Malibu Boats Inc (MBUU) 2018 Q2 法說會逐字稿

Good morning, and welcome to the Malibu Boats Conference Call to discuss Second Quarter Fiscal Year 2018 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; and Mr. Wayne Wilson. 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 2018.

We will then open the call for questions. A press release covering the company's second quarter fiscal year 2018 results was issued today and a copy of that press release can be found in the Investor Relations section of the company's website. I also want to remind everyone that management's remarks on this call may contain certain forward-looking statements including predictions, expectations, estimates or other information that might be considered forward-looking and that actual results could differ materially from those projected on today's call.

You should not place undue reliance on these forward-looking statements, which speak only as of today, and the company undertakes no obligation to update them for any new information or future events. Factors that might affect future results are discussed in our filings with the SEC, and we encourage you to review our SEC filings for a more detailed description of these risk factors. Please also note that we will be referring to certain non-GAAP financial measures on today's call such as adjusted EBITDA, adjusted EBITDA margin and adjusted fully distributed net income.

Reconciliations of these non-GAAP financial measures to GAAP financial measures are included in our earnings release. I will now turn the call over to Jack Springer.

Thank you, Wayne, and thank you each of you for joining the call. This was another historic quarter for Malibu. Our companies and brands are performing well in the marketplace and there is continued growth across-the-board. Net sales increased 69% to $114.4 million. Adjusted EBITDA increased $20.6 million or 53 -- 51.3%, and adjusted fully distributed earnings increased 39.5% to $0.53 per share. The first half of fiscal year 2018 has been very important for our future as we have grown the core Malibu business while integrating the acquisition of Cobalt. Our retail momentum at Malibu and Axis in the first half of the fiscal year has been fantastic posting mid-year -- mid-teen year-over-year growth in retail. We are excited for the second half of the fiscal year, because it is seasonally larger and encompasses the prime selling season. The second half also provides an opportunity to drive performance with our new product and realize the progress that we've made with Cobalt.

Speaking of Cobalt, we are very pleased with the progress at Cobalt, and we are ahead of our schedule in our plan to deliver synergies and efficiencies in the business. It's usually a complicated process when integrating a business the size of Cobalt, but we are proud to say that our entire team has executed the integration very well.

As examples, we have stabilized operational processes and boats are being built and shipped according to the schedule versus the inconsistent building and shipping that was occurring before.

We have already transformed several lines to single piece flow, which has greatly influenced schedule of payment, made it easier for associates to build boats and reduced overtime.

Lastly, we are performing ahead of budget on the financial metrics we had planned and anticipated. As we focus on product, operations and distribution, Cobalt's brand and performance at retail remain strong while channel inventories are in terrific shape. If anything, there may be opportunity to slightly increase channel inventories. While other brands in the sterndrive segment are losing share in volume, Cobalt retail registrations of fiberglass boats grew about 7% in calendar year 2017 according to the almost complete FSI data available. Combining this performance with what we view as a relatively low inventory levels in the channel, we see this is an opportunity going forward. In addition, we have just begun extending Cobalt's entrance into the outboard market, which has been strong and growing.

In the U.S., we continue to see the Performance Sports Boat segment grow. We expect the growth rate for calendar year 2017 to be about 7% for the segment at retail. Despite substantial growth since the recession, the Performance Sports Boat segment remains well below the previous peak.

As said previously, our Cobalt brand is performing very well in the sterndrive market. In the most important segments of that market, there is healthy growth and Cobalt is gaining market share. The highlights are the 21 to 23 foot segment and the 24 to 29 foot segment, which represent more than 60% of the total units and have grown about 5% in 2017.

In those very same categories, Cobalt has grown at nearly double that rate in calendar year 2017.

Looking to the future, there are macro factors that we see as benefits to the Marine industry. In the previous quarter, we stated that employment rates and tax reform were 2 instigators of growth and stability for the Marine industry and our customers. Tax reform should be a very helpful factor to the industry as relief on business owners and upper-medium to higher income wage earners increases the potential market for boat buyers. Employment rates were at multi-decade level lows, which generate consumer confidence and higher disposable incomes. Other potential tailwinds such as environmental and energy policy give us additional optimism about the future.

We, finally, have factors that are helping business growth instead of hindering growth and making business operations difficult.

Additionally, we believe, wakesurfing is far from reaching peak exposure and provides a strong cornerstone for growth. We are seeing this not only for Malibu and Axis, but Cobalt is experiencing strong growth for boats tailored to wakesurfing as well. As the market grows, we will focus on expanding our marketing leading position by bringing new products to the market, innovating and having the best dealer network in the industry for both Malibu and Cobalt, the very same factors that have made Malibu the premier company that it is.

Regionally, the pace remains consistent with what we have said in previous quarters. Texas is still a hot environment and a leader in the Performance Sports Boat growth. The recently held Houston Boat Show saw a large increase in attendants and orders. In the West, in the Southwest United States, we continue to see strong results as most of those states' 2017 growth rates are well above the national average.

In California, where we are by far the market leader, the recovery has accelerated with 2017 growing even more than 2016. It's still early in the boat show season and most western shows have not been held yet, but we are optimistic that the recovery toward prerecession levels will continue for that area of the country.

As of this quarterly call each year, early boat show results are always of interest. Both Malibu and Cobalt have had very successful starts to the season. Attendance is up at many shows and the crowds are made up of buyers more so than in past years.

A broad section of the U.S. has had boat shows. Malibu has experienced, particularly, good performance in Denver, Atlanta, Cincinnati, Seattle, Houston, Toronto and Los Angeles.

Cobalt has had very strong boat shows in Kansas City, Atlanta, Seattle, Tulsa and New York, along with the Fort Lauderdale and the Tampa shows from late last fall.

After some strengthening in the U.S. dollar in the second quarter, January has returned to rates that, we believe, are conducive to recovery in our 2 largest international markets: Canada and Australia. The 2 Canadian boat shows that have already been held were good, and in particular, the Toronto show saw a significant improvement in units sold versus last year.

We believe, if the Canadian currency continues to be at the current level or better, then we should see some growth in the near future. Other international markets remain weak, but there are reasons to be optimistic.

As I mentioned before, currency rates are favorable compared to the last few years. The early European boat shows in London and Düsseldorf had been positive for all of our brands and the international macroeconomic factors are moving favorably. Malibu and Cobalt are well positioned for a return to growth in the international markets when that recovery comes.

The Malibu 23 LSV is the best-selling performance sport boat in the history by a very large margin. And the new 23 LSV is no exception.

Demand is high and orders continue to come in rapidly. Customer enthusiasm abounds and many are customizing and ordering their new 23 LSV.

Our 2 new Axis models are the A24 and the T22. Both boats offer high-level performance at an entry-level price. The new T22, it is a new boat and it has completely new styling, it's performing better than we anticipated. The new A24 has been a surprise to us as well with both customer acceptance and orders. Usually, a 24-foot boat has a shallower pool of customer -- customers and is slower to gain acceptance. This boat has sold like hotcakes since day one.

Our final new boat for model year '18 was introduced in Q2, so it's just now being seen at boat shows. The brand-new Malibu 21 MLX is in the same family as the 21 VLX introduced last model year. It has all of the key features that makes Malibu special and comes well-equipped for a retail price of $82,995. We introduced 3 new Cobalt boats for model year 2018 as well including 2 new Cobalt outboards. The 23SC and the 30SC. We are excited about these boats as they help us to address the growth in the outboard market. The third new Cobalt is the A36. This 36-foot boat has a luxurious, cutting-edge design and is generating excitement everywhere it goes. It was a hit and sold well in Fort Lauderdale and Tampa. Orders for this boat are definitely ahead of plan. Lastly and continuing to advance the surf selection at Cobalt, we added the surf package to the C23.

Within sterndrive, Cobalt owns the majority shares of customers. Surfing continues to grow with Cobalt customers, and we will continue to invest in surfing for Cobalt.

A key foundation to our success at MBUU is our operational excellence. While it allows us to produce excellent margins and gauge highly profitable vertical integration and provide quality product to our dealers and retail customers, there's another critical result of being operationally excellent. It allows Malibu to be consistent and deliver quarter-over-quarter results. We have not experienced the ups and downs caused by new product introductions or issues in manufacturing that many companies have.

The Marine industry is very open in terms of knowledge about other manufacturers. It is a well-known fact that most are struggling with their supply chain and cannot meet the demand that they have. Malibu is one of the very few that has the operational excellence foundation to meet the demand we are seeing and we manufacture to that demand consistently. While others are telling their dealers that they cannot supply all of their boats that they need or they have production issues in getting boats to dealers. Combining operational excellence with our constant monitoring of the market allows us to ensure our dealers have the right product on the floor to satisfy retail customers. We consistently review our processes and look for ways to improve efficiency, expand margins and drive shareholder value through initiatives such as lean manufacturing principles and vertical integration. Our vertical integration of engines is successfully proceeding as did our vertical integration of towers, trailers and many of the stainless and billet components of our boats. Our engine marinization project is moving along as outlined in November of 2016, and our timelines, our objectives and our financial return goals remain the same. We expect to produce Malibu marinized engines for our boats some time during fiscal 2019 and the payback will be realized over a 3-year period.

Through the first half of fiscal year 2018, MBUU has experienced strong performance, and we are excited about the prime retail season in the second half. Our new product is performing well for both Malibu and Cobalt, and operations are running smoothly. Cobalt is progressing ahead of schedule and our channel inventories are healthy for both Malibu and Cobalt. This should continue in the Q3 and Q4 with solid growth in financial performance.

In summary, today, Malibu had another historic quarter and we're looking forward to the rest of the year. The assimilation and enhancement of Cobalt is moving faster and better than planned. The domestic Marine market continues to grow. The Performance Sports Boat category is healthy and growing. Cobalt is a clear leader in growing in the sterndrive segment, and we're adding models in the high-growth outboard segment. We believe, the strong retail momentum across all of our brands has left inventories at near-optimum levels. Early boat show results have been strong with buyers rather than observers' presence and shows have seen significant increases over last year. There are positive signs in some international markets, but it is too soon to say when we will see a full recovery. Operationally, we continue to excel and are operating at high efficiency. That efficiency is being extended to Cobalt.

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 quarterly results in more detail.

Thanks, Jack. All fiscal year '18 consolidated financial results include Cobalt, which we completed the acquisition of, in early July, 2017.

In the second quarter, net sales increased 69%, to $114.4 million. And unit volume increased 61.1%, to 1,489 boats. The Malibu brand represented approximately 46% of unit sales or 688 boats.

Axis represented approximately 20% or 291 boats and Cobalt represented approximately 34% or 510 boats, as all of our brands performed well.

Consolidated net sales per unit increased 4.9% to approximately $76,800. The increase was primarily driven by year-over-year price increases and a higher mix of our new models such as the Malibu 23 LSV and the Axis A24.

Gross profit increased 54.5% to $27.5 million and gross margin decreased from 26.3% to 24.1% due to the acquisition and consolidation of Cobalt.

Selling and marketing expense increased 45.2% or $1 million in the second quarter. The increase was driven by the acquisition of Cobalt.

As a percentage of sales, selling and marketing expense decreased about 50 basis points.

General and administrative expenses, excluding amortization, increased 115% or $4 million. The increase was driven by additional spend-related acquisition of Cobalt, our engine vertical integration expenses and litigation expenses.

Excluding the impact of these items, G&A increased $3 million in the quarter. As a percentage of sales, G&A expenses, excluding amortization, increased 140 basis points to 6.5%.

Net income for the quarter decreased 172% to a net loss of $5.6 million due to the impact of the tax cuts and jobs act. There were 2 large adjustments related to tax reform legislation that impacted net income in the quarter.

First of all, we recognized $30.3 million of other income recorded due to reduction in the tax receivable agreement liability. This is a significant reduction in future liabilities that will positively impact our future cash flow.

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

Adjusted EBITDA for the quarter increased 51.3% to $20.6 million and adjusted EBITDA margin decreased about 210 basis points to 18%.

Non-GAAP adjusted fully distributed diluted earnings per share increased 39.5% to $0.53 per share. This is calculated using a normalized C corp tax rate of 33.3% and a fully distributed weighted average share count of approximately 21.7 million shares.

Please note, one of the big benefits of the tax reform is a lower future tax rate for the company, going forward. Our assumption related to long-term tax rate for the business is expected to be between 23% and 24%.

We believe, corporate tax reform will positively impact our financial performance both from a cash and earnings perspective. We believe that pro forma for our long -- our lower long-term tax rate adjusted fully distributed net income per share would increase approximately $0.30 annually.

Importantly, the lower tax rate and lower payments under our tax receivable agreement are expected to increase future annual cash flows by approximately $7 million per year.

We will continue to be disciplined with our cash and focus on adding value to shareholders by concentrating on high return investments and operational improvements, vertical integration and strategic acquisitions.

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

We do not provide detailed earnings guidance, but our outlook for fiscal 2018 is based on the following factors: an increase in unit volume of 55% to 60%. With respect to cadence, Q2 and Q3 will be the highest quarters. From a volume mix perspective, Cobalt is expected to represent approximately 1/3 of unit volume. Consolidated net sales per unit is expected to increase in the low to mid-single digits for the full year. It will be the highest in Q1, then be fairly consistent throughout the rest of the year. Gross margin is expected to approach 24% with the year-over-year decrease from the inclusion of Cobalt to be felt pretty evenly throughout the year. Acquisition and engine expenses are expected to be approximately $5 million to $6 million, not including purchase accounting adjustments for asset step ups. Adjusted EBITDA margin is expected to be about 18%.

Finally, regarding capital expenditures, we are currently planning approximately $13 million to $14 million in capital expenditures that includes expenditures of approximately $5 million related to our engine vertical integration initiative. The lower tax rate to be used in the second half of fiscal 2018 will add over $0.15 to adjusted fully distributed net income per share versus our prior estimates.

In closing, our second quarter results were strong. Our Malibu business continues to perform very well, and we are pleased with the progress at Cobalt. There are many opportunities that give us optimism for the future and provide a strong platform for earnings growth going forward. With that, we would like to open the call to your questions. Operator?

(Operator Instructions) Our first question comes from Brett Andress from KeyBanc Capital.

Just to start off, Wayne, is there any way you can break out for us what the core Malibu gross margins, if you back out Cobalt, would have been in the quarter? And also for the first quarter, if you have it?

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

Got it. And that's for 1Q, too?

Both.

Both, okay, okay. And then you stated Cobalt is a better opportunity than you guys originally thought. So is there any update you have on that $7.5 million synergy target. Because, I mean, it feels like it's probably going higher. And then how much synergy, I guess, have you realized so far this year? And I guess, could you remind us, maybe, how much you expect to realize by the end of the year?

Yes, what we had said with respect to synergy, so we haven't gone back and done an additional calculation to -- of the $7.5 million. What we can say -- what we said before was that we expect it to be about 25% accretive by the second year. I think in the financial performance that you're seeing out of the business with year-over-year earnings growth being what it has so far with no impact from tax reform, you can see that, that 25% is likely being achieved already. And so in the current period, we're probably approaching $1 million of annualized synergies that we are at a run rate of. But those won't be fully realized in the year. We're picking them off one at a time operationally, with respect to various contracts, et cetera. So, we continue to plug away, and I don't know what the upside is, but you're seeing it in the earnings already, and I think, we're just ahead of schedule and we'll be able to drive past that 25% target that we originally put out.

Got it. And last one, just, I guess, some clarity. I think, year-to-date, you're tracking an almost 6% growth in ASPs, and you still kept that low to mid-single guidance intact. So, I guess, what should we expect in the back half in terms of ASPs, so that it has anything to do with the Cobalt seasonality, is it product mix, is it less option uptake? Just anything you kind of have for the back half on ASPs?

I think it's really just driven by the seasonality and a little bit of the mix impact. You'll probably see a little bit more of the Malibus in there, and we may pull that number down a little bit relative to the Cobalt business in the back half of the year. Not to mention, we saw some really strong uptake in the first 6 months on the Malibu side and our expectation is that it gets a little bit softer in the back half. That's why it's -- we're showing a little bit of softness in the second half on the ASP relative to what it's been.

Our next question comes from Michael Swartz with SunTrust Robinson .

Just wanted to pick a guidance a little bit. Just given some of the commentary on the call, from a unit volume perspective, I mean, you said retail for both brands is up, I think, mid-teens year-to-date. You're a little light inventory in the channel on Cobalt, improving economy, improving emerging markets, FX. All this stuff seems to be going in your favor. But it looks like guidance would imply about mid-to-high single digit unit volume growth for both of those brands. So I guess, I just want to -- is that number right? And then, I guess, really, what am I missing?

Yes, so the mid-teens number is kind of the back half of last year. And so it includes Q3 and Q4. Now Q3 has a bit of registrations, but Q4 is pretty small. And I think, we've been pretty prudent over time with the market for PSPs growing last calendar year at 7%. We have some strong momentum. But I don't think we believe that, that business, the Malibu core business, is going to massively outindex that segment into the mid-teens for a full calendar year. So we feel good about where we're at. I think your numbers are probably about right. I haven't done the math here real quickly. But I think, we feel good about how we're positioned. And look, moving our guidance target from 55% to almost up 55% to 60% is a meaningful move on a unit volume perspective. And I think, we're just being cautious and understand that over a longer duration of time that, that number isn't going to be a mid-teen number for a year in our -- the business that represents 2/3 of our volume.

Understood. And then another question on guidance relating to margins, I mean, you held margins flat, but you talked about, obviously, a raise in the volume guidance. You're seeing early synergies from Cobalt, and we've had a positive mix in option uptake thus far through the year. So I'm trying to understand, maybe, what the offsets are as to why margin guidance didn't go higher?

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

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

Gentlemen, just a little bit more detail color, the channel inventories, Malibu, Axis brands, Jack, you alluded to the Cobalt side and talked about already. But just, like, sort of, where you want it on Malibu and the Axis brands. And, in particular, in Canada, how are your channel inventories? How do you feel there? Is that tracking where it should be? Or could that also may be an area where inventories could go up?

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

On the Cobalt side, the statement that I made is that they might be slightly low. And I think, that's accurate. One of the struggles that Cobalt had additionally had prior to just after the acquisition was getting that product out in the field and getting enough inventory to dealers. That has recovered substantially at this point. But I do feel like that there's still upside. And that we can pick up a little bit more channel inventory on Cobalt.

As it relates to Canada, Canadian inventories are in great shape. We have our dealers that 2 things are in play: number one, versus, say, 2 years ago, they've moved through a lot of that channel inventory, but also secondly, just due to the way that the shipping patterns took place last year, the inventory that they do have is at lower currency rate.

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

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

Yes -- no, that's really a year-over-year comparison issue where there was a small seven-figure number flowing through as a contrary expense in that category, because of the movement related to Marine Power litigation where we had won some post-trial motions. So it just creates a little bit of noise in that number. So no, nothing with respect to our business and current expenses. Just a point of clarification to try and get people some better clarity on year-over-year numbers.

Okay. And then finally, gentlemen, capital deployment. Just any change or update, I mean, you called out, Wayne, $7 million total benefit here from the tax reform. But as we, especially as we start to look into '19 and, maybe, start winding down some of the investments related to the engine side and then folding in the tax benefits, how are you, maybe, looking forward to capital deployment outlook here?

Yes, great question. As we have said and been pretty consistent, look, we're looking to deploy the capital in things that are -- opportunities that are unique to Malibu, that -- whether those be vertical integration like our engine initiative or trailer initiative or strategic acquisitions like Australia or Cobalt. And those are where we're looking to do things, first and foremost. So we're constantly evaluating and continue to evaluate vertical integration initiatives as well as some strategic acquisitions. So that's first and foremost. Secondly, we are going to look to pay down debt. Our net debt position is sub a turn of adjusted EBITDA, and we'll continue to delever there. And thirdly, we would sit there and make sure we're able to support our stock. But I think our -- the first 2 are our primary objectives right now.

Our next question comes from Gerrick Johnson with BMO Capital.

Jack, you touched on Cobalt throughput. Dealers seem happy about getting product faster. So can you quantify the throughput gains that you're seeing there? And then, Wayne, inventory on your own balance sheet looks up about 90%. Why is that growing faster than sales? And if you can talk about a little bit on the input cost side what you're just seeing in materials and labor?

On the Cobalt side, Gerrick, it's really a consistency of delivery of product. And where we are looking at increasing the counts through additional days, they are 5 by 8 work week, so we'll have some Saturdays through the boat show season. And in addition to that, we're looking at potentially going up in count. So largely, to this point, it's just been reducing the sporadic nature of production and shipping and making it much more consistent in getting product out to dealers quicker, as it relates to Cobalt.

Yes, Gerrick, in terms of the inventory, the primary driver there is going to be Cobalt. That's the #1 driver of it. From an inventory perspective, they have some inventory and that's sitting on their books that we will be looking to move through and make that a little bit more efficient. But the primary driver's the addition of Cobalt.

Okay. And then on the input cost, what you're seeing in labor and materials?

On the materials side, we haven't seen major movements and don't -- are not feeling a big pressure there.

With respect to labor, in this type of economy, look, labor is always a challenge. I think it's a challenge for everybody. And we are -- thankfully, the labor content in our boats isn't so high that small movements in those wages meaningfully impact our margins. So we're trying to stay as competitive as we possibly can to maintain our great workforce, and -- but we are seeing some pressures there.

Our next question comes from Joe Altobello with Raymond James.

So first question, want to go back to margins for a second. I'm curious, how quickly you think you can close the gap between the Malibu margins and the Cobalt margins given that they have similar ASPs. And what's the major structural impediment that's keeping you from getting there?

I think there's -- there are a number of things. We -- from a labor perspective, we need to get into the plant and make it more efficient. Vertical integration is going to be a key. And potentially, additional optional features and high margin optional features that we can add to that brand are the types of things that are really going to move the needle and put that margin closer to where the Malibu number is. Now structurally, from a sterndrive perspective and its business overall today, does that number -- is that number ever going to get all the way to Malibu. There's a long way for us to go to get there.

Okay. But there is a plan -- or it seems like there is a, -- at least, a runway to get there over the next, call it, 2 to 3 years, to get close.

Absolutely.

And then secondly, in terms of acquisitions, you guys have now, I guess, we're 7 months into the acquisition of Cobalt. Any thoughts to additional M&A going forward?

We remain looking at potential candidates, but again, similar to what we did with Cobalt, it does have to be the right fit. It has to be the right brand image. It has to be the right accretiveness that we're looking for. So we remain active. We're looking for that next acquisition that makes a lot of sense for MBUU. And that is a potential capital deployment in the future.

(Operator Instructions) Our next question comes from Eric Wold with B. Riley FBR.

Couple of questions, if I may. One, on the vertical integration for the engines, I guess, how pervasive could that be in, kind of, year 1, year 2, year 3, is the goal to get to 100% penetration of your engines throughout the product offering over the 3-year period? Or is that separate from the kind of the 3-year payback? And then, is the plan to price boats with your engines versus non-your engines comparable or there plan to be some delta there in the pricing as well?

Well, to the first question, the way I structured Malibu will be -- Malibu and Axis, I should state, will be 100% all our engines. That's not on day one. What we have maintained from the beginning is that at some point in 2019, we will begin putting Malibu engines in our boats. So that will occur at some point in model year 2019 or 2020 that 100% of the engines are made by Malibu. As it relates to the pricing strategies, I won't go into a great deal of detail, but one thing that you can take to the bank similar to other vertical integration opportunities in trailers come to mind as an example, is we do believe it's important to share the opportunities with our dealers. So one of the key factors in vertical integration, one of the key factors that make Malibu and Axis such a value, is we are eliminating that middleman markup. That can be a huge component of what we're doing. So the likelihood of just on an apple to apple basis, engines being higher, because we're manufacturing our own engines really doesn't make a lot of sense, because we're eliminating a lot of markup in that regard. So as we go through this, we'll come up with the right pricing structure for our dealers and for the retail customer.

And last question, kind of looking back to the Q1 call, there were some, kind of, towards quarter-end delays in shipments are going to go -- moved into, kind of, early Q2. It's on a timing basis. So we kind of look at apples to apples, combine Q1 and Q2 this year and Q1 and Q2 last year for Malibu and Axis and get to a combined about 3.5% unit growth rate for the first half year-over-year. Is that the right way to think about it or is there anything else to consider in there?

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

And that's really what gives us a great deal of confidence in saying that our channel inventories are at optimum levels.

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

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

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