Good morning and welcome to Malibu Boats Conference Call to discuss Second Quarter Fiscal Year 2020 Results. [Operator Instructions] Please be advised that reproduction of this call in whole or in part is not permitted without written authorization of Malibu Boats and as a reminder this call is being recorded. On the call today from management are Mr. Jack Springer, Chief Executive Officer; Mr. Wayne Wilson, Chief Financial Officer; and Mr. Ritchie Anderson, Chief Operating Officer. I will now turn the call over to Mr. Wilson to get started. Please go ahead sir.

Thank you and good morning everyone. On the call Jack will provide commentary on the business and I will discuss our second quarter financials and outlook for fiscal 2020. I will then hand the call back over to Jack for some remarks and we will open the call for questions. A press release covering the company's second quarter fiscal year 2020 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 will now turn the call over to Jack Springer.

Thank you, Wayne and thank you all for joining the call. The second quarter was another outstanding quarter for Malibu. The strength of our brands industry-leading product innovation continued success of our acquisitions and our team's tremendous operational execution enabled us to drive robust top line growth and successfully overcome headwinds presented by the UAW strike that impacted our engines plus. For the quarter net sales increased 9% to $180.1 million. Adjusted EBITDA increased 4% to $30.7 million and adjusted fully distributed earnings increased 8% to $0.93 per share. I want to congratulate the entire MBUU team for a job very well done. The momentum we have experienced in the last several years underscores the strength of our strategy that we are executing every day. Our commitment to a rapid thoughtful pace of new product introductions both new boats and features robust investment in R&D efforts and best-in-class vertical integration initiatives have supported further market share gains while at the same time mitigating the impact of macro events such as the tariff situation and UAW strike through this we have driven margin expansion. Another very important part of our momentum and performance is our acquisition strategy. We have been prudent and only acquired premium brands at reasonable valuations. And through our operational expertise we have made them better more profitable and quarterly contributors of our growth and profitability. Acquiring great brands combined with our flawless execution to make them more efficient is a demonstrated core competency for Malibu. In our last earnings call we indicated the second quarter would experience headwinds and there would be an impact as we fully recovered from the UAW strike at GM which impacted engine supply. I am very pleased to tell you that with GM coming back online quicker than we anticipated and more…

Thanks Jack. In the second quarter net sales increased 8.6% to $180.1 million and unit volume increased 2.5% to 1804 boats. The Malibu and Axis brands represented approximately 61% of unit sales or 1101 units. Cobalt represented 31.1% or 561 units and Pursuit made up the remaining 142 units. Consolidated sales per unit increased 6% to over $99800 driven by year-over-year price increases and an increased mix of larger boats across our Malibu and Axis brands. Gross profit increased 4.1% to $39.9 million and gross margin was 22.1%. This compares to a gross margin of 23.1% in the prior year period. The decrease in gross margin is primarily attributable to the expenses related to the UAW strike and when adjusted for $1.7 million in costs associated with the UAW strike would have been approximately flat. Selling and marketing expense increased 1.4% or $0.1 million in the second quarter. As a percentage of sales selling and marketing expense decreased two basis points. General and administrative expenses decreased 10.3% or $1.2 million. The decrease was predominantly driven by acquisition-related expenses that were attributable to the addition of pursuit in the prior year period. As a percentage of sales G&A expenses excluding amortization decreased 120 basis points to 5.6%. Net income for the quarter increased 17.3% to $17.6 million. Adjusted EBITDA for the quarter increased 4.5% to $30.7 million and adjusted EBITDA margin decreased 70 basis points to 17%. Non-GAAP adjusted fully distributed net income per share increased 8.1% to $0.93 per share. This is calculated using a normalized C corp tax rate of 23.5% and a fully distributed weighted average share count of approximately 21.6 million shares. For a reconciliation of adjusted EBITDA and adjusted fully distributed net income per share to GAAP metrics please see the table in our earnings release.…

[Operator instructions] And to your first question comes from Brett Andress with KeyBanc Capital Markets.

So just looking at your retail data for Malibu and Axis in the back half of the year. So June to December I'm showing 25% type growth. And I know sometimes that can defer from your warranty registration. So I guess is that the correct way to think about how your retail trended really in the back half of this year?

Back half of or you're speaking to the calendar 2019?

Sorry. Yes. The calendar yes.

All right. So repeat the question please? I was looking at the fiscal calendar.

Sorry about that. Yes. No just how because if you look from June to December I'm showing retail 25% for Malibu and Axis. So I guess sometimes the warranty registrations can be different from that. Your internal warranty registration. So is that kind of a correct retail trend that you guys had in the back half of the calendar?

Yes. I think that's pretty correct. It matches for the most part what we saw in the warranty. And as I said earlier on the call the August September time frame in which we were trying to move inventory outperformed and the year-end sales event also outperformed last year. So it's been a very, very strong second or what I'll call it second half of the calendar year.

Got it. And then just kind of building off that. So your comments earlier about promotions not pulling forward demand I mean is encouraging. And so just outside of the boat shows is there anything else in the consumer behavior that you're seeing that is kind of leading you to that conclusion?

Yes. I think first of all I'll just go back to we outperformed in the August September period we exceeded last year in our self events and boat shows are double digits up. So that's that and that's part of the reason I think you see just such a what we would call an astronomical growth to market share. I think the other side of the equation is we are selling and this comes back to the consumer larger boats with a lot more features and options driving that ASP.

Got it. That's helpful. And then just one last one. How are you guys thinking about Australia this fiscal year and next fiscal year really given the fires and disruption there? What are your dealers seeing? Just any thoughts on that market.

Year-over-year Australia is really pretty flat. It will run about the same. I think we've seen a little bit of a blip in what's going on in Australia to the tune of call it 5% or so right now. But we believe that as the fires resolve themselves and we come into that boat show season. Because they're at the end of their summer season now. So as we come into the boat show season we expect it to pick back up.

Your next question comes from Tim Conder with Wells Fargo Securities.

Congratulations first of all. And Richie congrats on continue to ramp the Pursuit well. A couple of items. Jack Wayne whoever wants to take this. What are your expectations as you look here to calendar 2020 on the retail outlook for Malibu collective and let's just say North America and Europe? And then also maybe going back Jackie you commented that we continue to see the upward migration of price points and content. I know this question has been asked before but just want to revisit it. How are you guys thinking about it and planning managing? At some point there that will not continue. And just to make sure you don't start losing people coming in at the lower end of the funnel so to speak. If any color on that.

Yes. On the retail side we expect that to continue to be pretty consistent. We've had some pretty strong growth. I would expect that to moderate a little bit. I think the Malibu and Cobalt will remain somewhere in those levels that they're currently in. Pursuit is going to be flattish I think for now from a market share standpoint simply because of our capacity constraints. And then as we bring that product new product online and the new plan online I think we have significant opportunity for market share gains there going forward not necessarily in the back half of this fiscal year. Any additional commentary there?

Yes. No I mean I think look the performance sports boat grew domestically 4% last year that was negatively impacted by weather. So we're looking at that as kind of that mid-single-digit-ish rate grower. Yes you have the potential for some headwinds coming out of Canada in terms of the luxury tax and you obviously have the tariff situation in Europe which I think we've been addressing but building some boats out of Australia. So I think that's where our head is at. We've seen really positive momentum in the back half of calendar 2019 and we feel good about what we're seeing today out of boat shows. So we think that our guidance and what we've kind of embedded there and what plan for the businesses is appropriately conservative for uncertainty in the world but definitely achievable.

Yes. And Tim to your second question we are constantly monitoring what the consumer in the dealer base is thinking in terms of pricing. We've had this every single year come up as a question and we've not seen that top line. But I think it's also important to understand that we just don't continue to drive that pricing upward by bringing on new boats and adding features to both. We have been very, very prudent in that. We have that entry-level or call an entry-level position. Several years ago we introduced two models at a nationally advertised price that allowed people that had maybe come from 2006 '07 '08 time frame to get into a boat at a better price and we've retained that. This year with our A20 we have introduced that at pricing that is probably lower than what a lot of people expected. So I believe that we can play both ends of that market very well and we've done that.

Okay. And from I guess another avenue along that line as far as continuing to expand the market. How much of your business in calendar 2019? Or however you want to frame it here is with the rentals the boat club type market? And then what's your outlook for that as a percentage of your business here over the next in calendar 2020?

That's a really good question. And we're right now involved with three in terms of externals three different boat club type program to rental programs. In addition to that there are a number of dealers that were involved with that. And so we see that as a growing segment. It's not probably a segment that we're going to get in and own. I think the financial profile is quite a bit different. But as we continue those partnerships with dealers and external sources I think that will grow over time. And I think that ultimately as a feeder into that Malibu Cobalt Pursuit system.

Okay. And lastly gentlemen you've been very disciplined in your approach to M&A and thank you for that. So just your outlook at this point from that perspective. And relative to other capital allocation opportunities with the stock with anything else that you may evaluate on the capital allocation side.

Yes. I think you know this. One of the great things that we have is the amount of cash that we generate. We generate a lot of cash which we think sustains us in good times and bad. It's now approaching 18 months that we acquired Pursuit. And we've been I think you used a great term discipline. We've been very disciplined not only with what we've looked at and what we've acquired. We've made sure that were great brands that we could improve. But we've also been very disciplined in making sure that internally we have the team in place to make that next acquisition. And so we have been building that team. You have Cobalt is approaching three years under our umbrella pretty stable. Pursuit has a great management team and we're about to bring that plant online in a matter of a couple of months if not weeks. And so that's going to be a stabilizing factor. And all through that time we've brought in new people that can help us with the next acquisition. But the key always comes back to this. And that is the acquisition and does it fit our model. And as we've said before we've looked at over 40 different potential acquisitions that we've acquired too. So when that next asset comes if it's tomorrow or a year from now we're ready and we're going to use our cash today to pay down leverage and be ready to make that next acquisition.

Your next question comes from Gerrick Johnson with BMO Capital Markets.

Two fairly easy ones. First of all on the UAW engine impact. You said less than $3 million well $1.7 million is less than $3 million it seems like there might be some more coming through. So what else comes through in the second quarter? And why? And then on the capacity expansions and the capital projects you have ongoing. Can you give us a D&A for 2020? And then how much do you think these expansions will add to that next year? And then maybe offset what kind of start-up costs go away?

Gerrick you said they were easy questions. Yes so on the first one on UAW. We still have some impact flowing through as we work through some of that safety stock engines. And I would estimate that that's going to be between $700000 and $1 million probably in the third fiscal quarter and that will be the end of it. And then with respect to D&A there are not going to be a ton of D&A incrementally that hits in this fiscal year. I know Jack said weeks in or month in terms of when the Pursuit factory's potentially coming online but I think it's a little bit it's on the longer tail of that. And so ultimately there's just not going to be a lot of D&A impacting this year blow hundreds of thousand dollars in terms of incremental depreciation this year. And then if you look at into next year it's probably going to be to the tune of $1 million and $1.5 million incremental D&A flowing through.

Okay. And any period expenses going away from the start up?

In terms of I think we'll kind of give some more guidance at any of those expenses are kind of embedded in the guide this year. So when we give fiscal '21 guidance we'll either communicate that or just embedded in the guidance exactly what those startup costs going away are doing to our margins. We haven't specifically called any of those out. But I think that's a good question and there's a little bit of that friction embedded in it today. We do have people on staff. We're training them. The building is fully skinned and roofed and it's getting close. And we have people staff and we're training them. So there is a little bit of a drag there right now.

Your next question comes from Joe Altobello with Raymond James.

So I guess first question since we're just talking about Pursuit. I guess I'll start there. In the guide for this year in terms of units up slightly over 40%. It looks like it implies flattish growth in the second half in terms of shipments. Is that intentional ahead of the expansion completion?

Yes. It is. And this is Joe simply this is what we've been talking about for a long time. We can only build a certain number of boats until we get this new plant online. And so we are controlled by that. So it is going to be flat in the second half. But what we're seeing and I alluded to this in the script you look at the New York boat show as an example even though units were basically equivalent because of the size of the boats what is being put on the boats the revenue volume was up significantly. So unit was flattish but we think that the revenue has an opportunity to grow certainly over the future.

Yes. Absolutely. And then secondly on dealer inventories. I think Jack you said earlier that they're right on top of where they were at this time last year. Were you talking about dealer turns? Are turns flat year-over-year?

We don't measure turns. I mean we focus on weeks of inventory sitting on dealers' lots. And so I mean if somebody wants to do the math to invert that but ultimately it's right on track for where it needs to be.

Okay. But the point being that all that excess coming out of the summer seems to be done at this point?

Yes. I mean at Malibu and Axis if you retail domestically up to 25% and your year-over-year growth number is very small. You're clearly de inventory meaningfully.

Okay. And is it fair to say that you guys are fairly well ahead of the competition in your categories in terms of burning off that excess inventory?

Very fair to say. And especially related to aged inventory.

Your next question comes from Alex Maroccia with Berenberg.

So can you talk about the 12% drop we saw in ASPs among the Pursuit brand which both styles are going to hit the hardest? And was this really to you guys just focusing on moving volume versus pushing price given some of the capacity constraints?

Yes. Really it's driven by the fact that you have lumpiness when it comes to the contract manufacturer boats that come out of Holland. And so those are the two highest priced boats. And so you have some amount of lumpiness. At the beginning of the year we guided that ASP down year-over-year because we knew that that mix was going to mix down. And we're going to see less contribution from those boats overall over the course of the year. So it has less to do with kind of the mix that we see within our factory in Florida which actually has the fixated the mix has actually outperformed our expectations a little bit this year but more to do with the mix between the boats that we've been able to get out of the S2 folks and the boats that we build-out of the Fort Pierce facility. So that's really the function of it and it was as anticipated.

Okay got it. And then second one is balance sheet related now that we kind of have a full year run rate on the Pursuit brand being included in the portfolio days payables were down by four days. Can you just explain what you're seeing in the supplier market that's driving a bit more aggression from them and get you to pay them?

I think from an AP perspective look we try and look at that that can fluctuate just based off of the day of the week we run weekly payables. So we kind of pay our bills on time and have a philosophy that that's the right way to do business. And so you're going to see a little bit of fluctuation but we don't see that as a big use of cash and that's probably just normal variation that you're seeing.

Your next question comes from Michael Swartz with SunTrust Robinson Humfrey.

Just wanted to follow-up on some things. Jack and Wayne you both said this. But with regards to the Pursuit facility you're not talking about this thing opening in weeks versus months. I think we had all been of the assumption that this is June to July time frame. So I'm just a little more clarity on that comment.

What we've said all along is that we will be up and running at the beginning of model year 2021 which is July. You actually have to open before that. You just don't turn on the spigot walking the board and start building boats at full scale. So I look at it from a 12-week aspect well 12 weeks equals three months. So I think we're saying the same thing.

Got you. That's all I needed. I appreciate that. And then just the I guess with Canada and the potential luxury tax and I know you've called it out as something you're watching. Could you give us a little more color on maybe what you're hearing from your dealers and how they're thinking about bringing on inventory maybe mix of inventory this year?

We really have not heard a lot Mike. It's I think it's out there and they're using that as a reason to potentially push sales right now but a little bit surprising to us. Toronto was stronger and maybe this factors into Toronto was stronger this year than it was last year. We had a very good boat show up in Toronto. But largely we're just not hearing a lot about it.

Okay. And then just one final one. Wayne I think you said relative to your expectations you did a little better getting around the UAW issue and you had some catch-up I guess catch-up revenues were rebutted in the quarter any way to quantify how large that was that catch-up part?

I mean look I think what I alluded to there was in terms of just the magnitude of the performance in the quarter versus what we guided you to last quarter was a very fluid and dynamic situation. Operations is managing it. I mean whether it was sales or IT or the operations team it was and we wanted to make sure that we delivered on what we said to you guys and that the team really pulled together very, very well. And so in terms of the magnitude it's kind of split right? If you look at the guidance raise and the expectation raise. I think it's the beat isn't totally flowed through in the guidance raise and I think that's kind of the indication of that was the move between kind of Q3 and Q2.

[Operator Instructions] And your next question is a follow up from Gerrick Johnson with BMO Capital Markets.

I just wanted to clarify on channel inventory. You're talking about it being comparable last year. But on the last quarterly call you said it would take until the end of the fiscal year before it's kind of at an optimal level i.e. the mix of new and aged? Was it the right ratio? So where are we now on that progression?

We're ahead of where we expected. We've seen more strength. And so I think we feel like it's optimal for where we want it to be at this time. It pulled down faster given the outperformance in the retail.

At this time there are no further questions. I will now hand the call back to Jack Springer for closing remarks.

Thank you very much. Malibu delivered another strong performance in the quarter achieving profitable growth across our brands and demonstrating our operational excellence by successfully overcoming the headwinds we faced. Our industry-leading operational execution and acquisition strategy continues to differentiate us from our competitors and coupled with the strength of our compelling model year 2020 products position us well to deliver continued stalwart performance in the second half of fiscal year 2020. I want to thank everyone today for joining us on the call and for your continued support of Malibu. Have a fantastic day.

That concludes today's conference. Thank you for your participation. You may now disconnect.