Good morning, and welcome to Malibu Boats conference call to discuss Second Quarter Fiscal Year 2019 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 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 second quarter financials and outlook for fiscal 2019. We will then open the call for questions. A press release covering the company's second 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, adjusted fully distributed net income and adjusted fully distributed net income per share. Reconciliations of these non-GAAP financial measures to GAAP financial measures are included in our earnings release. I'll now turn the call over to Jack Springer.

Thank you, Wayne, and thank you for joining the call. Malibu had another outstanding quarter, continuing our practice of exceptional performance. For the quarter, net sales increased 45% to $165.8 million, adjusted EBITDA increased $29.4 million or 42.5% and adjusted fully distributed earnings increased 62.3% to $0.86 per share. Our second quarter performance is continued evidence of successful operational execution at our Malibu and Cobalt businesses, which expanded gross margins meaningfully year-over-year. Our strategic well-executed M&A strategy of acquiring great brands with meaningful upside is again being evidenced by the addition of Pursuit Boats during the quarter. The Pursuit acquisition closed on October 15, 2018. The 2.5 months of their performance is included in the quarterly results. We have been pleased with the rapid progress we have made to assimilate Pursuit into our company and the best is yet to come. As we have said, the key to unlocking the power of Pursuit is increasing production capacity, which will allow us to satisfy all of our current dealers' needs fully, significantly expand the distribution base and aggressively bring new product to market. Although this will take time, as we have said 12 to 18 months, we began diligently working on this even before the acquisition was completed. We have already acquired the land and are working on the permitting process for additional production capacity. However, until we unlock this additional capacity, we are not standing still. As we did with Cobalt, we are already involved in and making operational improvements that will drive financial performance. Cobalt and the operational improvements at Cobalt continue to go very well. We are ahead of schedule in every area of identified improvement, and this can be seen in the very strong operational and financial performance. The overall sterndrive market declined in 2018 based on…

Thanks, Jack. In the second quarter, net sales increased 45% to $165.8 million and unit volume increased 18.2% to 1,760 boats. The Malibu brand represented approximately 44.5% of unit sales or 783 boats. Axis represented approximately 18.2% or 321 boats. Cobalt represented 31% or 545 boats. And Pursuit made up the remaining 111 boats. Consolidated net sales per unit increased 22.6% to approximately $94,200. The increase was primarily driven by the inclusion of Pursuit models, which carry a significantly higher average selling price than our other brands; and at our Malibu and Cobalt brands, year-over-year price increases and a higher mix of larger boats. Gross profit increased 39.2% to $38.3 million and gross margin was 23.1%. Excluding the nonrecurring impact of $900,000 in purchase accounting step-up on Pursuit's inventory, our gross margin was a strong 23.7%. This compares to a gross margin of 24.1% in the prior year period. That decrease in gross margin was attributable to the inclusion of our newly acquired Pursuit business and consistent with our annual guidance and expectations. Our comparable gross margin performance in the combined Malibu and Cobalt business increased 60 basis points year year-over-year in Q2. Selling and marketing expense increased 47.4% or $1.5 million in the second quarter. As a percentage of sales, selling and marketing expense increased by 10 basis points. General and administrative expenses increased 51.1% or $3.8 million. The increase was primarily driven by the addition of Pursuit Boats in the quarter, including acquisition-related expenses, which, together, totaled $3 million of the increase. As a percentage of sales, G&A expenses excluding amortization increased about 30 basis points to $6.8 million – sorry, 6.8%. Net income for the quarter increased 368.6% to $15 million. Adjusted EBITDA for the quarter increased 42.5% to $29.4 million and adjusted EBITDA margin decreased about…

Thank you. [Operator Instructions] And our first question comes from Joe Altobello with Raymond James. Your line is open.

Thanks. Hey, guys, good morning. First question. We’ve heard from a number of companies this earnings season that December – the month of December was a bit rough from a demand standpoint, but there was a bit of a bounce back in January. I think you kind of touched on this a little bit when you talked about what you’re seeing at boat shows. But did you guys see that as well on your retail trends that December was a bit soft and January got a little bit better?

No. It was really consistent with last year from my perspective. And I think, if you look at December, because of the holidays and everything going on, it’s always going to be one of the softer months anyway. But it is fairly consistent with what we saw last year and then we did see probably a little bit of pick up in January.

Okay. Great. And then secondly, you’ve mentioned in the past that the first 18 months of the Pursuit integration will involve obviously increasing capacity. You touched on that as well this morning. Could that timetable get accelerated? And does it involve more headcount or really physical capital or improved layout? Thanks.

I mean, to be safe, we’re giving that timeline are there ways to accelerate it. You have to look at. You can always accelerate it with the builders, et cetera. But it comes back to the ROI. And so we’ll make those decisions as we know a lot more about how long it really will be as well as what is the ROI in getting that production up.

Okay. And is it more headcount or more physical capital?

It’s more physical capital.

Okay, great. Thank you, guys.

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

Hey, guys, good morning. Wayne, I wanted to touch on something I think you said at the end of your prepared remarks regarding Cobalt. I just want to make sure I heard it right. Did you say that on a 12-trailing month basis that EBITDA dollars have doubled since you acquired it?

It’s getting very close. It’s not quite there. So it wasn’t a determinative statement of absolute 100%, but it’s very close.

Okay. I mean, if it’s very close, I mean, that would imply that you’ve expanded EBITDA margin something like 400 basis points plus. So I guess, maybe where do we stand with regard to the synergies that you’ve kind of called out for 2021? Are we ahead? And maybe what’s the – maybe the new plan? And then just with the capacity coming online or additional capacity at Cobalt, how does that kind of play into the synergies? And I guess with some of that envisioned when you outlined that $7.5 million target after making the acquisition.

Yes. Some of it was envisioned at that point, Mike. We are ahead from a synergy standpoint what we thought we would be able to do. There’s no doubt about that. But the nice thing about a Cobalt asset or the nice thing about a Pursuit asset is as you get into it, you discover more opportunities. And so we’ll monitor those opportunities. We’ll understand what the ROI is. And that’s why I consistently talk about the fact we’re going to acquire premium brands. Because if you don’t, you’re going to struggle and you’re going to have problems.

Okay. And then just next question, shifting over to inventory. I know you guys have remained comfortable with your own inventory in the channel. There is a lot of discussion out there around pontoon slowing and maybe inventory building a little. So I guess, I’m just getting at or curious to what your thoughts are on dealers’ ability just to take on more inventory? And maybe their capacity and their floor plan if we are a little heavy on the pontoon side? How does that impact you? Or how do, I guess, you plan around that?

We do plan around that. This goes all the way back to 2010 or 2011. Wayne and I, at that point in time, started really concentrating on that floor plan because it was constrained. And so as it relates to our dealers, we’re very bullish. We’re very adamant that our dealers have the adequate floor plan to support Malibu and Axis and Cobalt and Pursuit. And so from a floor plan perspective, we feel very comfortable. And I think Wells Fargo is working with the dealers well in that regard, primarily as Wells Fargo. From an inventory standpoint, we are still hearing we need inventory, we want more inventory. And so there has not been – to my remarks, there’s not been the least bit of a pessimistic attitude towards taking inventory.

Yes. And specific, Mike, to your question around just have we seen any constraints? We aren’t running into constraints that are caused by excess inventory from pontoon. Pontoon distribution networks are a bit different than ours. If you look at our distribution network, the answer is you’re going to have guys that have some pontoon, but it’s not the primary driver of their business. So the likelihood that they are going to really eat into a material amount of their floor plan capacity with pontoon is really low, and so we have not experienced that.

Okay, great. Thanks a lot for color guys.

Thank you. [Operator Instructions] And the next question comes from Brett Andress with KeyBanc Capital Markets. Your line is open.

Good morning. I wanted to start with the guidance. So a nice lift in the sales expectations for the year, more than you beat by in the quarter. But on the gross margin and EBITDA front, you left that unchanged. And I know there’s different degrees of about flat or slightly down, but are there any puts and takes that we should be thinking about as to why you didn’t touch the margin guide on those better sales? Is it fully on digesting Pursuit? Is it too early? We need to get deeper into the selling season. Just some of your thoughts as we go through the next two quarters here?

So Brett – yes. Great question. I think – frankly, it’s being very early in the Pursuit transaction, right? I think we’re sitting back and taking stock of exactly where we’re at. We feel good about the business. I don’t think we plan to move. It’s very consistent with our plan, exactly where we’re at. But we want to make sure we go through and digest that acquisition before we see any uplift in those – in that margin guide. So part of it is the mix of Pursuit. Mix was – Pursuit was pretty strong in the quarter from a sales perspective. And so it’s very much in line with kind of what we expected, frankly.

Understood. Thank you for the clarification. And also thank you for all the color on the boat shows. That was very helpful. One of your peers recently mentioned some early season choppiness in the value and entry level segments of the market. And so Jack, I just wanted to get your thoughts on that. What are you seeing in regards to those markets? And I guess, what impact, if any, does that have on your business or the industry for 2019?

We would naturally see that in the Axis brand, if it were an issue. We have not seen that. I will acknowledge though that you have a scenario like December, when you have the negative noise in the news as is coming out, the first person that will be affected by is that value customer. Now I think it turned very quickly and Axis sales have been very strong. And I think part of this is also being driven by the product. It is a different consumer at that Malibu, at that Cobalt, at that Pursuit level. That demographic is considerably different. The way that they pay for the boats is considerably different for the most part. So in my opinion, they are the last ones to be impacted. And it has to be a lot longer in tenure in terms of any type of a negative environment.

Got it. Thank you. See you guys, Miami.

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

Thank you. Good morning. I guess, one on the Pursuit plans. Maybe give us a little sense of what you’re currently planning in terms of the size of facility, kind of the overall capacity you look to add there, maybe cost as well? And then, is there a point where you would need to consider something – expansion for Malibu, Axis? Maybe just remind us where you are on utilization of that facility?

Yes. I’ll touch on Malibu and then Wayne can touch on the financial metrics around the Pursuit enhancement. On the Malibu and Axis, we still have some runway to build additional boats. And going back to our plan that we’ve laid out over time is there are two variables that we utilize very well in terms of additional capacity. One is, going up in boat count, and we still have a little bit of room to go up in boat count. And then the second is the addition of the Fridays as we need to add Friday since we are a 4/10 work week. So we can add a significant amount of capacity if we need to just by those two levers. The other thing that I would point out is that we remain a one-shift plan in Malibu and at Axis and at Cobalt and at Pursuit. And so you also have that additional capability to add capacity by adding a partial or an additional shift.

Yes. So with respect to the Pursuit plans, we’re continuing to work through those plans. We would be looking to add a couple of hundred thousand square feet in that ballpark. The numbers moving around as we modify and really calibrate exactly what we want. We expect the total cost to come in, in a 8-figure number, somewhere north of $10 million, maybe $15 million. We – as we better define exactly what that footprint looks like, we’ll have a better estimate, and we’ll give it to you guys. The short of it is, we’re going through a big, long permitting process that we think we have a good traction on. But it’s kind of in that stage where we have a general ballpark, but not specificity with respect to the numbers.

And that cost is including the land that’s already been acquired?

The land is under contract. So we are looking to close on the land as soon as we get the appropriate permitting. So that would include the cost of the land.

Okay. And then last question. On the engines, where are you currently on engines per day? Kind of where do you expect to reach this year? And then any changes on kind of consolidated margin benefit for utilization.

We’re at [Audio Dip] based on the – what we’re putting it in. And they’ve been going in, as I said, in 25 LSV in September. So those boats are out in the field. They’re being used by our dealers. They’re being used by our customers. And it’s been extraordinarily successful. By the time that we get to model year 2020 in July, we’re very well prepared that we will be putting it in 100% of our engines in Malibu and in Axis.

Perfect. Thank you, guys.

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

Thank you. Jack, Wayne congrats to you guys and the team. Jack, you’ve been fairly steady and bullish on the consumer and the economy continues to play up. Maybe circling back to a prior question with the call outs in value. Early season softness here and you commented on Axis. Are you seeing anything that would worry you about that entry-level consumer? I mean, from employment, wages, anything that would worry you about that entry-level consumer at this point?

I am not. And I appreciate you putting that word fairly in front of bullish. But from a consumer point of view, my – if you look at what’s going on, we have the largest wage growth in history. We have more people working than in history. So in my estimation, everything that we experienced in December was political and it was designed to really stake out claims, stake out positions from a political basis. Now let’s not to discount what’s going on with tariffs, but I think we’ve negotiated well around that. But what I’m seeing in the boat shows is that Axis customer is still coming in. And if anything, Axis remain strong, but what we’re also seeing is that the consumers are saying I want that next larger boat, be it an Axis or be it a Malibu or be it a Cobalt. We continue to see that migration to larger boats, which means a higher price point, which means greater ASP and greater profitability.

Okay. And nice transition into the tariff question here. So if the Canadian tariffs are repealed, Wayne, Jack, whoever wants to answer this, how much is that headwind – again, you said that it’s not that material, but it is a little bit. How much of that is built into guidance? Or would it pick up? Just any color on that. And then also, since we’re on – outside the U.S. borders, any color on Australia.

Yes. Related to Canada, we’ve really not built any type of estimation or any type of prognostication that, that Canadian tariff will go away. So we would – I think there is a little bit of pent-up demand. We saw that out of Toronto, and so there’s some potential a little bit of upside there. On Australia, Australia is doing well. And Australia is very well acclimated to the fact that they have additional count that they’re building for Europe and for China. And in my opinion, these will probably be boats that would’ve been lost. And so Australia is doing well with their own business, and this is the way we’re looking at it. So how are you doing inside of Australia. And then it’s extraneous when we talk about Europe and China. But margins were holding very well. We’re capturing market share. There was some flooding of inventory that was going on in Australia for about 18 months, but that seems to have ceased somewhat. So we’re recapturing market share.

Okay. And then also just wanted – very quickly talking about the Pursuit capacity add. Roughly, how long do you think before that’s done? And then with the engines – last question here, with the engines, you guys gave some thoughts on margins when you launched the project. And obviously, there has been start-up costs, investment and so forth. Where do you see those margins contributing in fiscal 2020 here as you get that rolled out? And granted, does it mean the margin opportunity is done?

Okay. On Pursuit, we’ve said 12 to 18 months. And I think 18 months is kind of that outside. Could it be sooner than that? We’re trying to do everything we can to aggressively move that up. But 12 to 18 months is just the range that we feel comfortable with. As it relates to engines, Wayne, what is that margin contribution?

Yes. So the – what we had previously described, it still holds in terms of our margin expectation. So it’s really – we’ll come out and as we guide margins for fiscal 2020, which we haven’t done yet, I would expect for that guidance to be impacted but what we had previously said, which is a meaningful margin increase related to the engine business. Right now, we’re not seeing that much of an impact, just given the limited volume you need to really reach the scale to have the effect of that. But once we get that all onboard and get past the start-up elements of that, the number is going to be approaching 100 basis points probably in terms of overall impact.

Okay, great. Thank you, gentlemen. See you next week in Miami.

Our next question comes from Rommel Dionisio with Aegis. Your line is now open.

Yes. Thanks and good morning. Just a follow-up on Tim’s question, actually on the engine business. Now that you guys have had it just from a qualitative perspective for a few months, Jack, could you just talk about what you’ve learned in terms of – what are you hearing back from product quality? Obviously, you talked about ramping that up pretty significantly here over the next couple of quarters. So things sound like they’re going well. But just – could you just provide a little more granularity from that initiative? And from a quality perspective and from a throughput perspective what you guys are learning? Thanks.

Quality perspective, it has been excellent. It’s been exemplary. From the standpoint of boats added to the field with inside of customers’ hands, I’m not aware of any single major warranty issue. So it’s extraordinarily successful at this point. The acceptance from starting with our dealers back at last spring and through the early summer has also been exceptional. I mean, the key points I think that are being driven is the torque that has been generated out of these engines, the quietness of the engines and most of all, without a doubt, we believe that we have the most serviceable engine in the industry, which is best for the consumer and best for the dealers. So this is a home run, over the fence, out of the ballpark.

Great. Thanks for the color and I’ll see you next week. Thanks.

Thank you. And I’m not showing any further questions at this time. I would now like to turn the call back over to Mr. James – excuse me, Mr. Jack Springer for any closing remarks.

I can be James too. Malibu had another fantastic record-setting quarter. Although there has been noise, we believe our dealers and the consumers are positive and they have confidence in the economy. This is being seen through the early boat show results. Malibu and Cobalt are performing very well, and we have now added another high performer in Pursuit. This gives us confidence for the rest of the year. Wayne and I want to thank you very much for joining our call and for your continued support of Malibu. Have a fantastic 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.