Earnings Call Transcript - MBUU Q1 2020

Operator, Operator

Good morning, and welcome to Malibu Boats Conference Call to discuss First Quarter Fiscal Year 2020 Results. At this time, all participants are in a listen-only mode. Later, we will 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. As a reminder, this 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 financials and outlook for fiscal 2020. I will then hand the call back over to Jack for closing remarks. We will then open the call for questions. A press release covering the company's first quarter fiscal year 2020 results was issued today, and a copy of that press release can be found in the Investor Relations section of the company's website. I also want to remind everyone that management's remarks on this call may contain certain forward-looking statements, including predictions, expectations, estimates, or other information that might be considered forward-looking and that actual results could differ materially from those projected on today's call. You should not place undue reliance on these forward-looking statements, which speak only as of today, and the company undertakes no obligation to update them for any new information or future events. Factors that might affect future results are discussed in our filings with the SEC. And we encourage you to review our SEC filings for a more detailed description of these risk factors. Please also note that we will be referring to certain non-GAAP financial measures on today's call, such as adjusted EBITDA, adjusted EBITDA margin, 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 for joining the call today. The first quarter was another exceptional quarter for Malibu, as we continued to deliver strong results and exceeded expectations. For the quarter, net sales increased 39% to $172.1 million. Adjusted EBITDA increased 24% to $28.4 million, and adjusted fully distributed earnings increased 24% to $0.83 per share. Our industry-leading new product innovation and unwavering commitment to operational excellence continue to set us apart from the competition. Our model year 2020 products have been incredibly well received by both our dealers and our customers and are a clear example of the best-in-class performance and technology that we continue to bring to market through our robust product portfolio. The agility of our business and team has enabled Malibu to mitigate some of the industry noise created by higher channel inventories and a choppy retail environment, and a vertical integration strategy's strength of our supplier network has enabled us to mobilize quickly when unforeseen events like the UAW strike materialized with GM. I personally could not be prouder of our organization and our team as it continues to demonstrate the market leadership that you have come to expect from Malibu. Moving to our results for the quarter, as I mentioned on our last call, the Malibu and Axis brands have brought to market four completely new boats this model year showcasing the innovation of the brand. As you recall, the Malibu Wakesetter 23 MXZ, the perfect mix of luxury and water sports performance, was introduced in July. The new Malibu Wakesetter 20 VTX is the greatest selling crossover boat in water sports history, and the Axis A20 is an engineering marvel, which provides an impressive combination of value and performance. These boats were announced and introduced over the summer. In October, we announced the release of our new flagship model the Malibu M240. This boat was engineered with innovation throughout starting at the bow with a new design for enhanced passenger comfort. This model includes luxury and also an incredible amount of convenience features from the all-new Malibu Command Center to our patented Flip Down Swim Step. As you know, our ability to deliver uncompromising performance to our customers is what truly differentiates our brands, which is why the M240 is powered by the new Malibu Monsoon LT4 supercharged V8 engine and contains a number of innovative performance features. One of these features is our new Stern Turn, which allows for incredible control of the boat at the touch of a button as it provides maneuverability through tight spaces and the ability to stop quickly. This feature, integrated with a proprietary Power Wedge III, allows for tighter turns and reduces the time it takes to pick up a rider by 30%, providing greater fuel efficiency and delivering more time for action on the water. This boat truly exemplifies the innovative and iconic Malibu brand. Cobalt also continues to perform very well. While there has been a contraction in the overall sterndrive segment, Cobalt has continued to outperform the 23 to 30-foot segment link and remains the market share leader in the comprehensive 20 to 40-foot sterndrive segment. In fact, we have grown our market share in every segment, and in the critical 23-foot to 30-foot segment our market share is now nearly 35%. As we continue to work towards integrating our highly successful Malibu new product development model at Cobalt, we will bring a large number of new boats to market over the next 30 months in the focus categories of sterndrive, surfing, and outboards. To that end, we introduced the A29, the newest model in our A Series of Cobalt boats. This boat provides a suite of advanced technology and convenience features, including a fully powered and patent-pending Splash & Stow inflatables management system that will be a huge hit with families. Splash and Stow enables owners to readily deploy, retrieve, and store their water recreation devices and is a convenient way to enjoy the latest generation of inflatable rafts, paddleboards, and floating cabanas. In addition to the A29, we will also have another new boat coming out in the second half of the year, which we will be excited to tell you about very soon. Our production capacity expansion at Cobalt remains on track as we recently brought additional square footage online in October and continue to be on schedule with each of our capacity expansion initiatives there. Pursuit continues to exceed our expectations. As you will recall, one of our initial objectives was to maximize the value of Pursuit in expanding the manufacturing capacity. I am very pleased with the progress that we have made on that initiative. Just breaking ground on our 182,000 square foot facility in August, we made tremendous progress and remain on schedule to bring the new factory online and begin producing boats by early fiscal 2021. This will allow us to expand production and distribution, thereby maximizing units sold and margins. Given the additional manufacturing capability in the expanded dealer network that our production capacity initiative will bring to Pursuit, we are rapidly moving toward implementing the new Malibu product development process at Pursuit. This will consistently bring three to four new boats to market every year. We know that product development is one of the critical pillars to our success, and we remain focused on integrating our industry-leading innovation and operational expertise at Pursuit. As you've heard me say many times, our vertical integration strategy sets Malibu apart, allowing us to control the entire supply chain, control quality, generate synergies across our brands, and drive overall growth and profitability. In July, we brought to market our latest vertical integration initiative, which incorporates our own flooring into all of our Malibu and Axis boats. This integration has gone incredibly well and will eventually make its way to Cobalt and Pursuit, providing further evidence of our ability to cross-integrate our dynamic innovation within each of our brands. While it is not our largest vertical integration initiative by scale, our flooring integration project provides a very attractive profitability profile and gives the customer greater optionality and flexibility. In addition to our flooring vertical integration, our Malibu Monsoon engine initiative is also a substantially competitive differentiator for our brand and has been completely integrated into 100% of our Malibu and Axis boats since July 1. That said, the manufacturing of our Monsoon engines was recently impacted by the UAW strike, which far outlasted anyone's expectations, being the longest GM-related strike in 50 years. We successfully navigated through it with no impact to our annual production plan. As many of you know, GM supplies the engine block for our Monsoon engines. As a result, we moved quickly to mitigate any impact on our production capabilities. I am pleased to say that, due to our team's agility and strong supplier relationships, we were able to secure additional engines without missing a beat. We view this as an important insurance policy to protect our company, our dealers, and our employees. As a result of our efforts, Malibu is prepared to withstand a prolonged strike. There will be a cost to that. The engines were sourced at a premium, and we will be aggressive to work through that inventory. Despite the cost, we believe that our ability to procure this supply demonstrates our operational prowess to protect our business for the long term. Further, our strategic view and execution allowed us to strategically address the slightly elevated inventories we talked about last quarter. We moved quickly in late August and early September to accelerate sales, bringing our inventories down to appropriate levels and positioning us incredibly well for model year 2020 and the upcoming boat shows. Our prudent inventory management is also a strong tailwind for our model year 2020 product portfolios; our dealers have sold through much of their 2019 inventory and are positioned very well for the boat show season. While we remain very well-positioned to continue to execute through any changes in our environment, we are aware of the continuous noise in the market from retail choppiness to concerns of a potential cycle change. As we have stated previously, we do not believe a downturn is imminent. We continue to believe that the 2020 election cycle plus one year is the next potential down cycle, depending on whether we have a pro-business environment or not. The key economic indicators we monitor continue to support our view of the strength of the U.S. consumer today, as the unemployment rate in September fell to a 50-year low of 3.5%, signifying an increasingly strong labor market. Even more telling, is that all 50 states continue to have a positive GDP, with many solid marine states leading the way. While our outlook for the marine industry and broader economy remains constructive, I would like to reiterate our confidence in our ability to maintain our margin structure through a normal downturn scenario. In the economic downturns we experienced prior to the Great Recession in 2008, the industry experienced a 20% to 30% unit decrease, which quickly recovered within two to three years from that decline. In a normal downturn of a similar nature, we believe we will be able to maintain gross margins in the range of 20% to 24% and EBITDA margins in the mid-teens, with a quick acceleration to above 24% gross margins and near 20% EBITDA margin upon a cycle recovery. Additionally, our industry-leading vertical integration strategy, which brings more of our manufacturing in-house, provides a competitive cost advantage and drives confidence in our ability to outperform our competitors in the event of an economic slowdown. In summary, we are confident in our ability to drive superior performance as we move through fiscal year 2020 and beyond. Our product innovation and strong execution continue to set us apart from the pack. We believe that we are in an excellent position to drive value for all our stakeholders. Our first quarter was another very strong quarter for our business. New product development and operational excellence initiatives enabled us to outperform and set us apart from the competition. We have positioned our channel inventory at an attractive level for upcoming boat shows. Our unparalleled vertical integration strategy continues to drive innovation and increase competitive differentiation across all of our brands. The agility of our team, our operational expertise, and focus on superior execution will allow us to continue to further our leading positions in each market we serve. While an ongoing level of uncertainty remains within the macroeconomic environment, we remain bullish on the strength of the U.S. consumer today. Malibu remains strongly positioned going forward to continue to drive growth and increasing profitability and deliver long-term value to our shareholders. I will now turn the call over to Wayne to take you through the quarterly results in more detail.

Wayne Wilson, CFO

Thank you, Jack. In the first quarter, net sales rose by 39.4% to $172.1 million, with unit volume increasing 13.9% to 1,727 boats. The Malibu and Axis brands accounted for about 58.7% of unit sales, totaling 1,014 boats. Cobalt contributed 33% or 570 boats, while Pursuit made up the remaining 143 boats. Consolidated net sales per unit increased by 22.2% to roughly $99,600, driven by the addition of Pursuit models, which have a higher average selling price compared to our other brands, along with year-over-year price rises and a higher mix of larger boats within Malibu and Axis. Gross profit increased by 31.1% to $40 million, with a gross margin of 23.2%, compared to 24.7% in the previous year. The decline in gross margin is mainly due to Pursuit's inclusion for the quarter. This will be the last quarter without Pursuit being included in the prior year figures. Next quarter will include an additional two weeks compared to last year. Selling and marketing expenses rose by 44.8% or $1.6 million in the first quarter, with these expenses also increasing by about 10 basis points as a percentage of sales. General and administrative expenses increased to 18.9% or $1.7 million, driven largely by additional costs from adding Pursuit boats; as a percentage of sales, G&A expenses, excluding amortization, decreased by 110 basis points to 6.2%. Net income for the quarter climbed 38.8% to $16.7 million, and adjusted EBITDA rose by 24% to $28.4 million, though the adjusted EBITDA margin fell by 200 basis points to 16.5%, mainly due to Pursuit. Non-GAAP adjusted fully distributed net income per share increased by 23.9% to $0.83 per share, calculated using a normalized C Corp tax rate of 23.5% and a fully distributed weighted-average share count of about 21.8 million shares. For reconciliation of adjusted EBITDA and adjusted fully distributed net income per share to GAAP metrics, please refer to the tables in our earnings release. Additionally, we bought about 383,000 shares of our stock during the quarter at an average price of around $29 per share, which is about 1.7% of our market capitalization. Our consolidated outlook for fiscal 2020 remains unchanged, with some additional detail: we anticipate incurring costs of up to approximately $3 million this year related to the UAW strike, mainly affecting the second fiscal quarter. For Malibu and Cobalt, we expect a low single-digit percentage decrease in unit volume for the full year. Q2 volumes will likely be negatively impacted by the UAW strike, down by 5% to 10% year-over-year, but we expect growth in the latter half of the year to meet our annual goals. Unit volume growth for Pursuit should approach 40% for the fiscal year. As anticipated, strong net sales growth was observed in the first quarter, with consolidated net sales expected to rise by a mid to high single-digit percentage for the full year. However, Q2 is projected to decline by a low single-digit percentage year-over-year due to reduced volume from the UAW strike. We expect consolidated gross margin to slightly increase year-over-year, excluding UAW strike impacts; when adjusted, Q2 margins may fall slightly from the prior year but should improve in the second half. Consolidated adjusted EBITDA margin is expected to decrease slightly year-over-year, excluding UAW strike effects. EBITDA margin for the second fiscal quarter is anticipated to drop by a similar amount as in Q1 year-over-year due to lighter volumes, with a recovery expected in the latter half of the year. Consolidated capital expenditures are still expected to be between $40 million and the undetermined amount, driven by our facility expansions for Pursuit and Cobalt. In conclusion, fiscal year 2020 has started strong with another quarter of exceptional financial results. We remain focused on executing our strategic investments to achieve significant growth and profitability across the business. We are confident in the strong market positions of each of our brands and are optimistic about the economy and the marine industry.

Jack Springer, CEO

Now that we had yet another strong quarter off to a great start to the fiscal year, each of our brands are very well positioned to continue to capitalize on our exceptional model year 2020 product portfolio, and we continue to execute very well on our initiatives. I will now open up the call for questions.

Operator, Operator

Your first question comes from Brett Andress from KeyBanc Capital Markets. Your line is open.

Brett Andress, Analyst

Hey, good morning.

Jack Springer, CEO

Good morning.

Brett Andress, Analyst

Jack, I was hoping you could elaborate and put some numbers around your retail trends. Obviously, the industry was coming off of a soft first half. But I guess how did the quarter progress for you? And then building off that, I guess, how much of the retail increase do you think was promotional driven versus pent-up demand from earlier in the year?

Jack Springer, CEO

We had a phenomenal quarter from a retail standpoint. We were substantially up and significantly grew our market share during that quarter. It's really difficult, Brett, to ascertain how much of that was promotional versus how much of that was new demand. I do think there was pent-up demand just simply from what we saw in that June time frame. But if you look at the entire quarter beginning with July, it started right off the back, offsetting what we saw in June, and continued through August and September with our being in front of our competition and driving inventories down for our dealers certainly had an impact.

Brett Andress, Analyst

And has that continued into October?

Jack Springer, CEO

Yes. It has from what we're hearing.

Brett Andress, Analyst

Thank you. Wayne, could you provide more details on the impact of the GM strike? It seems to have affected your second quarter. Is it just a gross margin effect? Did it also have an impact in the first quarter? Are your supplies back to normal? I would appreciate any insights on how to consider this moving forward.

Wayne Wilson, CFO

On a going-forward basis, it did not affect the first quarter. The first quarter results were in line with our expectations. The primary impact is on the second quarter due to a slight price premium associated with acquiring the insurance policy and our goal to move through these situations as quickly as possible. There may be some discounting and inefficiencies at the factory due to the duration of the strike. However, it should not significantly affect us. We are receiving blocks now, and we have a clear understanding of the situation. The impact will mainly be seen in the second quarter, with a small carryover into the third quarter.

Brett Andress, Analyst

All right. Thank you.

Jack Springer, CEO

Thank you.

Operator, Operator

Your next question comes from the line of Michael Swartz from SunTrust. Your line is open.

Jack Springer, CEO

Good morning.

Michael Swartz, Analyst

Could you maybe give us a little more detail or granularity on some of the inventory levels you're seeing out in the retail channel, maybe by brand or geography? Just anything that stands out. And then maybe from what you can ascertain the inventory levels of some of competitive brands out there as well that would be very helpful.

Jack Springer, CEO

Mike, we've been very focused on where we were at. What we did over a three-week period in that August, September time frame is we focused on moving for our dealers model year 2019 inventory. Our goal was to be very clean coming into the boat shows, having model year 2020 product primarily for our dealers to sell. We know that there have been other promotions that are out there. But I can't say that I know where competitors are at. I hope that they're down. But I don't know that. I think you still have some segments, and I'll speak to it on a segment level that still are pretty heavy in inventory. I'd point specifically to what I'm hearing about pontoons; that's still a pretty heavy environment from an inventory standpoint. My overall sense though is that the performance sports boat segment is better at the end of September than it was at the end of June, and I do hope that's the case.

Michael Swartz, Analyst

Thanks for that. Could you provide some insights on the recent larger boat shows? What have you observed at a high level? Additionally, could you share any information on early orders and retail trends for your products that emerged from those shows?

Jack Springer, CEO

I think the best way to word it, it is surprisingly strong. So I'll go back to Atlantic City. Very good boat show ahead of last year. Tampa, as you probably know, was delayed around one month or so, was also another very strong show, especially for Pursuit, which we would expect to be the primary carrier. They were substantially up in multiples of units over last year. The most recent show, which is a huge Pursuit show and lesser for Cobalt but they also participated in Fort Lauderdale. Pursuit had the best Fort Lauderdale show I believe that they've ever had, but it was substantially over last year. It blew away what our expectations would be for Pursuit. What is really interesting for us is that there was a lot of concentration on our new product from Pursuit as well as larger boats, which is fantastic. On the Cobalt side, they slightly exceeded what they did at the Fort Lauderdale show last year, so we consider that to be successful as well.

Michael Swartz, Analyst

Okay, great. Thanks for the color.

Jack Springer, CEO

Thank you.

Operator, Operator

Your next question comes from the line of Tim Conder from Wells Fargo. Your line is open.

Marc Torrente, Analyst

Good morning. This is actually Marc Torrente on for Tim. Just a few questions for us. I wanted to dig into the inventory situation a little more. It sounds like you've made some good progress, but there may still be some work to do on the Malibu side. Could you maybe walk through some of the dynamics at play? Shipments were up strong in the quarter while you're still clearing inventory. Retail also continues to be strong. So is it really just a function of needing to clear the model year 2019 product? And I guess what does that imply for production cadence through the rest of the year?

Jack Springer, CEO

We're maintaining our production schedule as planned. We indicated in our last call that the first quarter would see a slight increase, and we have followed through on that. Looking at our inventory levels, I believe we are in an excellent position. I can confidently say that our inventory is much cleaner compared to any competitor. Our dealers are focused on selling the model year 2020 inventory, which is preferable to having them try to sell off older inventory. Therefore, we feel we are better positioned than any of our competitors.

Wayne Wilson, CFO

Yeah. I mean, Marc, what I would say is that this has always been the plan. We've always over the years managed our production schedule. The factory is running really smoothly at the throughput that we've been running it at. We made the decision as we walked into the year to continue to run it at that high efficiency. The plan all along has always been that we've had some growth, but we've had really meaningful growth in retail in Q3 or calendar Q3. That has led to some of the inventory. But given the implied guidance that we've set for those wholesale shipments and where retail is at, that will just continue to keep it healthier and frankly position us for upside.

Marc Torrente, Analyst

Okay, okay. Makes sense. And then you repurchased a good amount of shares during the quarter. You saw some availability under your authorization. How are you thinking about deployment of that going forward?

Wayne Wilson, CFO

I believe we will continue to take advantage of opportunities as they arise. We recognized a great chance to buy stock at $29 a share, and we'll keep our focus on investing in unique opportunities. This approach remains unchanged, and the chance to invest in this company and our team was incredible.

Marc Torrente, Analyst

Okay. Thanks, guys. Great quarter.

Jack Springer, CEO

Thank you.

Operator, Operator

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

Joe Altobello, Analyst

Thanks. Hi, guys, good morning.

Jack Springer, CEO

Good morning.

Joe Altobello, Analyst

So first question, I'll stay on the dealer inventory topic for a second. I think last quarter you guys had said that you expected to clear out whatever extra weeks of inventory were in the channel by the end of December at the latest. And this morning, it looks like you're saying by fiscal year-end. Was there a change there? Or am I misreading those statements?

Jack Springer, CEO

No, I don't believe you are misinterpreting those statements. At that time, we understood our strategy for moving that model year out of inventory. As we progress through the first half of the fiscal year, we anticipate that inventories will build for boat shows, but not excessively. We performed better than expected with our promotional efforts to move inventory. I can assure you that as we enter Q2, our inventory levels are cleaner than we initially anticipated.

Wayne Wilson, CFO

I think there's a significant disconnect. The reality is that current levels are slightly higher than in previous years. However, we've consistently communicated that our wholesale shipments would be robust and strengthen in Q1. For Malibu and Cobalt, we anticipate a decline in low single-digit volumes year-over-year, suggesting that there will be pressure on those volumes in Q2, Q3, and Q4 for the rest of the year. In a growing market, having negative year-over-year comparisons means you are further reducing inventory, which is a considerable factor. So, I don’t believe there is a genuine disconnect; this has been our plan all along. As for the timeline, we expect to be in a better position by December. What may be misunderstood is that by December, we believe our plan will be on track. Jack's comments indicate that we managed to resolve issues quicker than anticipated.

Gerrick Johnson, Analyst

It's a bit surprising for me to see that you're expecting healthy channel inventory by the end of the fiscal year. It seems longer than we anticipated.

Wayne Wilson, CFO

I mean we could have cut volumes a whole bunch and got even cleaner and then sat there and started growing more wholesale in the back half of the year and run the plant more inefficiently, but I don't think people want that.

Gerrick Johnson, Analyst

Okay. Understood. Thank you.

Operator, Operator

I'm showing no further questions at this time. I would now like to turn the conference back to Mr. Jack Springer.

Jack Springer, CEO

Thank you. Malibu performed very well, and we executed despite surprises like the UAW strike in the quarter. For now, though, we expect our performance to continue as guided on our last call. I want to thank you for your continued support of Malibu and for being on the call today. Have a great day.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and have a wonderful day. You may all disconnect.