Earnings Call Transcript - MBUU Q1 2022

Operator, Operator

Good morning, and welcome to Malibu Boats Conference Call to Discuss First Quarter Fiscal Year 2022 results. Please be advised that reproduction of this call in whole or in part is not permitted without reauthorization of Malibu Boats. And as a reminder, today's call is being recorded. On the call today from management are Mr. Jack Springer, Chief Executive Officer; Mr. Wayne Wilson, Chief Financial Officer; and Mr. Ritchie Anderson, Chief Operating Officer. I will turn the call over to Mr. Wilson to get started. Please go ahead, sir.

Wayne Wilson, CFO

Thank you, and good morning, everyone. On the call, Jack will provide commentary on the business, and I will discuss our first quarter of fiscal year 2022 financials. We will then open the call for questions. A press release covering the company's fiscal first quarter 2022 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. The factors that might affect future results are discussed in our filings with the SEC. And we encourage you to review our SEC filings for a more detailed description of these risk factors. Please also note that we will be referring to certain non-GAAP financial measures on today's call, such as adjusted EBITDA, adjusted EBITDA margin, adjusted fully distributed net income and adjusted fully distributed net income per share. Reconciliations of these non-GAAP financial measures to GAAP financial measures are included in our earnings release. I will now turn the call over to Jack Springer.

Jack Springer, CEO

Thank you, Wayne, and thank you all for joining the call. We once again demonstrated our dominant leadership in the marketplace as we've delivered sustained momentum in the first quarter of fiscal year 2022, supported by continuing strength in retail demand even as we enter the off-season. While inflationary and supply chain pressures intensified, our team's unparalleled commitment and execution, coupled with our industry-leading brands and inherent operational strengths were next to none, driving our outperformance in the quarter. Malibu continues to be a premier force in the marine industry in the entire leisure space, setting the tone for continued growth and agility as we navigate through fiscal year 2022 and beyond. For the fiscal first quarter, we posted strong top line growth as net sales increased nearly 40% to $254 million over the prior year, with adjusted EBITDA growing 23% to $45 million. Adjusted gross margin declined by 170 basis points to 23.6%, and adjusted EBITDA margin declined by 250 basis points to 17.6% during the quarter. The decrease in margins was better than anticipated and was primarily generated from the inclusion of Maverick in fiscal 2022, the restart of Cobalt boats costs, and the realization of supply chain issues that increased labor costs. Against consensus, all financial metrics were met or exceeded expectations. In addition, we saw an increase in material pricing pressures that accelerated in the first quarter impacting margins. During the quarter, we continued to capitalize on very strong retail demand, particularly for larger, more feature-rich boats with our innovative best-in-class brands. For Malibu, sales for our new 25 LSV and T250 models and our premium M-Series boats are booming, driving enhanced margins for the business despite the negative impact of the supply chain on volumes. Also, our new Cobalt R-Series, consisting of 9 new models in the last year, remains highly sought after by consumers. These Cobalt models include stern, surf, and outboard variants for the R4, R6, and R8. Related to retail demand, the unlimited cheeseburger picnic continues, and we are now offering soft-serve ice cream for dessert. Our order book remains unprecedented for every Malibu brand. We are not seeing any meaningful increase in dealer inventory levels, as most boats are either retail sold or sold as soon as they hit the dealer's lot. To put it more precisely, we estimate over 90% of new boat orders will be retail sold in the second quarter of fiscal 2022. At the same time, channel inventory levels remain at historically low levels, driven by high retail demand and increasing supply chain pressures affecting the entire powersports industry and global economy. We estimate we have nearly $0.5 billion of channel inventory to fill, which is nearly 6 months of production without selling another boat at retail. Even if the economy softens, it will be at least 2 years before the channel is rebuilt. The recent Fort Lauderdale Boat Show concluded last weekend with very strong attendance, and our brand sales were well above expectations. We were pleased and surprised with the strength shown at the 2020 Lauderdale Show, as last week significantly exceeded those numbers. Pursued sales at the show were up substantially compared to almost any previous year. The Cobia brand under our Maverick umbrella saw sales numbers more than 4 times last year's figures at the Fort Lauderdale Show, and Cobalt also saw an increase compared to the 2020 show. The strength of retail is further validated by the fact that our recent price increase was in effect during a very limited promotional environment. Despite record-setting demand and a strong backlog of orders, supply chain pressures continue to affect production, as the number of parts impacted has grown throughout the first quarter. Production volume for many has declined over the fiscal first quarter, as manufacturers in the marine space have reduced production counts to manage parts availability. Shortages are widespread, unlike previous quarters where resin and outboard engines were the main issues. Numerous parts are in short supply on any given day, which has caused Malibu brands to reduce production counts. This strategy helps us maintain efficiency and ensures our customers receive the highest quality boats as we focus on in-process builds. While our volume expectations have moderated since August, we believe the price increases we are implementing will help offset this volume decline and support our overall margin profile in the long term. However, at this time, we are reducing our guidance for margins for the year due to the number of retail sold units that will be produced amid these rising input costs. Malibu continues to stay ahead of the competition with our industry-leading innovation, vertical integration, and operational excellence. We are well positioned to ramp up production at any moment when supply headwinds subside. All brands have at least 25% additional capacity that can be utilized to increase boat production once the supply chain returns to some normality. Furthermore, we remain on track to execute our strategic initiatives aimed at further enhancing our production capabilities. We are ahead of schedule on our Maverick Plant 2 expansion, which doubles the production footprint of that facility, and we expect to start building in that new space during the second half of fiscal 2022. I am incredibly proud that we have kept our talented workforce intact despite the labor shortages affecting the industry, as federal programs on social distancing and vaccinations influence individuals' decisions regarding returning to work. In the short term, our efficiencies and gross margins are impacted as we are employing more labor than needed, based on our current daily run rate. We are doing this while considering that when the supply chain improves, we can quickly raise production counts rather than waiting weeks or months due to labor shortages, hiring, and training delays. Although we cannot predict when the supply chain will improve, we fully expect our return to normal. Our new Maverick 2022 product lineup underscores Malibu's premium brand lineup as the preferred choice for our customers' boating needs. For Malibu and Axis, we continue to deliver exciting new products. Alongside the debut of the all-new Malibu Wakesetter 25 LSV and the brand-new Malibu Wakesetter 21 LX, we recently introduced the Axis T220, a premier 22-foot wakesurf and wakeboarding boat during the quarter. The T220 traditional valve model replaces the T22 for Axis, and the new name reflects that this model is bigger and better than its predecessor, with enhanced performance on the water. Additionally, we launched the largest Axis ever produced, the T250, in the first quarter, which adds to our strong margin profile and product suite. The T250 is the first 25-foot boat produced by Axis and will set a new standard for performance, convenience, style, and value in the 25-foot class. As we mentioned last quarter, we are moving at a rapid pace with product development and new boat launches within the Pursuit brand. This fiscal year, we will introduce 3 new boats, all filling out product categories that we identified upon acquiring Pursuit. For Cobalt, we are excited to roll out 5 more boats between now and the Miami Boat Show. The new models include the R4 Stern and the R4 surf, which replace the previous R3 versions. Additionally, the R4 outboard model will be a new addition to the R-Series, available in the 23- to 24-foot length. We anticipate that the R4 models will strengthen the legacy of this luxury brand. We will also present a larger boat exceeding 30 feet in both stern and outboard versions at the Miami Boat Show. Our newest brand, Maverick, is continuing to smoothly integrate with Malibu's world-class product development model, and we will soon share more new products from Maverick. Similar to Cobalt, there are opportunities to replace outdated products, and like Pursuit, there are product gaps that we will address to drive growth. Looking ahead, Malibu is uniquely positioned to meet expectations for fiscal year 2022, despite tightening supply chains and inflationary concerns. Our team has a lot to be proud of as Malibu navigates one of the most volatile and unprecedented periods in history. Their commitment to operational excellence, top-quality products, and distribution will support our strategic vision. As a result, we are incredibly well positioned in the marketplace. Our foresight has allowed us to remain resilient, swiftly overcoming many obstacles our competitors face. We are off to an incredibly strong start this fiscal year 2022, and we believe our sustainable long-term competitive advantages will yield market share gains and increased profitability. Together, this will support continued outperformance in the industry and value creation for our shareholders. I will now turn the call over to Wayne to discuss our financial performance in more detail.

Wayne Wilson, CFO

Thanks, Jack. In the first quarter, net sales increased 40.1% to $253.5 million, and unit volume increased 23.8% to 2,024 boats. The increase in net sales was driven primarily by a favorable model mix in our Malibu and Cobalt segments, year-over-year price increases and increased unit volumes primarily due to the acquisition of Maverick Boat Group on December 31, 2020. The Malibu and Axis brands represented approximately 52.3% of unit sales or 1,059 boats. Saltwater Fishing represented 24% or 485 boats, and Cobalt made up the remaining 23.7% or 480 boats. Consolidated net sales per unit increased 13.1% to approximately $125,200 per unit, primarily driven by year-over-year price increases and a greater mix of larger boats for Malibu and Cobalt segments. Gross profit increased 30.6% to $59.8 million, and gross margin was 23.6%. This compares to gross margin of 25.3% in the prior year period. The decline in gross margin was primarily driven by the inclusion of Maverick in the current period. Selling and marketing expenses increased 41.7% or $1.5 million in the first quarter. As a percentage of sales, selling and marketing expense remains consistent with the prior year period. General and administrative expenses increased 38.1% or $4.4 million. The increase was driven primarily by an increase in compensation and personnel-related expenses, travel-related expenses, IT infrastructure, other administrative costs and incremental general and administrative expenses due to the acquisition of Maverick Boat Group. As a percentage of sales, G&A expense, excluding amortization, remains consistent with the prior year period. Net income for the quarter increased 26.7% to $27.9 million. Adjusted EBITDA for the quarter increased 23.1% to $44.7 million. And adjusted EBITDA margin decreased 250 basis points to 17.6%. Non-GAAP adjusted fully distributed net income per share increased 21.2% to $1.37 per share. This is calculated using a normalized C Corp tax rate of 23.8% and a fully distributed weighted average share count of approximately 21.7 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. As Jack mentioned earlier, we had a tremendous start to fiscal year 2022 and outperformed our first quarter expectations in spite of an incredibly dynamic environment. We remain acutely aware of the uncertainty related to supply chain and inflationary pressures and as such, have factored these items into our most recent outlook. Despite these challenges, Malibu remains incredibly well positioned given historically low dealer inventory levels, robust customer demand and recently announced price increases mitigating the impact of rising input costs. Based on our current operating plan, our expectations for fiscal year 2022 are as follows. We anticipate revenue to grow in the low to mid-20% range. This is supported by robust ASP growth as we move prices to offset input cost increases. In terms of cadence, we expect second quarter sales growth to be in the mid-30% growth range. Consolidated adjusted EBITDA margin is expected to be approximately 19.5%. The reduction in our margin for the year is driven by the combination of lower volumes and the temporary impact of inflationary cost pressures as we work through our announced price increases across our product lines. We expect the second quarter will see margins decrease approximately 300 basis points year-over-year driven by the inclusion of Maverick and increased input costs. Despite these challenges, we are incredibly excited about the future of Malibu. Our legacy Malibu and Axis business continues to perform well. Pursuit and Cobalt have made great progress since they've been acquired, and we are waiting anxiously for an improved supply chain that can demonstrate the incredible progress of our teams at each. Our Maverick integration is full speed ahead, and we see robust growth opportunities over the next 18 months. We feel primed for success as we continue to drive innovation, capitalize on record-setting consumer demand and deliver high-quality products at healthy margins. We believe we are well positioned to advance our long-term growth plan in fiscal year 2022 and beyond. With that, I'd like to open the call up for questions.

Operator, Operator

Your first question comes from Mike Swartz at Truist Securities.

Mike Swartz, Analyst

Jack and Wayne, regarding the comments about lower volume expectations, you achieved approximately 2,000 units in the quarter. If I understood correctly, you mentioned that unconstrained, you could potentially reach about 20% to 25% more than that, which would be around 2,500 units per quarter. Is that accurate? Additionally, how should we view volume dynamics over the coming quarters, considering the manufacturing and supply chain challenges we are currently observing?

Jack Springer, CEO

Yes, I believe you are quite accurate. Currently, if our supply chain were functioning properly, we could reach that 2,500 target easily and potentially go even higher. For instance, we have been heavily focusing on vertical integration and are continuing those efforts with several initiatives. Recently, however, we adjusted our priorities; we slowed down some of the vertical integration work and redirected our capital expenditures and attention towards expanding our final finish area. We believe this positions the Malibu and Axis brands to exceed that 25% growth once the supply chain rebounds. Our intention is to ramp up our accounts as quickly as possible when the supply chain improves, especially given that we have nearly $0.5 billion in backlog inventory. You're correct about the quantity expectations, but moving forward, things may evolve. Our capacity to increase accounts in the second quarter could exceed our original expectations, or it might remain the same. The unpredictability of the supply chain and the weekly changes make it challenging to forecast. I don’t see any indications that we will decline further as Wayne mentioned.

Wayne Wilson, CFO

Adding some context to that, Mike, in terms of timing, I would say Q2 resembles Q1 quite closely. We have observed this pattern in previous years, especially during last fiscal year. Given how the holidays are distributed and the seasonality, combined with our management of the supply chain last year, we believe this year will unfold similarly. The timing we shared will likely result in similar outcomes. Ultimately, you can expect volumes to trend towards the 2,500 unit range in Q3 and Q4 of this year. Additionally, we have the capacity to handle more if supply chain conditions improve.

Mike Swartz, Analyst

Okay. That's very helpful. And then just on your pricing commentary and understanding, I think most of the price increases were taken in October, so they weren't reflected in the first quarter. But maybe help us understand the magnitude of the price increases you did take and then maybe how your policy on the price protection has changed in recent months.

Jack Springer, CEO

Well, from a standpoint, the way that we did it, Mike, is we did a surcharge. You have a couple of opportunities. One, you can increase prices systematically, which is more complex. Or you can look at it from a surcharge basis, which allows you some flexibility to take it down, take it up, whatever you need to do. So we went with a surcharge format. And our strategy or our focus was to not only try and compensate for the cost increases that we were seeing, but anticipate a few of them that may be coming based on conversations that we've had with our suppliers. Our strategy was to remain margin neutral. So look at that price increase, make sure we're capturing all the costs and keep our margins where they need to be versus what we have predicted before.

Wayne Wilson, CFO

And Mike, just to add one piece of color. Those will actually start impacting our P&L in the month of December. So that's part of the temporary disconnect between price increases and cost input increases. So that leads a little bit to the pressure on that 19.5% guide versus the 20% for the year.

Operator, Operator

Your next question comes from the line of Joe Altobello with Raymond James.

Joe Altobello, Analyst

I guess first on the component shortages, it seems like it changes by the week and sometimes by this day. Is it concentrated in any particular brand or facility at this point?

Jack Springer, CEO

No. I mean it's across all of marine. If you're a manufacturer in OEM, you're seeing these impacts across the board. And it's not really focused in one brand. You have certain things that are pertinent to a brand or a segment. For example, you have the outboard engines that will affect the Maverick brand and the Pursuit brands. We don't have the engine issues as it relates to Malibu and Axis. But there are some components that extend all the way across, some electronics components. Petroleum-related products still are an issue and plastics, and so that extends across all the brands.

Joe Altobello, Analyst

Got it. Okay. And in terms of the surcharges you mentioned going in place in December, how does that position you from a pricing standpoint versus the competition? Are you seeing others take pricing up in a similar magnitude?

Jack Springer, CEO

Every single manufacturer I know is implementing price increases, and some are even going higher. Some have also indicated they might consider another price hike after the beginning of the new calendar year. We believe our increase is necessary to protect the profitability and balance sheet of Malibu. Therefore, we feel we are very much aligned with where others are adjusting their prices.

Operator, Operator

The next question comes from Craig Kennison with Baird.

Craig Kennison, Analyst

Just following up, with respect to your pipeline, your order backlog, as you push through price increases, have there been any cancellations as people push back against a higher price than maybe they expected?

Jack Springer, CEO

No, Craig, it's been interesting. We've been observing it very closely. Clearly, we're in a world that many of us have never encountered before. There has not been any noticeable impact on the price increase. I believe a couple of factors are at play. There's still a lot of money available, and our demographic has substantial financial resources to spend. Additionally, I think customers are realizing early on that if they want a boat, they need to get in line because there is a wait. Some of our models, depending on the brand, are already sold out for 2022 and well into 2023. There seems to be a consumer dynamic recognizing that if I sell my boat and want to buy another one, I must get on a list to secure a slot, and we haven't seen cancellations. Another point to consider is that we closely monitor the Fort Lauderdale Boat Show since it was our first event after the price increase went into effect. We experienced four times the volume for Cobia and significant volume for Pursuit compared to last year. The pricing had no negative impact on the results of the Fort Lauderdale Boat Show, indicating, along with other data, that people are willing to buy boats right now.

Craig Kennison, Analyst

And it's such an ideal environment in some way. I know it's difficult on the supply chain. But in terms of taking orders, your dealers have to be delighted to get full MSRP. Is there anything you can do to kind of preserve some of the best elements of this current environment in terms of maintaining the right stocking level and maybe creating a process where you can take orders and more or less sell slot as opposed to boats in the channel?

Jack Springer, CEO

Yes, you're asking about a more permanent approach going forward. I believe that it really depends on the market conditions, and those conditions will change. While some may wish for a different approach, we operate in a capitalistic environment, and I expect it will return to a more normal state. Dealers will need to keep stock because customers will want to make purchases. We should see a balance again, with around 50% of sales coming from stock boats and 50% from retail sold boats. Customers will return and express interest in buying stock boats. Whether it goes all the way back to previous levels is uncertain, but I don't foresee a situation where consumers will keep buying slots at the same rate. We are likely to revert to that mix of 50% for slot purchases and retail sales.

Operator, Operator

Your next question comes from Fred Wightman with Wolfe Research.

Fred Wightman, Analyst

There was a comment that you're carrying more labor today than you need just given current run rates. And I totally get why you would do that given the expectation that volumes will ramp as we move through the year. But can you quantify the drag in the quarter, either for the first quarter or how to think about that into the second quarter and the balance of the year?

Wayne Wilson, CFO

Yes. What I would tell you is that you're going to measure it in a dozen or two, call it, 10 to 20-ish basis points is probably the appropriate number from that drag. I think we're hopeful that drag will persist a little bit into Q2. And I think we're hopeful that the supply chain recovers and a little bit from where it's at today, and we're able to minimize that drag in the back half of the year.

Fred Wightman, Analyst

Okay. Great. And then could you just maybe touch on some of the higher-level industry data from SSI. I mean 2-year trend slowed a bit. Ski Wake goes down, call it, mid-single digits year-to-date. Are you seeing a big disconnect from some of your internal registration data versus what some of the industry sources are saying? And how do you sort of see the retail dynamic shaking out going forward?

Jack Springer, CEO

Yes. We believe that our internal data on registration aligns closely with what the SSI data shows. As we've mentioned in previous quarters, there was significant demand last year in the first quarter, which can't be sustained with current inventory levels. We anticipate that over the next quarter or two, the SSI data will reflect lower figures compared to last year. However, we'll soon be comparing against more normalized numbers, and I expect to see an increase again. Additionally, if we can get more inventory into the channel, it will likely lead to a rise in SSI data and retail registrations.

Wayne Wilson, CFO

Yes. From our perspective, retail is often viewed as an indicator of demand. However, given the current environment, it is not an accurate measure because there is a significant lack of inventory. For instance, when examining Ski Wake's performance in September, we observed a decline in sales compared to two years ago, with a decrease in the mid-single digits rather than the 25% drop experienced in August and September. This slowdown is purely due to inventory shortages. We believe this will eventually correct itself, and we feel confident that retail demand remains strong. Additionally, using registration data as an indicator is challenging due to the inventory issues.

Operator, Operator

Your next question comes from Gerrick Johnson with BMO.

Gerrick Johnson, Analyst

One for Wayne, one for Jack here. Wayne, you mentioned gross margin was primarily impacted by Maverick. Can you talk about what that would have looked like, excluding the impact of Maverick, and then a follow up for Jack.

Wayne Wilson, CFO

I don't have the exact number in front of me due to our reporting methods, but I can say that the business is performing quite well. Some of the labor costs we are carrying are a burden, which has affected the gross margin year-over-year, excluding Maverick. I estimate that the impact on EBITDA is probably around 150 basis points for the year, with gross margin being slightly higher at about 50 basis points. In individual quarters that are not comparable, the impact could approach a couple of hundred basis points.

Gerrick Johnson, Analyst

Okay. All right. And then, Jack, we always love when you play economist. The cheeseburger picnic continues, I'd say at Fort Lauderdale, it looks more like an all-you-can-eat steak dinner. So how are you feeling about the U.S. consumer right here of all that's going on in the world? What's your outlook for the consumer in the next 6 months to next 12 months?

Jack Springer, CEO

I feel optimistic about the current outlook. Our consumer demographic is in a strong position with ample financial resources. The metrics I use have shifted, influenced by the changing environment. Currently, the main indicator I focus on is the stock market. As long as it performs well, our demographic will likely remain active in their purchases. They've shown no hesitation in buying boats, regardless of the price, which has surprised me. Looking ahead to the next 6 months, I am very positive. If we can improve the supply chain and increase boat production, things should be excellent. By the way, would you prefer strawberry, vanilla, or chocolate?

Gerrick Johnson, Analyst

I guess right now, all of the above.

Jack Springer, CEO

All right.

Operator, Operator

I'm not showing any further questions at this time. I would now like to turn the call back to Jack Springer for any further remarks.

Jack Springer, CEO

Thank you very much. In summary of our quarter, while inflationary concerns and ongoing supply chain constraints that put significant pressure on our industry and the global economy, our first quarter results yet again demonstrate the inherent strength and capabilities of Malibu brands. Our strategic planning, operational excellence and supply chain management continue to support our outperformance. Our vertical integration strategy remains second to none and a competitive differentiator, driving profitability and unlocking maximum value from our innovative product portfolio. We also continue to capitalize on a hotter-than-ever retail environment and unprecedented backlog, which will support further growth and strong earnings. We remain optimistic, these tailwinds will remain elevated for some time. While we are limiting in increasing production accounts, every brand is well positioned, and we are prepared to increase production quickly and with substantial volume once parts and systems are available from our suppliers. Our teams continue to push boundaries through the introduction of new product models that exemplify innovation and luxury and draw customers into the Malibu, Cobalt, Pursuit and Maverick lifestyles. As price increases help counter short-term volume declines and the supply chain issues moderate, we look forward to advancing our industry-leading position and outperforming our peers. Given our excellent start to the year, we remain confident in our ability to deliver value to our shareholders while maintaining our guidance for fiscal year 2022. As always, we thank you for your continued support and for joining us in our journey towards growth and continued excellence in fiscal year 2022. I hope you and those around you are saying safe and healthy. Have a fantastic day.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.