Malibu Boats, Inc. Q3 FY2023 Earnings Call

Good morning, everyone. Before I turn the call over to David, I'd like to take a moment and thank the entire Malibu team for their commitment and dedication over my nearly 14-year tenure. It's been an honor to work alongside each and every one of you during our incredible transformation. We've accomplished a tremendous amount, and I leave proud of what we have achieved. More importantly, I look forward to watching the continued success of Malibu and leave knowing that our talented team remains incredibly well positioned to expand our leadership as the premier recreational boats manufacturer. I will now hand it over to the capable hands of our new interim CFO, David Black.

Thank you, Wayne, and good morning, everyone. On the call, Jack will provide commentary on the business, and I will discuss our fiscal third quarter 2023 financials. We will then open the call up for questions. A press release covering the company's fiscal third quarter 2023 results was issued today, and a copy of that press release can be found on 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 the 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.

Thank you, David, and thank you all for joining the call. Before we begin, I wanted to acknowledge that this will be Wayne's final earnings call for MBI. For nearly 14 years, Wayne has played an integral role in executing our strategic vision, while at the same time, supporting our tremendous growth. He will be deeply missed, but he has built a strong team around him. And as David leads on an interim basis, I have the utmost confidence in our team's ability to navigate the ship and continue to deliver the results that our stakeholders have come to expect. On behalf of everyone at Malibu, we wish him the best during this next stage of his career. Turning to the third quarter, we extended our strong track record of performance, delivering another record for sales despite modest margin pressures as volumes and inventories normalize within our Freshwater brands. While the macroeconomic environment continues to evolve and create uncertainty, we remain very confident in our ability to execute and match wholesale to retail demand. During the quarter, we have seen steady improvements in lingering supply chain disruptions and resilient demand in our Saltwater segment, all while continuing to make great strides in improving our pace of production and normalizing dealer inventories. Our team knows how to navigate any environment, and this quarter was no different. We have a clear strategy that we are executing. And while the waters may be choppy at times, we are in a unique position to advance our innovation, increase our capacity and deliver on our vertical integration initiatives. For the third fiscal quarter, we posted net record sales of $375 million, increasing 9% over the prior year with adjusted EBITDA of $79.3 million and net income of $53.5 million. As expected during the quarter, we have seen a softening of volumes within our higher-margin Malibu Access segment as channel inventories reach the correct balance. As a result, gross margin declined 190 basis points to 26.3%, while adjusted EBITDA margin declined 210 basis points to 21.1%. Channel inventories for Malibu in particular are ahead of schedule, while Cobalt is not far behind. However, despite the progress we have made filling our Freshwater channels, the upcoming launch of our new model year lineup is on the way and dealers are standing ready heading into the prime selling season. Meanwhile, demand within our Saltwater segment has been exceptionally strong throughout the monsoon season, reaching peak levels for the larger shows. Pursuit had historic boat show performance across the board from our shows at Fort Lauderdale in November to Palm Beach in April. This also includes superb shows in New York, Miami, and Atlantic City. Cobia and Pathfinder also had strong showings supporting our leadership position in this growing segment. Dealers remain quite optimistic in this category, and we have additional room to fill this channel heading into the first half of fiscal '24. Overall, compared to our Freshwater brands, our Saltwater brands stand several weeks behind the Freshwater segment in reaching normalized inventory levels. Given the strong pent-up demand, Pursuit has the most room to grow followed by Cobia, while our Pathfinder brand is closer to being at optimum channel inventory levels. Further to my point about Pursuit's growth profile, we have not yet begun to see the replacement of boats related to Hurricane Ian. Many of our dealers believe this will be very significant as it has been estimated that 15,000 boats were totaled as a result of the hurricane. While the timing of this replacement cycle remains uncertain, we stand ready to fulfill these orders. The next few weeks through the quarter will be important to fully understand what retail demand is and will be through the summer. Weather has been a headwind to this point due to a cool spring and lots of precipitation. We have just begun hearing from dealers that the weather pattern is alleviating, and we are beginning to see the warm weather needed to drive retail. Our success over the years has been driven not only by our leadership in the market but also our commitment to investing in the business, either organically or through acquisitions. A prime example of the tremendous progress we have made with the acquisition of the Maverick Boat Group of brands and our successful facility expansion there. NBG is running at a ramped-up pace and showcasing our tried-and-true model of integrating premium brands within our industry-leading operations. Today is no different. We continue to have our foot on the gas from a strategic growth standpoint. At MBI, we are constantly looking for ways to increase our manufacturing capacity, expand our vertical integration footprint, grow our distribution network and bring key capabilities in-house. I am excited to speak to some transformative new developments. I will begin with a successful build-out of a 100,000 square-foot new tooling plant on available Pursuit property. On March 1, we officially launched our tooling design center or TDC. The TDC is a very large vertical integration initiative that will first focus on Pursuit and the tooling needs there. This has been a huge endeavor and part of our multi-year plan to bring our product tooling in-house. We are very excited about the potential this brings to MBI as we look to better control capital expenditures, improve our tooling quality, and increase volumes. We have a strong team in place there to lead the charge and plan to start expanding our tooling capabilities for Pursuit with the ultimate goal of eventually building the majority of all tooling for all MBI brands. Secondly, we recently filed an 8-K for the purchase of property with plans to build out a 260,000-plus square foot facility, which is strategically located near our MBI headquarters in Tennessee. This facility gives us added capacity and flexibility to grow in line with the long-term market opportunities ahead. We always want to be in the best position to have adequate capacity for growth, whether growth through our existing brands or diversifying our mix into other high-growth segments such as greenfielding into pontoons, this purchase does just that, providing us with premium optionality for expansion wherever the tide turns. And another very exciting development and one that many of you have asked about over the years, starting in the first quarter of fiscal 2024, we will begin offering monsoon sterndrive engines to our Cobalt dealers and customers. As we move into the second half of fiscal 2024, we plan to continue the rollout of our Monsoon engines in the Cobalt surf boats. As we scale this over the next few years, we believe this move has the potential to further enhance our strong EBITDA margin profile and generate a triple-digit return on investment. Comprehensively, we have kept our hand on the throttle and continue to adapt well in a tide-turning market environment. Our operational excellence and vertically integrated model have cemented our strong footing as the premier recreational boats manufacturer. We look forward to delivering another successful year. And as we look across the horizon, I am confident in the steps we have taken to pave the way for the next leg of our growth. With that, I will now turn the call over to David to take you through our financial performance in more detail.

Thanks, Jack. In the third quarter, net sales increased 9% to a record of $375.1 million and unit volumes increased 2.9% to 2,637 boats. The increase in net sales was driven primarily by increased unit volumes for our Saltwater Fishing and Cobalt segments, year-over-year price increases, and a favorable model mix. The Malibu and Axis brands represented approximately 50.7% of unit sales or 1,338 boats. Saltwater Fishing represented 27.2% or 718 boats, and Cobalt made up the remaining 22.1% or 581 boats. Consolidated net sales per unit increased 5.9% to $142,252 per unit, primarily driven by a greater mix of larger boats for Malibu and Cobalt segments and year-over-year price increases. Gross profit increased 1.5% to $98.6 million, and gross margin was 26.3%, this compares to a gross margin of 28.2% in the prior year period. The decrease in gross margin was driven primarily by a decreased mix of our higher-margin Malibu segment and increased dealer flooring costs. Selling and marketing expenses increased 6% or $0.4 million in the third quarter. As a percentage of sales, selling and marketing expenses decreased by 10 basis points over the prior year period. General and administrative expenses increased 13.6% or $2.3 million in the third quarter. The increase was driven primarily by an increase in compensation and personnel-related expenses along with an increase in professional fees and increased travel-related expenses. As a percentage of sales, selling and administrative and general and administrative expenses increased 20 basis points to 5.2% compared to 5.0% for the prior year period. Net income for the quarter decreased 2.5% to $53.5 million, adjusted EBITDA for the quarter decreased 0.6% to $79.3 million, and adjusted EBITDA margin decreased 210 basis points to 21.1%. Non-GAAP adjusted fully distributed net income per share decreased 0.8% to $2.59 per share. This is calculated using a normalized C corp tax rate of 24.3% and a fully distributed weighted average share count of approximately 21.3 million shares. For a reconciliation of adjusted EBITDA and adjusted fully distributed net income per share to GAAP metrics, please see the tables in our earnings release. This quarter highlighted the strength of our operations team given our strong performance in spite of moderated volumes for our Malibu Axis segment. As expected, channel inventory has reached more normalized levels in the Malibu Axis channel. While we have some runway for continued inventory within our Saltwater segment, we will now focus on expansionary distribution over the coming quarters that has been planned for years post-acquisition. With prime selling season coming down the pike and inventory at more normalized levels, we look to maintain our trajectory and deliver a strong close to fiscal year 2023. Based on our current operating plan, our expectations for fiscal year '23 are as follows: we anticipate revenue to grow just north of 10% year-over-year and consolidated adjusted EBITDA margin is expected to be down slightly. While we look forward to delivering another successful fiscal year, we are even more excited about what the future holds. As Jack mentioned earlier, we announced three new major initiatives, two of which represent the next phase of our vertical integration strategy. These initiatives are indicative of how we position MBI to outperform over the long term by utilizing our scale and experienced team in high ROI projects that are unique to our business. These vertically integrated initiatives are why we continue leading the way as the premier recreational boats manufacturer, and I look forward to working with our best-in-class team to execute in the coming quarters and years. With that, I'd like to open the call up for questions.

Thank you for your contributions, Wayne. I'm hoping you guys can talk a little bit about how you think the profitability in Saltwater can change over time. So in the near term, we're looking at a higher mix of Saltwater relative to the past. But it looks like the EBITDA margin will be improving despite sales declining maybe in the fourth quarter. But can you talk a little bit about how that shakes out over both the near term and the longer term because it would seem like the Saltwater segment becoming a bigger percentage of the mix might actually be a bit of a drag on the overall EBITDA margins?

Yes, Jaime, that's true, and it reflects our evolution. We've observed this with all our acquisitions. When we acquired Malibu Axis back in '14 and '17, we had a very high EBITDA percentage, making our margins the highest in the industry. Each acquisition, starting with Cobalt, has reduced our overall EBITDA margin because we were dealing with brands that had lower EBITDA margins, but we have been working to improve them. For instance, in the first two years, Cobalt doubled its EBITDA, contributing to higher margins. We saw similar improvements after acquiring Pursuit in '18 and NBG in 2020, where we started with much lower margins. However, we're beginning to see those margins increase, particularly with Pursuit, which continues to grow. In the short term, we’ve experienced that growth, but it still lags behind Malibu and Cobalt at this point. Nevertheless, we anticipate that over the long term, we will be able to bring all our brands up to a 20% EBITDA margin threshold. Achieving this for the Saltwater segment will take a few years, specifically two to three, but we are confident we will reach it. This will primarily enhance our margins from the Saltwater segment.

Yes, I was surprised that with the strength in Saltwater, we might see EBITDA margins increase year-over-year in the fourth quarter. My other question is about dealer profitability. In previous quarters, you mentioned that dealers were achieving optimal profitability, but that may need to adjust now due to the changing environment. Can you discuss how that has evolved over the last quarter and whether dealers are willing to lower their profit per unit to encourage quicker sales?

Yes. I think it's adjusting without a doubt. Coming out of COVID, there was that overhang of keeping margins high. We've addressed it with the dealers, and I was pretty vocal about it last quarter. It is adjusting. Is it where it needs to be yet? No. And I think Wells Fargo will tell you the same thing across the entire spectrum of marine. But one of the situations or realistic events that's going to occur is we're about to go into a heavy selling season. And we have inventories that, at least on the Freshwater side, are approaching normality and then they're building on that Saltwater side. It is going to be a much more competitive environment. And the message that we're delivering to our dealers is, the dealers that are going to win are the dealers that are very aggressive in their marketing and lead follow-up and also very aggressive in their pricing, unwilling to lose deals. And we have seen a moderation in that holding that high margin, not where we want it to be yet in some of our brands, but I think it will get there.

This is Martin on for Joe. Jack, can you help us square your shipments for the quarter with the soft SSI data we've seen so far? And how do you feel about dealer inventory across your different brands?

Okay. Would you repeat the first question, please?

Yes, absolutely. Can you help us square your shipments for the quarter with the soft SSI data that we've been seeing?

Okay. I think it's important to take a moment to understand our current situation. The retail environment has had very low inventory levels. It's straightforward to see that when inventories are down, we need to build them back up through wholesale shipping. This relates to your second question as well. For the past 30 months, we've been playing catch-up to ensure there’s enough inventory available. We are largely on track with the Freshwater brands, specifically Malibu and Cobalt, but we still need to catch up with the Saltwater brands, Pursuit and Cobia. Looking at the overall picture, last year's comparables were exceptional, and we have indicated that we won't reach those same levels this year. However, as we enter the second half of the year, it should get easier since those comparables will decrease. The key factor here is the comparables. Additionally, our wholesale and retail alignment is closely tied to channel inventory. We need to increase the inventory in the channel to achieve the retail levels we want. Regarding channel inventories, Malibu is where it needs to be according to historical standards, while Cobalt is slightly lagging but should catch up by the end of the fiscal year. Pursuit and Cobia are a few weeks behind Malibu and Cobalt, and we expect channel inventories to normalize in the first half of 2024.

Got it. And you mentioned the opportunity to expand distribution for Pursuit and Maverick. Can you give us an idea of what the rough magnitude of that looks like?

Yes. I’m going to discuss this geographically, focusing on the Pursuit and Cobia brands while also mentioning Cobalt. Both Pursuit and Cobia primarily target the Southeast and Northeast, with some presence in the Mid-Atlantic and a little in the Great Lakes region. There’s significant potential for growth with the Pursuit dealer network, which currently has about 35 locations, especially when compared to their two main competitors. Cobia and Pathfinder face a similar situation in terms of expanding in the Mid-Atlantic and Great Lakes while considering moving westward. Over time, they may not become major dealers since Florida fulfills much of the Saltwater demand, but we believe there’s room to increase the Pursuit network to 45 or 50 dealers within the next year to 18 months and to add 15 to 20 dealers for Pathfinder progressively. Cobia has a similar opportunity. Our focus in Saltwater is to significantly increase the dealer count, which in turn will boost volume. Additionally, we have an opportunity with Cobalt, where the current number of Saltwater dealers is limited due to past constraints on boat production. We are actively working on a target list of additional outboard dealers and anticipate making progress in the next three to six months.

This is Griffin on for Brandon. I guess my first question, in terms of cadence of the quarter, do you guys see any slowdown of retail later in the quarter and then maybe how that trended in April? I mean it sounds like Saltwater Fishing is doing well, but curious how other brands and categories trended?

I wouldn't say we saw a slowdown in the quarter. I will benchmark it against, call it, the last six, seven years of time. I think more than anything, what we've seen is a delay in the season kicking off because of the cool weather and because of the precipitation. My belief is that over the next, call it, to the end of our fiscal year, but certainly through the end of June, we're going to have a much, much better understanding of what that retail environment is going to look like because we're going to have a weather pattern that is actually helping us instead of hindering us.

That's helpful. With the increased sales guidance, can you explain what's included in that? Is the outperformance primarily due to the boat shows, or are you seeing stronger retail performance at dealers outside of the shows?

I think it's a little bit of a combination of both. I mean, certainly, on the Saltwater side, you had the growth in the boat shows that we talked about. So those are customers that have placed retail sold orders. So we're seeing a little bit of that. I would classify that from a retail on the Freshwater side, it's been pretty consistent throughout the first half of the calendar year, not a lot of growth at all. It's more of a flat nature. And again, I think that comes back to a little bit of the weather that we're dealing with.

A couple of questions. I guess, first off, on the new real estate purchase. I know it's early, but maybe any sense of a time line of when you think a decision might be made on a direction for that and kind of the earliest of when we might see kind of second part of that when I see construction of any new facility. How far out might that look?

So just to put a little bit more, a finer point on it, Eric, is the facility is already going up. So we're buying a land in a facility that was already in the design phases and started going up. So that will come to bear very quickly in terms of it will be this calendar year that we will take possession of that. Next quarter, I'll be more probably forthcoming in terms of what we're going to do with that. And there's some combinations. Certainly, it's around capacity. We've talked a lot about we always want to have 20% to 25% capacity for every single one of our brands to run a one-shift operation because we strongly believe in the one-shift operation. And then secondly, I've stated for a number of quarters, we are going to be in pontoon. So if there's not an acquisition to be made, then we will greenfield pontoons. But both of those will be coming over the next, call it, a couple of quarters. Okay. Thank you very much. In summary, our third quarter results were strong, meeting expectations as we demonstrate the inherent strength and capabilities of our MBI brands. Demand for Saltwater has been robust, and we have capitalized on our historic boat show performance in this segment throughout the boat show season. Our supply chain disruptions have eased, and we have continued to maximize our production capabilities. Meanwhile, Freshwater channel inventory is reaching normalized levels led by our Malibu brands, while inventories for Saltwater will follow and increase in the channel in the coming months. Our commitment to continued investment in the business and growth is unwavering, and we are extremely excited to execute on our next phase of vertical integration plans as we bring tooling in-house, and expand our Monsoon engines to Cobalt as well as add additional capacity for growth. We are well positioned to deliver value to all of our stakeholders, and we remain confident in our ability to execute for the remainder of fiscal year 2023. As always, I want to thank you for your support and for joining us as we look to deliver on our strategic objectives and continue to grow our leading brands throughout the remainder of 2023 and into 2024. Have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may all now disconnect.