Malibu Boats, Inc. Q3 FY2025 Earnings Call

Good morning, and welcome to Malibu Boats conference call to discuss Third Quarter Fiscal Year 2025 results. At this time, all participants are in a listen-only mode. Later, we'll conduct the 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; and Mr. Bruce Beckman, Chief Financial Officer. I will now turn the call over to Mr. Beckman to get it 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 third quarter of fiscal year 2025 financials. We will then open up the call for questions. A press release covering the company's fiscal third 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 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 these 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 GAAP financial measures to non-GAAP financial measures are included in our earnings release. Finally, during today's prepared remarks, comparisons are to Q3 of fiscal 2024 unless otherwise noted. I will now turn the call over to Steve.

Thank you, Bruce, and thank you all for joining today's call. Our results this quarter demonstrate solid execution in an environment that remains challenging. Both Q3 sales and adjusted EBITDA margins finished above our guidance expectations for the quarter. We are successfully navigating continued industry softness. Our premium brands and feature-rich offerings continue to resonate with customers, as evidenced by our mix-driven ASP increases in all segments. And as expected, we returned to growth in the third quarter, both sequentially and versus the prior year. It is worth remembering that we were among the first in the industry to reduce our production levels in response to the elevated dealer inventories. As a result, year-over-year comparison in the second half are less challenging than they were in the first half. Turning first to the selling season, our overall dealer inventories entering the season are healthy, aligned with historical levels and well below where they were a year ago. The retail environment remains challenging as elevated interest rates and ongoing macro uncertainty continue to weigh heavily on consumer sentiment and discretionary spending, prompting buyers to be more cautious and deliberate in their purchase decisions. We remain actively engaged with our dealer network, continuously calibrating our strategies to closely align production levels with real-time retail dynamics. And we are committed to ensuring dealer inventories remain healthy and appropriately balanced. While our overall boat show performance was mixed, we observed pockets of strength, notably with our Pursuit brand. We also remain incredibly proud that our Pursuit once again received the prestigious Marine Industry Customer Satisfaction Award from NMMA, underscoring our ongoing commitment to delivering exceptional customer experiences. Additionally, our Cobalt brand continues to deliver impressive results. We continue to see persistent demand from cash buyers who appreciate our premium feature-rich boats. Supported by our decision to invest in expanding capacity at our Roan facility, we have realized a gain of 380 basis points of market share in the Cobalt models produced there. Innovation remains absolutely critical to our long-term strategy, and I want to emphasize that we are keeping our hands firmly on the throttle for our new product development even during these challenging market conditions. Our ability to introduce compelling and differentiated new products is truly a cornerstone of our competitive advantage. This ongoing innovation resonates strongly in the marketplace, driving substantial customer engagement and enthusiasm. The performance of our newly introduced models at the boat shows provides strong evidence that our strategy is working. Nearly 40% of our Malibu boat show unit sales were driven by two premium models introduced this year, the M230 and the 25 LSV. A similar percentage of Cobia boat show unit sales were driven by the all-new Cobia 265 and 285 center console models. We look forward to sharing the exciting innovation we have planned for the 2026 model year in the near future. As we all are aware, tariffs have reemerged as a prominent topic within our industry. As we have stated previously, we do not expect tariffs to have a meaningful impact on our fiscal '25 cost structure. We will remain proactive in mitigating impacts through our strategic supply chain management initiatives to balance any tariff-related price increases to our customers. Additionally, we will continue to leverage our robust vertically integrated U.S. manufacturing capabilities, which provide a meaningful advantage in managing supply chain risks and gives us direct control over tariff mitigation strategies. We remain agile and fully prepared to adapt swiftly if tariffs or other cost pressures escalate. Looking ahead, we remain confident in our balanced approach emphasizing dealer health, operational excellence, and continued innovation. We have purposely built an agile and resilient operating model, backed by our strong balance sheet and robust cash flow generation, allowing us to strategically navigate current market conditions. Our diverse brand portfolio, combined with our premium market position, significantly enhances our capability to capture demand when the market returns to growth. We remain prepared to quickly adapt to changing market dynamics including tariffs, supply chain development, or cost pressures bolstered by our proven ability to effectively manage uncertainty. Finally, I want to sincerely thank our dedicated team and our dealer partners for their exceptional efforts, adaptability, and resilience. Your commitment reinforces my confidence in our trajectory and positions us strongly for future growth. With that, I'll turn it back to Bruce to discuss our financial results in more detail.

Thanks, Steve. As mentioned earlier, we returned to growth during the third quarter with results above our expectations. Net sales increased 12.4% to $228.7 million, and unit volume increased 12.8% to 1,431 units. The increase in net sales was driven primarily by increased unit volumes in the Malibu segment, a favorable model mix across all segments and inflation-driven year-over-year price increases, which were partially offset by decreased unit volumes in the Cobalt and Saltwater Fishing segments and an unfavorable segment mix. The Malibu and Axis brands represented approximately 52% of unit sales, Saltwater Fishing represented 22.8%, and Cobalt made up the remaining 25.2%. Consolidated net sales per unit decreased 0.3% to $159,792 per unit, primarily driven by an unfavorable segment mix, partially offset by a favorable model mix in all segments and inflation-driven year-over-year price increases. Gross profit increased 13.4% to $45.7 million, and gross margin as a percentage of sales increased 20 basis points to 20.0%. The increased gross margin was driven primarily by fixed cost leveraging and strong operational performance at our factories. Selling and marketing expenses increased 4.3%. The increase was driven primarily by higher event marketing activities. As a percentage of sales, selling and marketing expenses decreased by 20 basis points to 3.0%. General and administrative expenses increased 6.7% or $1.2 million. The increase was driven primarily by legal and professional fees. As a percentage of sales, G&A expenses were 8.7%. This represents a significant sequential improvement with expenses normalizing as expected. Q3 GAAP net income increased 119.4% to $13.2 million. Q3 adjusted EBITDA increased 16.0% to $28.3 million, and Q3 adjusted EBITDA margin increased 40 basis points to 12.4%. Non-GAAP adjusted fully distributed net income per share increased 14.3% to $0.72 per share. This is calculated using a normalized C corporation tax rate of 24.5% and a fully distributed weighted average share count of approximately 20.1 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. We continue to demonstrate the resilience of our business model, generating over $15 million in cash from operations during the quarter. Capital expenditures totaled $6.7 million and we repurchased $10 million of stock in the quarter. Looking ahead, we are tightening our expectations for CapEx to $25 million to $30 million, and we intend to modestly reduce the pace of share repurchases relative to the $10 million executed this quarter. We view these as prudent adjustments to our plans given the increased macroeconomic uncertainties. I would be remiss if I didn't highlight the strength of our financial position. We finished Q3 with over $39 million of cash on hand and over $300 million of untapped liquidity on our credit facility. We remain committed to our capital allocation priorities and are confident our resilient business model will enable us to navigate the uncertainty ahead. To recap, we feel good about our operational and financial performance in the third quarter. However, we have recalibrated our expectations for the upcoming selling season and now expect our retail markets to be down double digits for the full fiscal year. Accordingly, with our acute focus on dealer inventory levels, we are revising our full year guidance to reflect lower expected shipments. We now expect full year net sales to be down 3% to down 5%, and full year adjusted EBITDA margins to be between 9% and 10%. Again, this updated outlook reflects our commitment to prioritizing long-term dealer and brand health over short-term volume. It is important to note that the implied Q4 sales and profitability levels are meaningfully above last year, largely due to the actions taken in the prior year, as Steve mentioned earlier. In summary, we continue to manage our business proactively during a period of considerable macroeconomic uncertainty. We do not expect tariffs to have a material cost structure impact for the remainder of fiscal 2025. We are deploying a multitude of tariff mitigation strategies in order to balance the need for associated price increases. We anticipate having much greater tariff visibility when we review our Q4 results. Our highly variable cost structure, strong balance sheet, and resilient cash flow generation position us well to navigate near-term challenges while maintaining our capital allocation priorities and investing strategically to drive long-term growth and value creation. With that, I'd like to open up the call for questions.

The first question comes from Craig Kennison from Baird.

I wanted to start with inventory. What would the goal be by the end of June with respect to dealer inventory and maybe relative to last June?

Yes. Dealer inventories usually decrease significantly as we progress through the selling season, particularly at the end of Q4, where we typically see a range of 20 to 25 weeks. This year, we expect to reduce our dealer inventories by mid-teens percent, which has been a consistent goal for us throughout the year. We began discussing this at the start of the fiscal year, and achieving this will lower our inventory levels compared to last year. Dealers have indicated that they prefer to bring their inventories below historical levels and are also considering the same macroeconomic uncertainties that we are observing.

I appreciate that. And then with respect to, I guess, the Malibu customer or the customer of your boats, do you have any insights into the behavior of that customer? How is the repeat buyer doing? How are your first-time buyers doing? I'm just looking for a profile of who's in the market today and how that has changed.

Yes, Craig, we are observing retail trends as we anticipated. We are noticing some repeat buyers returning, especially those who make cash purchases. However, new buyers still make up a small portion of our overall retail sales. The typical seasonal ramp is occurring, but as Bruce mentioned, due to economic uncertainty, we haven't seen a full rebound as we expected a couple of quarters ago.

Yes, Craig. We continue to analyze the data regarding the percentage of our sales to first-time buyers, and this has remained relatively stable over time. There were concerns that this might decline after we moved past the COVID period, but we have not observed that, which is encouraging.

The next question comes from Eric Wold from Texas Capital Securities.

I guess, first off, you noted that, obviously, the boat show season was mixed, something you kind of said in the past. So I guess now that we're kind of firmly past it, what are you seeing with the competitor promotional activity, especially with those brands that you feel may not be in the best inventory position? And given kind of the state of the consumer, how much are you willing to kind of chase deals against someone that's maybe overly competitive versus maybe letting some of these deals go?

I think two respects there. One is we've been really, as we stated earlier, helped by our new products. I mean when you look at some of the new product innovations that were launched and some of the new products, those continue to do really well in the marketplace, gaining share, and we don't have to support those as strongly in the promo environment. For ours, we've been pretty consistent in our promo execution, and we're going to continue to do that and work with our dealers to make sure that we're competitive in the marketplace, but we haven't had to do anything elevated to be in our strong position.

Yes. I would just echo that, that our promotional levels have been pretty consistent year-to-date with where we were last year. And we'd expect them actually to be much less in our fourth quarter of this year than they certainly were a year ago because a year ago, we were focused on getting our dealer inventories down. So I think in the overall market, you've seen various competitors address their inventory challenges, and to a certain extent, that's going to play out the way it's going to play out. You can't chase all of those deals. But we expect that the promotional environment will remain competitive but will moderate as the industry kind of works through its challenges.

Got it. And then just last question, kind of on the follow-up on the previous question on the inventories and kind of, you mentioned that your dealers are kind of comfortable with inventories being kind of where you want to place them and below last year. Any group of your dealers that you feel are maybe in a tough position, maybe struggling a little bit out there? Any ones that you're worried about or you think is the health pretty good across the board?

Pretty good across the board. We monitor every brand in all the different regions of the country and so forth, and I think everybody is in pretty good shape and pretty consistent.

The other thing we're always doing, Eric, is monitoring the overall health of the dealer network, and the dealer network from just an overall standpoint is pretty healthy. And we are always in conversations with the floor plan finance providers and checking on that and are pretty happy with where the dealers are right now, particularly given the challenging market.

The next question comes from Michael Swartz from Truist.

Maybe to start just on the tariff side, I know that you have said that you don't expect any material impact in fiscal year '25, which ends in a couple of months. But as we look out further afield, I mean, is there any way to think about your tariff risk? I don't know if you have much direct exposure from international sourcing. But any way, any parameters you could give us on how to think about that as we think about fiscal year '26 and beyond?

We're managing our direct exposure to tariffs every day by monitoring changes and understanding their impacts. Internally, we are focused on how to leverage mitigation opportunities through strategies like reshoring and purchasing in advance. We have a team dedicated to this effort.

Yes. From a quantification standpoint, we source about 18% to 20% of our cost of sales from outside the U.S., which relative to others in the industry, I think, is less than the overall industry, but there certainly is some exposure there.

And are there any singular large sources within that 18% to 20%?

I believe it's spread across various categories. Some are quite clear, like outboard engines, while others are perhaps less apparent, such as hinges, latches, and electronics.

Okay, that's very helpful. As we consider model year '26, I don't expect you to share your pricing figures, but do you have any insight on where you think the industry might be heading based on your discussions with suppliers? Also, are you aware of anyone who is pushing model year '26 forward by a month or two?

No, we're not aware of anybody moving model year '26 ahead by a month or two. And no, we have not really seen anybody in the industry make a move in pricing yet. All of us, I think, are kind of wait and see what are the impacts and how we're going to deal with them. So we still have Q4 to kind of figure that out.

Yes. I would just say that I think it's probably a normal inflation environment, and this is an industry that passes along cost increases. So I would expect, absent the tariff topic, that it would be a pretty normal year.

The next question comes from Noah Zatzkin from KeyBanc.

This is Ryan Williams on for Noah Zatzkin. Maybe the first one, it would just be helpful to hear kind of any additional color on how demand trended in the quarter. And then if there were kind of any meaningful step changes in April as well.

No, I think we mentioned that the demand for the quarter followed the expected seasonal ramp, but it did not show the strong growth we had hoped for a few quarters ago. So we consider it mixed results. It continues to progress steadily, and we are noticing similar trends in April. Our new products are performing well, and we are fortunate to have several new offerings in the market.

Okay, that's really helpful. Maybe I can ask about how you plan to handle costs if the situation worsens, given that we're in a fluid environment.

Well, I mean, we talk a lot about the highly variable nature of our cost structure, and we would definitely be relying on that. If we were to see a further downturn, our cost structure is 80% to 90% variable above the gross margin line. And then, of course, we would look for opportunities to free up cash from the balance sheet as well to manage any downturn just like we've done previously. So we have a very resilient business model. We generate cash in all kinds of environments, and we have a very strong balance sheet. So we feel as good as you can feel coming into what continues to be a challenging market environment.

The next question comes from Mike Albanese from Benchmark.

I think last quarter, you had called out some additional weakness maybe forming in the saltwater segment. Could you just comment on what you're seeing in that market specifically? Or any changes to, I guess, consumer behavior that kind of happened throughout the quarter?

Yes. We saw an improvement, I would say, in the Saltwater segment, particularly in Florida. I think in the last call, we talked about Florida being down around 20% in the second quarter. We saw that improve in the third quarter. We didn't see it bounce back to growth. I think it just kind of went back to the kind of the overall trend in the market. So some improvement, but not a different trajectory entirely.

Got it. That's helpful. So I mean, just really last quarter, I know you had called out Florida. I mean safe to kind of say, as you're looking at it through this quarter here, you kind of got a return from that and kind of back to that normal trend, if you will, that you were thinking, well, maybe two quarters ago.

Yes.

Yes.

And the next question comes from Jaime Katz from Morningstar.

I just wanted to ask about the upcoming quarter. It looks like the third quarter was a little better than we expected and then you have adjusted EBITDA pushed down a little bit. So can you talk a little bit about what has changed since your last update in that cost structure that is just leading to that pressure?

Well, it's really the units. I mean, we've taken our expectations for units down because we've changed our view on the market. If you remember previously, we were saying that we were expecting to see a little bit of improvement in the market in the second half of the year from what trend we were experiencing in the first half of the year. And as we've kind of seen the market play out through the third quarter, and then given what our dealers are telling us and just the general macroeconomic uncertainty, we're no longer expecting an improvement in the market. So therefore, we had to make an adjustment from our prior expectations in production levels and therefore, it impacts our overall financial projections for the year and for the quarter.

Sure. And then as you think about capital allocation and share repurchases in the quarter ahead or the next fiscal year, if the environment stays this way, does it make more sense to have dry powder on the balance sheet just to navigate the environment? Or given the depressed level of shares, do you think it's maybe more prudent to continue down that share repurchase cycle that you've been on?

We are committed to our capital allocation priorities, but we may need to adjust our tactics occasionally due to market conditions. This is why I mentioned in my prepared remarks that we will be adjusting our share repurchase levels in Q4. However, we still plan to include share repurchases as part of our overall capital allocation strategy going forward, as we aim to maximize shareholder value through these priorities.

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