have been able to invest more money and get more resources in place to speed up the introduction of new product to drive those revenue synergies as well..

Okay, great. Thanks for the color..

Thank you. End of Q&A.

Thank you. [Operator Instructions] And I'm showing no further questions at this time..

All right. I will conclude. MBUU remains well positioned to take advantage of the growing marine market and product trends. Malibu and Cobalt are performing on all cylinders in a very robust economic environment. Soon, we will add another premium company in Pursuit to the Malibu portfolio and plan again to add value for shareholders.

I want to thank you for joining the call today and thank you for your support. Have a fantastic day..

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