Malibu Boats, Inc. Q1 FY2025 Earnings Call

Good morning and welcome to Malibu Boats Conference to discuss First Quarter Fiscal Year 2025 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, today's call is being recorded. On the call today from management are Mr. Steve Menneto, Chief Executive Officer, Mr. Bruce Beckman, Chief Financial Officer; and Mr. Ritchie Anderson, President. And I'll now turn the call over to Mr. Beckman to get started. Please go ahead, sir.

Thank you, and good morning, everyone. Joining me on today's call is our CEO, Steve Menneto. On the call, Steve will provide commentary on the business, and I will discuss our first quarter of fiscal year 2025 financials. We will then open the call for questions. A press release covering the company's fiscal first quarter 2025 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, and 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 GAAP financial measures to non-GAAP financial measures are included in our earnings release. I will now turn the call over to Steve.

Thank you, Bruce. Thank you all for joining the call. Before we dive into the results, I would like to comment on the hardships caused by the two hurricanes. Our heart goes out to all those affected. At Malibu, the safety of our people, customers, dealers, and communities is always paramount. Our Fort Pierce facilities experienced some delays, but we have implemented measures to minimize any disruptions to production and distribution. However, some of our partners have asked to delay shipments for a short amount of time as they work through operational challenges. We have incorporated that into our plans and expect no impact on our outlook for the fiscal year. Turning to the first fiscal quarter. As expected, we navigated a challenging market environment driven by continued macroeconomic factors and slower retail demand. Net sales decreased by approximately 33% year-over-year as we maintained our focus on reducing channel inventories. While we are encouraged by the recent move in interest rates, we will need a sustained cycle of rate cuts to bring back payment buyers into the market. Retail demand remains challenging and will likely remain challenging until payment buyers return to the market. As stated, our key focus has been on maintaining disciplined control over dealer inventories by adjusting production levels. As expected, Q1 showed sequential improvements in inventory alignment compared to quarter four, positioning us well for the coming quarters. In addition, our margin performance in the first quarter also improved compared to the prior quarter, which aligned with our expectations as promotional support returned to more normalized levels. This tailwind, coupled with our resilient business model, highlighted by our variable cost structure, enables us to adapt quickly to changing market conditions and maintain financial stability. Adding to the stability of our business, we are bringing the Tommy matters to closure. The trustee has liquidated nearly all of the remaining new Malibu and Axis inventory. As mentioned in prior discussions, our newly authorized dealers are up and running, selling boats and providing great service to our customers. And following the legal settlement announced earlier this month, which covers all impacted locations, we are now turning our full attention to supporting our dealers in restoring and ultimately improving our market share in these important markets. Turning to our model year 2025. We are excited to enter the boat show season, where we will showcase our newest models, including the recently launched all-new Malibu M230 and the Cobalt R31. The all-new M230 exemplifies our commitment to luxury and advanced functionality. This model features a state-of-the-art Malibu Command Center enhanced with the new Malibu operating system, which allows for seamless wave control and preset water sport options. Other notable design elements include the E-Z Stash Board Locker and Max Relax Sundeck catering to both casual users and serious water sport enthusiasts. We are also thrilled to introduce the all-new Cobalt R31, the latest addition to our Cobalt lineup. This luxury dayboat is designed to embody the exceptional quality and innovative features that have become the hallmark of the Cobalt brand. We look forward to showcasing our lineup at the Fort Lauderdale International Boat Show. Early feedback from dealers has been very positive, reinforcing our confidence in our industry-leading innovation, further solidifying our leadership in premium features and customer experience. Separately, as a testament to our industry-leading innovation, we are pleased to announce that our 2024 Malibu Wakesetter 22 LSV has once again been recognized by Wake World Riders Choice Awards as Wake Surf and Wake Board Boat of the Year, marking the fifth consecutive year we have received this honor. This award reflects our consistent delivery of performance and quality that our customers have come to expect, reinforcing our leadership position in the towboat segment. We continue to see positive market share gains across our brands. On a trailing 12-month basis through June, Cobalt continues to gain share, led by our Sterndrive segment gaining 200 basis points. Within Cobalt's 22- to 24-foot model segment, which are now being produced at our new Roane County, Tennessee facility, we have gained over 250 basis points of share. And lastly, Pathfinder, which is represented by our Bay Boat segment, has gained 400 basis points of share. We continue to make great strides in our vertical integration initiatives. Recently, we completed the move of Malibu Electronics and are now fully producing wiring harnesses out of our new Roane County facility. This fully integrated and consolidated footprint enhances our operational efficiency and positions us for growth as market conditions recover. As we discussed two months ago, we have taken the necessary actions to reset the business. Therefore, we are maintaining our full year guidance. Dealer inventory levels are aligned with historical averages, allowing us to better align wholesale shipments with retail demand. Our capacity expansion projects are also complete, giving us the ability to increase shipments should the retail market return to growth sooner than anticipated. We expect to see sequential improvement throughout the year in the top and bottom lines as wholesale shipments pick up. As I continue to engage more deeply with the business, I am pleased to announce that we are planning to host an Investor Day in calendar year 2025. At this event, we will discuss our long-term strategy and outline our approach to sustained growth, operational excellence and product innovation. I look forward to sharing more details soon and am excited about the future of our business. I'll now turn the call over to Bruce for further remarks on the quarter.

Thanks, Steve. Our results in the first quarter were slightly above our expectations. Net sales decreased 32.9% to $171.6 million and unit volume decreased 39.7% to 1,024 units. The decrease in net sales was driven primarily by decreased unit volumes across all segments, resulting primarily from decreased wholesale shipments, partially offset by favorable model mix and modest inflation-driven year-over-year price increases. The Malibu and Axis brands represented approximately 37.5% of unit sales. Saltwater fishing represented 29.3% and Cobalt made up the remaining 33.2%. Consolidated net sales per unit increased 11.2% to $167,559 per unit, primarily driven by favorable model mix and modest inflation-driven year-over-year price increases. Gross profit decreased 50.3% to $28.2 million, and gross margin was 16.4%. This compares to a gross margin of 22.2% in the prior year period. The decrease in gross margin was driven primarily by lower net sales associated with a nearly 40% reduction in unit volume. Cost of sales decreased 28% in a period where revenues declined 33%, demonstrating our operational excellence and highly variable cost structure, in line with our historical range of 80% to 90%. Sequentially, gross margins improved by 850 basis points, primarily due to a return to more normalized levels of promotional support as expected. Selling and marketing expense decreased 15.4% in the first quarter. The decrease was driven primarily by lower event costs. As a percentage of sales, selling and marketing expense increased versus the prior year by 60 basis points to 2.8%. General and administrative expenses increased 31.6% or $6.5 million. The decrease was driven primarily by an increase in compensation-related expenses and higher legal fees, inclusive of the $3.5 million legal settlement with the trustee for the Tommy's state previously mentioned by Steve. As a percentage of sales, G&A expenses increased 780 basis points versus the prior year to 15.9%. GAAP net income for the quarter decreased 124.8% versus prior year to a net loss of $5.1 million. Adjusted EBITDA for the quarter decreased 74.6% to $9.9 million and adjusted EBITDA margin decreased to 5.8% from 15.2%. Non-GAAP adjusted fully distributed net income per share decreased 92.9% to $0.08 per share. This is calculated using a normalized C-Corp tax rate of 24.5% and a fully distributed weighted average share count of approximately 20.6 million shares. For a reconciliation of GAAP metrics to adjusted EBITDA and adjusted fully distributed net income per share, please see the tables in our earnings release. Turning our attention to capital. We continue to execute on our capital allocation priorities by repurchasing $10 million of stock in the quarter. Capital expenditures in the quarter were $8.6 million, putting us on track to our expected $30 million to $35 million in capital expenditure levels for the fiscal year. Our strong balance sheet and ample liquidity give us the ability to invest in our core business and pursue value-creating acquisitions. Turning our attention to the full year. Our view of the market has not changed since we last updated you during the Q4 earnings call in late August. The market continues to be challenging. The long-anticipated interest rate cuts have begun, which is a positive, but time will tell how many more cuts are required for payment buyers to return to the market. As discussed previously, we expect there to be a continued decline in retail demand for the remainder of the fiscal year, albeit at a reduced rate of the decline from last year. We also continue to expect our dealers to maintain a heightened focus on reducing their inventory below historical levels. We remain confident in our ability to execute our long-term strategy despite the near-term uncertainties. Therefore, we are keeping our fiscal year 2025 outlook unchanged. For the full fiscal year, we continue to expect a year-over-year net sales increase of low single-digit percentage points. For Q2, we expect net sales to be up sequentially, but down high single-digit percentage points on a year-over-year basis, given a challenging prior year comparison. This is our last challenging comparison of the year, and we expect our sales to return to growth in the back half of the year. We continue to expect consolidated adjusted EBITDA margin for the full fiscal year to range between 10% to 12%. For Q2, we expect adjusted EBITDA margins of mid-single digit as we maintain modest production levels and a focus on dealer inventories. Our performance in the first quarter came in as expected, underscoring our progress on reducing channel inventories and normalizing promotional spending. We expect this progress to continue and provide tailwinds for the remainder of the year, particularly in the back half where comparisons ease. We are encouraged to see the recent interest rate cuts and given the strength of the innovation we are bringing to market, we are eagerly anticipating the boat show season. We remain optimistic about our competitive positioning in the industry and are prepared to support a resurgence in demand when the market recovers. Until then, our resilient business model, flexible cost structure and vertical integration strategies allow us to generate strong cash flow and execute on our capital allocation priorities. We are confident that our strategies, combined with our strong brand portfolio and dedicated team will drive long-term growth and value creation for our shareholders. With that, I'd like to open up the call for questions.

Thank you. The first question comes from Eric Wold with B. Riley Securities. Please go ahead.

Thank you. Good morning, everyone. A couple of questions for me. I guess, first of all, can you maybe dig in a little bit more into the strength of ASPs in the quarter and how sustainable you think these levels can be going forward? I guess for incoming orders, from the dealers now that inventories have normalized? Are you seeing any kind of upward downward shifts in kind of options and kind of whatnot baked into the models or ordering? And then as payment buyers return to the market, how would you expect that to skew ASPs, if at all? And I have a follow-up.

Good morning, Eric. The current market dynamics are largely influenced by the mix of buyers, particularly the premium cash buyers who are leading the market. We are introducing a range of premium offerings, especially this year in Malibu, with new models that are high-end. This shift towards Malibu models has significantly impacted our average selling prices. Additionally, the saltwater segment is also being supported by larger pursuits, and our investments in the Cobia product lines are contributing to that mix as well. Overall, we've seen a strong mix in the first quarter.

Got it. Thank you. And then I know we're at the start of the boat show season right now. You mentioned that your margins were benefited by your promotional activity kind of returning to more normalized levels. What would you expect to see at the boat shows? Or kind of what are you seeing from competitors in your markets right now in terms of their promotional activity? And how do you think that kind of plays out as you move through the boat show season as they're still a little bit too heavy in inventory in their markets?

Yeah, Eric, we expect it to be a competitive environment. I mean, we saw sequentially our promotional spending improve as expected because we invested so heavily in Q4 to get our inventories in a good spot. They were lower in Q1, but they were not lower on a year-over-year basis. We continue to expect it to be a competitive retail market.

Thank you. The next question is from Craig Kennison with Baird. Please go ahead.

Hey. Good morning and thank you for taking my questions. Steve, it's been about 100 days since you've been in that chair. And I'm just curious what observations you've made about opportunities or challenges, now that you've had a chance to meet a lot of people and assess operations.

Operations are truly at the heart of the business. Historically, Malibu has been a strong component for us, and working closely with Ritchie has deepened my understanding and reinforced my belief that it's a key strength of our business. It's encouraging to see. However, we face challenges with current market dynamics, particularly regarding our customers and payment buyers, as mentioned earlier in the call. We will continue to observe the industry and consumer behavior, focusing on how we can enhance our efforts to drive demand to our stores and support our dealers in maximizing retail potential during this period of downturn. When the market recovers, I believe we are well-positioned for success. The company is in a favorable position, and I feel more confident about our direction. We have strong operational capabilities, and we will keep refining our commercial strategies to meet demand and assist our dealers in achieving their retail goals.

Thanks. I'm curious about your background in the powersports industry, particularly regarding the distribution channel which seems to incentivize OEMs to occupy as much showroom space as possible to avoid losing market share. Is this situation similar in the boating industry? Or do you believe that your partnerships with boat dealers allow for a more strategic approach to inventory planning, ensuring that if you have a key brand in a category, you won't need to act irrationally?

Yes. I think there is a difference between marine and powersports clearly. I think the size of the units itself, right, creates opportunities for share of floor. But yes, the relationships of how they represent the brands. Some of the marine segments, the dealers are only carrying one brand in a particular segment and so forth. So the dynamics are different. But partnership is at the core in both industries, right? And partnering with the dealers is at the core, and that's what we plan on doing and we're heading to our Malibu dealer show here in a couple of days, and we'll meet with the dealer council and continue to meet dealers across the business. I've been to the Pursuit dealer meeting, been to the Cobalt dealer meeting and continue to really engage dealers and learn from them and understand what challenges and what opportunities there are in their businesses and how we can be a better OEM. So, it's been educational. It's been different than powersports, which is noted, and we'll continue to work to make sure in the marine space, we're an OEM that dealers want to be part of our business and be a partner with as we grow our business together.

Great. Thanks, Steve.

Thank you. The next question comes from Joe Altobello with Raymond James. Please go ahead.

Thanks, guys. Good morning. I guess, first question for you, Steve. In your prepared remarks, you mentioned the quarter was a little better than you expected. And maybe kind of at a high level, what drove that? It seems like sales were better and margins are better. I assume that's related, but what was the positive surprise in the quarter?

The positives have been the new product has been doing really well. The innovation continues to pay off in terms of driving share, satisfying customers. Those are the boats, both Malibu, what we've seen in Pursuit have been helping us in the first quarter. And it's, again, been the core of this business. And so that's kind of really where it mainly has been.

Okay. Got it. And just a follow-up on that. I was a little surprised to hear that the promotional environment sounds like it's easing a little bit. How much of that is seasonal as we enter the winter months here?

I think it is a little bit seasonal result. It's also us having our inventories under control, smartly working with the dealers to get those in the right position. As we're entering the boat show season, as we said, we'll monitor where promotional environments go. We're encouraged right now that as we kick off Fort Lauderdale, we're optimistic about the boat show, but time will tell here over the weekend. So right now, I think it's a little seasonal. I think it's some other competitors working through reduction of their inventories. But we're in pretty good shape. And I think we'll continue to monitor what's necessary to be competitive.

Thank you. We have the next question from Noah Zatzkin with KeyBanc Capital Markets. Please go ahead.

Hi. Thanks for taking my question. Maybe just one on the kind of M&A front. I guess, has the thought process kind of remained the same or changed around potentially kind of pursuing pontoons?

Our thought process remains unchanged. We are still considering it as an option. As we mentioned before, we are looking for value-creating M&A opportunities. If a suitable opportunity arises, we will evaluate it. If it aligns with our business, we may proceed. Pontoons continue to be a viable option for us if it makes sense.

Thanks. And not to put too fine a point on it, but have you given kind of like unit expectations for the fiscal year in terms of industry retail units? And then I guess, relatedly, like maybe within your plan, how you're thinking about number of rate cuts and magnitude? Thanks.

Yes. We don't provide specific unit guidance, but we expect the retail markets we participate in to decline in the mid single-digit range. We have communicated this and continue to hold that belief.

Thanks. And then just on rate cuts in the plan. How you're kind of thinking about that?

We don't speculate on interest rate cuts or base our forecasts on them. Instead, we focus on our current situation, which indicates that the industry is likely to decline in the mid-single-digit percentage range. We would welcome any positive surprises in the future, particularly if enough rate cuts could stimulate activity among payment buyers. Based on our factory scheduling and our capacity to respond, we are confident that we can support a recovery if it occurs.

Thank you. The next question comes from Griffin Bryan with D.A. Davidson. Please go ahead.

Hi. Good morning. So it seems like retail for September specifically within the ski-wake category looks pretty good relative to the rest of the categories. I guess kind of like what do you attribute this to? And is there any indication that this continued through October?

What I would say is there always seems to be a bit of a delay between when we observe things on an internal warranty registration and when the boats are reflected in SSI. I believe what you're noticing is the impact of our Q4 promotional activities along with the acceleration of Tommy's liquidation event in September. As a result, those boats are beginning to appear in the SSI figures.

Got it. And then with the hurricane impacts are there any early signs that there will be sizable insurance claims that could help with some dealer destocking for your products specifically?

Relying on insurance companies to pay quickly enough for people to have cash to buy a new boat is not something I want to base my guidance on. We hear informally that some replacement activity may occur, but I wouldn't want to speculate on the exact timing of that activity.

Thank you. The next question comes from Greg Badishkanian from Wolfe Research. Please go ahead.

Hey everyone. It's Fred Wightman speaking for Greg. I wanted to revisit the impact of the hurricane. You mentioned that some dealers requested delays or deferrals in shipments due to the storms. I'm curious if this was reflected in the reported first-quarter results or if it indicates a shift to the latter part of the year compared to your original expectations. Can you provide any insights on the potential timing shift?

Yeah.

Go ahead, Bruce.

It's a minimal shift from what we might have shipped in Q2 to what we are expecting in the second half of the year, so it's a modest impact.

Okay. That's helpful. And in the past, really last quarter, you had talked about some market share impact from those impacted Tommy’s markets. I'm wondering if you're still seeing those former Tommy’s markets underperformed or lag from a share perspective or if it's kind of closer to what you're seeing broadly?

Yes. I mean the Tommy’s markets are starting now to see that liquidation activity go through those markets. And up until that time, it's been a pretty big drag on us. I would expect that it's going to be a tailwind for the next couple of months as those boats flush through SSI. And then is when we get back to the kind of a more normalized where our new dealers are the ones that are competing and market share battles in their respective markets.

Thank you. Next question comes from Jaime Katz with Morningstar. Please go ahead.

Hi. Good morning. I want to ask about the line in your press release where you guys articulate that you're seeing some encouraging signs from a macro perspective. I think the rhetoric was a little bit different in the commentary. And so I'm curious if maybe that's something beyond just the start of interest rate cuts and OEMs behaving better.

No. I think it's really the beginning of interest rate cuts. We’ve been discussing this for a while and they have now started to occur. That was the essence of my earlier comment. Additionally, we are working diligently to assist our dealer partners in aligning their inventories at the end of the last fiscal year. We feel optimistic going into the boat show season, as interest rates have begun to decline, and we have a strong model lineup along with a healthy inventory preparing for the show. This provides a bit more insight into my comment about optimism.

Okay. And then can you give us some color on input cost inflation? I'm thinking about does that improve with higher throughput through the back half of the year? Are there some breakpoints that maybe help ease any input cost inflation you guys are seeing and just sort of what to expect there? Thanks.

Yes. What I would say is that we're experiencing very modest inflation, which has significantly decreased from its peak during COVID. However, we're not seeing a decrease that leads to deflation, and I don't expect this to create any favorable conditions for our margins. As volumes increase, we will benefit more from the leverage on our fixed costs within the cost of sales line.

Thank you. I am not showing any further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.