Wayne Wilson - CFO & Secretary Jack Springer - CEO & Director.

Brett Andress - KeyBanc Capital Markets Michael Swartz - SunTrust Robinson Humphrey Joseph Altobello - Raymond James & Associates Eric Wold - B. Riley FBR, Inc. Gerrick Johnson - BMO Capital Markets.

Good morning, and welcome to Malibu Boats Conference Call to discuss First Quarter Fiscal Year 2019 Results. [Operator Instructions]. Please be advised that the 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 would now 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 first quarter financials and outlook for fiscal 2019. We will then open the call for questions.

A press release covering the company's first quarter fiscal year 2019 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..

a, supply-side; and an international distribution perspective. In summary, we started the year with an impressive quarter exceeding everyone's expectations. This fantastic quarter was achieved without any contribution from Pursuit, which closed in the second quarter. This only indicates the great performance to come.

With the closing of our acquisition of Pursuit, we have added another premium brand that presents numerous opportunities to enhance value creation. We are in a very strong economy that is performing - that has outperforming history in most economic categories. The consternation of the last few weeks is unnarrative in our opinion.

Concurrently, the domestic Marine market is showing strong growth, and we are setup well to capitalize due to our competitive advantages. U.S. dealers and consumers are confident in the economy, that's resulted in strong demand, record demand. Channel inventories remain healthy for our brands.

Tariffs are an excuse for others, but Malibu has successfully maneuvered them and we are experiencing very little incremental impact. By building both for Europe and Australia, we have removed much of the European concern. Robust margin expansion improves our operational excellence, sets us apart.

And our engine initiative has begun to roll out but it's not the end of our vertical integration strategy. Overall, MBUU remains incredibly well-positioned going forward, and with Pursuit, we will have an arsenal of premium brands in attractive segments. 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, net sales increased 19.3% to $123.5 million, and unit volume increased 15.8% to 1,516 boats. The Malibu brand represented approximately 42% of unit sales or 636 boats. Axis represented approximately 20% or 297 boats, and Cobalt represented the remaining 583 boats.

Consolidated net sales per unit increased 3% to approximately $81,500. The increase was primarily driven by year-over-year price increases. Gross profit increased 33.1% to $30.5 million, and gross margin increased from 22.1% to 24.7%.

Excluding the impact of $1.5 million in purchase accounting step up on Cobalt's inventory, in fiscal first quarter 2018, our gross margin increased 110 basis points from 23.6% to 24.7%. Selling and marketing expense decreased 2.5% or $0.1 million in the first quarter.

As a percentage of sales, selling and marketing expense decreased by 70 basis points. General and administrative expenses increased 26.8% or $1.9 million. The increase was primarily driven by expenses related to the acquisition of Pursuit boats and investments to support our Cobalt growth strategy.

As a percentage of sales, G&A expenses excluding amortization increased about 50 basis points to 7.3%. Net income for the quarter increased 87.3% to $12 million. Adjusted EBITDA for the quarter increased 29.7% to $22.9 million, and adjusted EBITDA margin increased about 140 basis points to 18.5%.

Non-GAAP adjusted fully distributed diluted earnings per share increased 59.5% to $0.67 per share. This is calculated using a normalized C corp tax rate of 24.1% and a fully distributed weighted average share count of approximately 21.8 million shares.

For a reconciliation of adjusted EBITDA and adjusted fully distributed net income to GAAP metrics, please see the tables in our earnings release. In October, we closed the acquisition of Pursuit boats. We remain extremely excited about the opportunities Pursuit provides us to grow and increase shareholder value.

The following consolidated outlook for fiscal 2019 includes the 8.5 months of contribution from Pursuit since it closed on October 15. For Malibu and Cobalt, an increasing unit volume over last year in the high mid-single-digits. For Pursuit, a total unit volume for the fiscal year of just over 400 units.

Net sales growth for Malibu and Cobalt approaching double-digits. Consolidated net sales growth approaching 30% for the full year. Consolidated gross margin is expected to be about flat year-over-year.

Acquisition and engine expenses are expected to be approximately $6 million to $7 million, not including purchase accounting adjustments for asset step-ups. Consolidated adjusted EBITDA margin is expected to be down slightly year-over-year. And for consolidated capital expenditures, we are currently planning between $17 million and $18 million.

Finally, our forward-looking normalized annual C corp tax rate is expected to increase modestly for the year above our current rate of 24.1%, once we fully integrate the impact of Pursuit. We are extremely proud of the great progress we've made at Malibu over the years.

Introducing industry leading margins and our rapid success in improving them at Cobalt should give all investors great confidence in what we can achieve as a combined entity. We understand that Pursuit being our second acquisition in the last 1.5 years has once again reset the baseline for our margins.

However, we believe through the continued focus on operational improvements and vertical integration, there is a path back to 20% adjusted EBITDA margins. In closing, we had a record setting start to fiscal 2019 and are set up for an incredibly strong year.

We continue to execute several attractive opportunities to grow the business and its profitability. And we are optimistic about the economy and the Marine industry. With that, we would like to open the call to your questions.

Operator?.

[Operator Instructions]. And our first question comes from Brett Andress from KeyBanc Capital..

Jack, I wanted to touch - I know you touched on this in your prepared remarks.

But given the market volatility recently, you know we are interested in getting, I guess, some of your deeper thoughts on the boat cycle? And more specifically, I guess what are you seeing right now at the consumer level in terms of new boat demand? Are you seeing any changes in consumer behavior? Or the ordering patterns, buying patterns, just anything along those lines here, recently at some of the boat shows?.

number 1, that it is a competitive advantage; but secondly, we also know that that consumer is buying, if they want it on their boats. Anything that enhances their use and enhances their convenience, they're acquiring it. And this goes across Malibu, Cobalt and from early returns, we've also seen that it also goes across Pursuit..

Got it. And then I know you mentioned the SSI data has been choppy. The last few months with inaccuracies in some of the key states like California.

But I'm just curious, what exactly does 1 key registration is up significantly mean? Is that 10%, 20%? Is that across all the brands? And then I also think in the press release, you've mentioned record-setting demand.

So is that the retail sell-through that you're seeing? Or is that more of your order book building?.

So the record-setting backlog will be orders that we have in house, for both Cobalt and Malibu, they are at record levels. Meaning that dealers either through sold boats or needed stock inventory to place orders with Malibu and Cobalt. I cannot tell you that in my entire tenure at Malibu, I've seen a backlog that goes out as long as we have today.

Secondly, to kind of answer that question a little bit. When we talk on warranty registrations, we're up, and I think this including Pursuit, we're up across the board.

Malibu is very strong, Cobalt is a little bit further backward, but I think that from a warranty registration standpoint, we have been dealing with a deck of inventory, that we're just now getting to a level that we wanted to be. So there would be naturally less warranty registrations.

As it relates to the SSI data, I've frankly, gotten to a point where I get the monthly data and say, I'll wait for the quarterly data. Because it is just not anything as I pinned upon on a month-to-month basis..

Got it. That's fair enough. And then the last one here.

Could you just help us better frame up the state of the dealer inventories at Pursuit? I guess just help us understand the opportunity there? What two weeks on hand? What does that look like? I mean how far off of optimal levels do you think that network is right now?.

We're still getting our arms around that. Wayne maybe able to answer that, as to the weeks on hand. I think I would point to a couple of factors that are in play. Number 1, because of the lack of capacity, Pursuit has restrained their ability to grow the distribution.

And I think in our last call that I mentioned the fact that Pursuit has a concentration of their dealers in the Southeast and the Northeast. Midatlantic across the country, West Coast, even internationally, there's not a preferable dealers that are in place. So that is - that represents a huge opportunity in our opinion.

For the most part, the dealers that exist today probably get the great majority of the boats that they need, minus a few of them. And so that concentration is certainly been evident, that they've tried to satisfy the current dealer network and hold back on growth.

I do believe that once we get that capacity in place, the existing dealers will now say, I know I can get both. We're going to see the exact same thing with pursuit that we saw with Cobalt. The dealers will know, that they can get boats, they're going to place some orders and they'll bring the stock levels up.

And I think in turn, what that will do is it will give us a great impact with Pursuit to be the brand of choice in the segment that they operate in. And then we can grow distribution from there.

Wayne, do you have any statistics?.

No specific statistics to share. We generally aren't sharing weeks of inventory data, but what I would tell you is we think it's a healthy number. We don't think it's heavy in any way, shape or form.

But I think your description of, that they have done a nice job of servicing the dealers that they have, but it really has constrained their ability to expand that distribution network.

And it's a little less season than ours as well, just because it's a lot more in the Southeast, a lot more Florida and so it has a little bit less, sort of the, seasonality to it..

Our next question comes from Michael Swartz from SunTrust..

Just wanted a little more clarification, I guess as it relates to guidance with some of the commentaries around the retaliatory tariffs. And I know back in August, or sorry September, when you initially gave guidance that you had built-in some type of impact from the retaliatory tariffs.

So I'm trying to understand, did that change in your updated guidance? And just maybe a little more color how you're dealing with that, particularly in Canada since that is a pretty significant market for you?.

I'll speak Canada, and then let Wayne take your first question. On Canada, that's really good analogy. We worked with our dealers. Our dealers I think, were coming from a position that they didn't have, probably as much stock as they wanted to have. And so as I said in my remarks, we've not seen any downturn in the number of orders in the first quarter.

And we probably held back on that a little bit, frankly. So we believe that Canada has largely not affected us at all. 10% has been something that we've been able to accommodate pretty easily along with our dealers.

Wayne, you want to answer the other question?.

Yes, with respect to the projections. I think nothing really has moved in the projections. We obviously, per Jack - Jack's commentary anticipated some of those issues in our original guidance. And obviously, some of those have manifested themselves, but we're actively managing it. And I think we're aggressively managing it.

So our hope would be to under promise and over deliver and manage that better than we originally set out..

Okay, great. And then second question which is sticking with the guidance but really pointing it on the gross margin, came in a little healthier than I would have thought, particularly given the inclusion of Pursuit. But if I'm doing the moving parts here on the 3 different businesses, Cobalt, Malibu, Pursuit.

Obviously, making some assumptions, it really looks like Cobalt, am I right in saying Cobalt's gross margin relative to the guidance is up a couple hundred basis points since when you acquired it? And then just where are we on the path of cost synergies as we look out I think through 2021 you expect to get $7.5 million is what you've said.

Maybe where do we stand today?.

Go ahead, Wayne..

Yes. I would tell you, we are well down the path in terms of improving that Cobalt gross margin. It is on a year-over-year basis. This quarter was up over - excluding the impact of that $1.5 million step of the inventory that occurred at the transaction, it was up over 400 basis points. So and that's a combination of both materials and labor primarily.

The 2 major components. So I think we feel very good about where Cobalt's gross margin has - we've been able to take it so far. I think that point of year-over-year comparison is probably the most dramatic. So I'm going to expect that prospectively.

However, I think it's pretty indicative of the quantum shift that we see in operations team and Shane and the group out there have been able to affect. It's been really impressive.

And so I think, we're pretty far down the path, but there is still opportunity whether that be on operations side, vertical integration, and we have still some more back office stuff that we're working on that will manifest itself in the coming 6 to 12 months with the combined entity.

So we feel really good about the trajectory as you can probably tell from my commentary on margins..

And our next question comes from Joe Altobello from Raymond James..

Just wanted to go back to your comments earlier about the overall market. I think you mentioned, you were expecting the performance of sports boat market to increase a little more than 7% this year, which is slightly better than last year's growth.

So how are you guys specifically thinking about calendar '19? Would you expect further acceleration next year? Or some moderation to that mid-single digit growth rate?.

I think, the way that I view that is, as we go back to what we've said for a long time, there might be a slight moderation, but we believe it's going to be in that 5% to 8% range for the foreseeable future. Right now the market is hot and strong, all the economic factors are driving our demographic and our consumer.

And there's nothing that in 2019 that I see that will back that off..

Okay, got it. And a couple of quick points on guidance. It looks like the unit growth outlook for Malibu and Cobalt is a little bit better than what you gave us 3 months ago.

What's driving that? Is that just better demand and a better backlog that you've seen over the past 3 months?.

Yes, demand certainly. But the other thing that we alluded to, and I think this touches both at demand equation as well as the margin equation. Is as we got in, and we discovered what was occurring at Cobalt. You have a series of boats called the R series that are very, very strong in the market.

Highly recognized, highly in demand and that was one of the areas that we just simply could not built enough of them. And when we mentioned this morning that the greatly enhanced, the tooling capabilities, we had a tooling as an example for the R series, and that's allowed us to build many more of those boats.

So that also feels that additional unit count as well as margin..

Okay, got it. One last one on EBITDA margins. I know obviously, you gave us the margins for the Pursuit acquisition.

But is the base Malibu, Cobalt EBITDA margins still expected to be up slightly for this year?.

Yes, I mean I think our original guide was up modestly. And I think our guide today, it includes that and....

Okay.

So the change in boat today is purely Pursuit?.

Purely Pursuit..

And our next question comes from Eric Wold from B. Riley..

Couple of questions around vertical integration.

I guess one, can you talk a little more about the plans with the engines around model '19 production, I guess 1, where are you right now on engines per day? Where do you think you can get to by the end of the fiscal year? And then will the engines be provided somewhere as an option in the certain models? Or be the standard in those models, when it's rolled out?.

The engines today, and we have begun building a backlog of engines even before the model year came up. We wanted to make sure that we were fully prepared. So we're building a little bit more than what the need is today. And as we continue to roll new models out, we'll increase that load or the capacity of the engines that we build.

By model year 2020, every Malibu and every Axis boat will be getting that Malibu engine is the plan. And that will in turn each - depending on the size of boat, it will have a standard engine that we would recommend, but you also have scenarios where people want more power. They want to do something a little bit differently.

Perhaps our concentration on the boat. And given that the versatility of our boats, that you can do anything with them, they don't have to be specifically a surf boats or a wakeboard boat. Then they can go upscale in that engine.

So each engine, or excuse me, each boat will have a recommended kind of starting point on the engines, but people can then upgrade if they want to..

Got it.

And then secondly, at the Analyst Day, in mid-September, you discussed about other opportunities around vertical integration beyond engine powers, trailers you have done with something that was kind of near term? Any update there?.

Not yet. We still believe that we're probably rolling this out towards the end of model year '19. And although, it'll not be as large and as compelling as engines, it will still be pretty compelling to have a good margin profile..

[Operator Instructions]. And our next question comes from Gerrick Johnson from BMO Capital Markets..

We've seen large backlogs in the RV industry create bad behavior and unintended consequences.

Are you concerned about your backlogs being too high? And how do you police your dealers from over ordering and engaging in that bad behavior we've seen elsewhere?.

I think that if you look back in 2009 and '10, our entire Marine industry is probably in a little bit different frame of mind than we were then. And I would say that Malibu is in much more of the frame of mind that I'm going to talk about.

In 2007 and '08, people were doing what I call going and blowing, they were building new things, they were taking on inventory. They felt like the end was never going to come. And that along coupled with a banking industry that almost fell apart, you have a great recession.

What happened as a result of that, I believe, is it put some prudent thought processes in place. Not only with the dealers, not only with the manufacturers, but also with Wells Fargo and other financing institutions. So you have 3 different core groups now that are looking at inventory levels, looking at where we're going to be or where we're going.

And I think that we're doing it much better than other industries, 1 that you mentioned. From a Malibu point of view, we are very, very focused on it. I referred to the fact that we looked at the inventory levels for all of the dealers that have Wells Fargo financing in September. We do that periodically.

We know on a month-to-month basis what our dealers have in inventory. We know on a month-to-month basis what the trends are, and what the weeks on hand is. And so the worst thing that I believe that any of this can do is just turn a blind eye and start pumping inventory into the channel and say everything is going to be okay.

We know exactly where we want our dealers to be, what inventory that we want them to carry, not just that, that large level but down to the model level and what they caring in that regard. So we're extremely focused on it. I think that people make bad decisions.

And there may be some people in Marine that make the bad decision of trying to pump too much inventory into the channel. Malibu will not be the one of them, and I think as a whole, our industry will not be the Marine - the RV industry..

Great. And I guess Cobalt's in the next phase of your integration, you've increased margin through put.

So can you talk about the opportunities to expand distribution?.

Yes. The distribution at Cobalt is - really more of a matter of improving. On the contrast that with Pursuit, you've heard us talk about Pursuit as a great opportunity on distribution. Increasing the number of dealers, going worldwide frankly in our ability to put dealers in certain places. Cobalt was somewhat different.

Cobalt had a great dealerbase, largely number 1, number 2, number 3 in their respective markets. I think the biggest opportunity for Cobalt has been in that whitespace area. Not replacing dealers but areas that they didn't have the saturation that a Malibu had.

And so we've added a few dealers and that will continue to be an area that we can gain, but the biggest opportunity that we have at Cobalt, is to take that dealer that is number 3, number 4 or number 5, work with them and help them to become number 1 or number 2. And that's been the communication.

We expect a Cobalt dealer with the product that they are being delivered, if they are good dealership to be number 1 and number 2 in the market. And that's where we're headed and focused..

And I'm not showing any further questions at this time. I would now like to turn the call back over to Mr. Jack Springer for any further remarks..

Thank you very much. Malibu had a great quarter, outperforming all our expectations. We continue to excel with our strength of strategy and execution, and we're looking forward to the benefits that can be generated for our shareholders with the Pursuit brand. I want to thank you for your support of MBUU, and thank you for being on the call today.

Have a good day..

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