Earnings Call Transcript - MBUU Q3 2020

Operator, Operator

Good morning, and welcome to Malibu Boats conference call to discuss third quarter fiscal year 2020 results. 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, 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 now 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 third quarter financials. We'll then open the call for questions. A press release covering the company's third 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 all for joining the call. As we sit here today, more than 6 weeks into one of the biggest health and macroeconomic crises we have seen in our lifetimes, I'm even more proud of the Malibu team and our ability to deliver on our strategy. Regardless of the environment we are facing, this team delivers results. An incredibly strong fiscal third quarter with this year's boat season momentum, extending into March, radically changed in the last 3 weeks of the quarter. The number of COVID-19 cases skyrocketed, leading many states to invoke shelter-in-place orders. We mobilized quickly to protect our employees, support our dealers, and adjust to reduced demand levels by suspending production at all of our manufacturing facilities on March 24. For the quarter, net sales decreased 8.8% to $182.3 million. Gross margin increased 20 basis points to 25.1%. Adjusted EBITDA decreased 3.7% to $36.4 million and adjusted EBITDA margin increased 110 basis points to 20%. This performance, despite an 8.8% decrease in revenue, highlights what an outstanding year we would have had if we had not removed 7 days of production at the end of the quarter. It is also important to communicate that we are very well-capitalized and have over $100 million of cash on hand, more than ample for the current downturn. Once again, our team demonstrated their agility and operational prowess to overcome these substantial headwinds and deliver strong margin performance year-over-year despite the reduced volume. Before the drop in demand late in the quarter, performance across our brands was very strong. Up until that point, results from the boat shows were excellent, with exceptional performance in technology of our model year 2020 products driving Malibu and Pursuit up double digits compared to the prior year, and Cobalt was performing well. This momentum was driven by the strength of our portfolio and the innovation our customers expect from us. Importantly, these competitive advantages will be what supports our resurgence as the environment returns to a new normal. For Malibu, the new 23 MXZ in our latest flagship model, the M240, has been very strong. Both of these new products feature several of our patented technologies, including our Stern Turn technology and proprietary Power Wedge III. Our 20 VTX has once again cornered the market as being a true crossover boat, performing very well for ski, lake, or surf. As you know, all of our models for Malibu and Axis are powered by our Malibu Monsoon engines. This new engine by Malibu has certainly been the differentiator and competitive advantage we thought it would be. It is quiet, easy to maintain, powerful, and rock solid. For Cobalt, our new product innovation is continuing to accelerate. Our Cobalt A29 has been in very high demand with its sleek Cobalt-like features. Our one-of-a-kind Splash & Stow feature, the first inflatable management system, has been a huge hit with an even bigger take rate. It is a perfect feature to enjoy boat life, keep the kids happy, and deploy social distancing. Further, at Cobalt, we have 3 new boats being released this summer beginning in June that we will speak about on our next call. For Pursuit, our DC 326, introduced last August, was far stronger before the pandemic in sales than we had planned. The new S 378 is just hitting the market, having been introduced at the Miami Boat Show. As a reminder, this boat replaces the contract built S 368 and has been designed with pure Pursuit DNA. We expect it to be a strong driver of margins going forward. We also introduced the S 268 Sport in April and believe it will be a high-demand boat for model year '21. In recent weeks, the full calendar year 2019 market share data was released. As a reminder, we do not focus on the monthly data for market share. It is incomplete and can be skewed based on the states reporting and their timing. While quarterly market share data is more robust, the annual calendar year data is complete and more accurate than any other data provided by SSI. With that in mind, as of the December 31, 2019 numbers, I'm thrilled to say that all brands under MBUU had an exceptional year at retail. Malibu increased market share by 130 basis points in calendar year 2019 and is almost 1/3 of the entire domestic market. Both the Malibu and Axis brands had significant share increases. Combined, Malibu and Axis is #1 or #2 in market share in 86% of the market served. That's an over 600 basis point increase versus 2018. Cobalt had a staggering 260 basis point increase in market share in 2019. Every segment length was substantially up in the all-important 24- to 29-foot segment, which is well over 1/3 of the market for Cobalt. In the outboard segment we serve, which is 23 to 30 feet, Cobalt again grew share in units. This has been a growing market and it will continue to be. As we accelerate new product introduction, Cobalt adds more outboard models over the next year, we will only see that share grow. Pursuit, despite ongoing capacity constraints in 2019, also continued to grow market share. With our new capacity as of July 2020 and the volume of new product we are bringing to market, we are very excited to see the market share growth that will occur over the next several years. Overall, we are incredibly pleased with our market share domination in calendar 2019, and it is a testament to our team, our strategy, and our competitive leadership. As the pandemic swept the country in late March, our employees, dealers, and retail customers who have boats on order have been our top priority during this tumultuous time. During the shutdown period, we continued to pay our employees for the first 2 weeks. After that, as the states and new federal employment kicked in, we implemented temporary furloughs while maintaining the regular benefits package, including health insurance. As the government's relief and recovery package became effective in April, we assisted our furloughed employees in collecting on these benefits. When we resume production at all of our plants, MBUU brought back all of our employees. There were no layoffs or reductions in force. I cannot say enough about our teams at Malibu, Cobalt, and Pursuit. They've been very supportive and understanding during an unknown time as they first had to be furloughed and then came back to work. Their attitudes and support have been inspiring. I cannot thank each person adequately. In addition, many of our dealers were forced to shut down or scale back their operations due to state and local shelter-in-place mandates. Based on our conversations with dealers, the impact of these shutdowns has varied greatly. Some of our dealers continued to sell boats at a steady pace, but dealers in other states were not allowed to receive boats for an extended period of time, even if we had built and shipped them. As a result, those dealers were hardest hit. That said, we were proactive and aggressive in supporting our dealers by educating them on the Payroll Protection Program under the CARES Act. While MBUU was not eligible for this program and took no government funds, it was very important to our dealers, most of whom are small businesses with less than 25 employees. Wayne worked very closely with them, providing resources, step-by-step actions and clarity on the process to apply and ensure they had access to these critical small business forgivable loans. As a result, we estimate that our dealers, on average, received more than $250,000 per dealer, which has allowed them to maintain their staffs and curb layoffs. This, in addition to the deferral of interest from Wells Fargo and curb curtailments during the April and May period, has resulted in no known solvency issues that we are aware of with any of our dealers across the brands. Importantly, the resiliency and strength of our dealer network has been highlighted during this difficult operating environment. While retail sold orders have held up well, stock order confirmations have slowed considerably, as can be expected. Those dealers that could continue to operate the service side of their businesses and sell boats, either through prescheduled one-on-one appointments, virtual boat shows, or out on the water. In addition, MBUU has significantly boosted our digital marketing, virtual presentation of product, and lead generation to the highest levels we have seen. We resumed production at Malibu on April 21, at Cobalt on April 27, and at Pursuit on May 4. Prior to that, we have prepared our plans for the new environment and implemented many safe workplace practices. I am proud to say that we served on the Governor of Tennessee's force that provided recommendations for reopening manufacturing in the state of Tennessee. That is another example of MBUU leadership at play. It is important to state that we have reopened our plants at the same production levels as when we closed each plant. Retail order demand has driven the same production levels. It's simple. Retail customers for performance sports boats and recreational cruising boats specifically want their boats for Memorial Day weekend. If you have retail orders, as we did at Malibu and Cobalt, you need to build boats to support your dealers and not to disappoint your retail consumers. Further to that, all of our brands, including Pursuit, have had retail orders remain intact with very few cancellations. That is a great omen for when we come out of this time and indicates a very different environment from the 2008 recession. Today, most of our plants are exclusively fulfilling retail sold orders through May. That is important to understand for a couple of reasons: First, it highlights the strength of our retail order book. We had a significant number of retail orders at all 3 companies; nearly every boat being built is a retail sold order. Secondly, this means that we will not resume building stock orders that will go into the channel until June. As a result, we will go 2.5 months without putting inventory into the channel while dealers have continued to sell boats. This will greatly help in driving channel inventories down in a post-COVID-19 environment. If pent-up demand exists, this will be a strong tailwind for us coming out of the crisis. Our furloughed employees are back at work. As previously mentioned, we brought back all of our team members with no layoffs or reductions in force. We have made a number of decisions to align our cost structure to the current landscape and realize significant reductions in expenses. Despite these measures, we have maintained full production capabilities for each of our brands to ensure we have the capacity and throughput to deliver retail sold boats already under contract with our dealers. While the complete impact of the state-mandated shelter-in-place orders is not entirely known at this point, we expect new orders will pick up as restrictions are lifted, but the timing of when that happens will have a material impact on the summer season. If dealers can get back to business this month or early June, that will be very positive as they will have the summer to sell boats. I will also note that this plays to a captive customer, as travel sports, select leagues, camps, and other activities that families are normally involved in during the summer are canceled for the summer of 2020. From an inventory standpoint, we believe the channel is healthy across our brands prior to the disruption in March. Further, when reviewing externally generated segment data from a premier marine resource, our aged inventory is remarkably better than our competitors by a large margin. This means that our aged channel inventories are minimal, and we pull down the segment averages. As I previously mentioned, from late March until June, dealers will not receive any stock inventory while they continue to sell boats. We believe this will allow the inventory channel to adjust even further. That said, given the rapidly changing environment today, we are prepared to swiftly adapt our production to continue to prudently manage our inventory levels. Further, the foundation of our business, industry-leading innovation, vertical integration, and operational excellence will continue to propel us forward in the uncharted waters we're in today. Our unparalleled vertical integration strategy allows us to control a greater portion of our supply chain than our competitors and is a true differentiator for Malibu. In addition, our variable cost structure allows us to quickly flex costs in alignment with our top line, allowing us to preserve operating margins in a lower demand environment, evidenced by our performance this quarter. We remain on track to complete our production capacity expansion at both Cobalt and Pursuit. The Cobalt plant expansion was nearly finished prior to suspending work at our facilities in March, and is now completed for large cruisers and on schedule in our phased approach for the small boat plant. We are also nearing completion with our Pursuit expansion, which is on track to be completed in June. We will begin building boats in the new Pursuit plant with a new model year, which begins in July. This includes the brand-new S 378, which replaces the low-margin contract built S 368. Our team's unwavering commitment to operational excellence will enable us to continue progressing on our strategic initiatives through this environment. We have already seen this expertise in play. While we know competitors had issues with their supply chain in receiving sufficient supply parts, our brands did not at all. Further, we were able to ramp up production at the same production volumes without fear of not having sufficient parts. This is demonstrable operational excellence. It is just another example of our operational excellence and being prepared. Since we have started back to building boats, we have had no supply chain issues, and there are none that we are aware of to date that could be an issue for us. I am confident in our team's ability to extend our leadership during this period of uncertainty. Our management team is comprised of exceptional leaders with considerable experience managing companies through various environments. We have navigated through down cycles in 1989, 1994, and after 9/11 and during the Great Recession in 2009. More specifically, Wayne and I, with other members of the management team, successfully navigated Malibu during the most significant downturn of our lifetime, and we emerged as a better and stronger company. We will again this time. In summary of the quarter, we delivered strong results despite facing unprecedented headwinds due to the ongoing global pandemic. Despite these unforeseen circumstances, our team mobilized quickly to address the situation, took action to protect our employees, support our dealers, and we delivered exceptional operating margin performance. Our strategy remains unchanged. We remain laser-focused on delivering industry-leading new product innovation, increasing vertical integration initiatives, and leveraging our outstanding operational execution. The impact on Malibu will not be as deep in this pandemic as for others, and our ascension out of the crisis will be faster and more pronounced. As a result, we are well positioned to navigate through this downturn and recover at a quicker pace than our competition. I will now turn the call back over to Wayne to take you through the quarterly results in more detail.

Wayne Wilson, CFO

Thanks, Jack. In the third quarter, net sales decreased 8.8% to $182.3 million, and unit volume decreased 14.2% to 1,796 boats. As Jack mentioned, we suspended production in our plants on March 24. This resulted in about a week less of production in the quarter. However, historically, we experienced higher shipment volumes at the end of the quarter, and the shutdown in the last week impacted us in excess of $20 million in sales. The Malibu and Axis brands represented approximately 63.4% of unit sales or 1,139 units. Cobalt represented 29% or 521 boats and Pursuit made up the remaining 136 boats. Consolidated net sales per unit increased 6.3% to approximately $101,500, reflective of a higher mix of Pursuit sales, year-over-year price increases, and an increased mix of larger boats across our Malibu and Axis brands. Gross profit decreased 7.8% to $45.8 million, and gross margin was 25.1%. This compares to a gross margin of 24.9% in the prior year period. This margin included $900,000 of costs related to the UAW strike. Selling and marketing expense decreased 13.3% or $0.7 million in the second quarter. As a percentage of sales, selling and marketing expense decreased by 10 basis points. General and administrative expenses decreased 21.8% or $2.7 million. The decrease was predominantly driven by temporary suspensions at our manufacturing facilities, along with acquisition-related expenses that were attributable to the addition of Pursuit Boats in the prior year period. As a percentage of sales, G&A expenses, excluding amortization, decreased 90 basis points to 5.3%. In addition to temporarily suspending production, we reacted quickly to take costs out of the business and targeted uncommitted expenses for the fiscal fourth quarter to more closely align our cost structure to lower expected shipments. We are currently in the process of evaluating the expected wholesale shipment needs for fiscal 2021. And accordingly, we'll make appropriate adjustments to our expense structure heading into the year to align our cost structure with expected demand. Net income for the quarter increased 7.5% to $23.9 million. Adjusted EBITDA for the quarter decreased 3.7% to $36.4 million, and adjusted EBITDA margin increased 110 basis points to 20.0%. COVID-19 likely impacted our fiscal Q3 adjusted EBITDA negatively by nearly $5 million. Non-GAAP adjusted fully distributed net income per share decreased 1.7% to $1.13 per share. This is calculated using a normalized C corp tax rate of 23.5%, and a fully distributed weighted average share count of approximately 21.6 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 in his prepared remarks, we also took aggressive action to make sure we have sufficient liquidity to support our operations and strategic investments. At the end of March, we drew down $98.8 million on our revolver. As of May 5, 2020, we had cash and cash equivalents of approximately $113 million, which reflects a temporary use of cash in working capital that will normalize over the coming weeks following the restarting of production at our facilities. Our robust balance sheet allows us to continue to invest in our business and pursue strategic investment opportunities. Given the unprecedented uncertainty related to the COVID-19 pandemic as previously disclosed on March 24, we have withdrawn our fiscal year 2020 outlook. As Jack said, while we felt comfortable with inventories prior to the slowdown in late March, short-term retail demand shocks posed a threat to leave us in an over-inventory position. As always, we are focused on keeping channel inventories at appropriate levels. Our lower production forecast for fiscal Q4, combined with the fact that the vast majority of what we are producing today are retail sold units should position our channel inventories well heading into fiscal 2021. Based on our current operating plan, we are anticipating fourth quarter revenue to be down approximately 50% on a year-over-year basis. Despite our efforts, given the speed and magnitude of this decrease, we do expect margins to be meaningfully impacted in the quarter. In the event of a prolonged downturn that brings a 20% to 30% top line decline, we are confident in our ability to maintain EBITDA margins in the mid-teens percentage range. We are constantly evaluating the dynamic environment today, and we'll provide further information when we report our year-end results in August. In closing, we delivered a solid quarter in light of substantial headwinds imposed on our business. Our experience, operational excellence, and variable cost structure allow us to react to the dynamic environment we are in today, and largely preserve our margin structure in the event of continued slowdown. As we navigate through ongoing economic uncertainty, our strong balance sheet and liquidity position enable us to continue to position ourselves to execute on our long-term strategy for growth.

Operator, Operator

Your first question will come from Brett Andress with KeyBanc.

Brett Andress, Analyst

Hoping, can you give us any more detail on April retail trends? And I guess, more importantly, the cadence of April? Is the month progressed? And I think you talked about some geographic disparities as well. So if there's any color on that? And then the last one is just, any comments on May retail?

Jack Springer, CEO

Yes. For April and May, we are hearing many successful retail stories, similar to what others have reported. We believe retail is on the rise. It's natural to expect that as states reopen and our dealers resume selling boats, retail will increase. One factor aiding us this year, which we did not have last year, is favorable temperatures that we expect to continue. We are witnessing a steady rise in retail week by week. If you consider April 1, the numbers were lower, but they have improved throughout the week, leading up to last week, and we see retail growth. However, it is still early to predict the impact for this quarter or the next, as we are in a discovery phase and not all states have fully reopened yet. Over the next 5 to 6 weeks, as we approach the first quarter of 2020, we will be communicating with dealers to gain a clearer understanding of what to expect. Overall, the outlook seems positive.

Brett Andress, Analyst

So when you say retail increase, you mean retail is tracking up year-over-year?

Jack Springer, CEO

Not only year-over-year, but it's tracking up versus where it was in March or at the 1 April. I'm saying that each week, retail gets a little bit better, but you still have a lot of dealers that are not opened up. As an example, Maryland just opened up this morning.

Brett Andress, Analyst

Understood. Thank you for the clarity there. It’s clear that we had impressive margins in the quarter. As we consider the fourth quarter, Wayne, could you explain the current fixed and variable structure and how we should approach modeling the next few quarters? Was the mid-teens EBITDA margin specifically referring to the fourth quarter?

Wayne Wilson, CFO

The mid-teens EBITDA margin was not related to the fourth quarter. That figure pertains to a scenario with a decline of about 20% to 30%, which corresponds to a more extended period where we can ensure our cost structure is appropriate. The significant drop of approximately 50% in Q4 clearly amplifies the effect on the margin. Additionally, over shorter time frames, some costs tend to be stickier. So when we mention that the cost of goods sold is over 90% variable, I would say it's actually in the mid-80s, possibly a bit lower in a fourth-quarter context due to the rapid changes and the extent of the decrease. Is that helpful?

Brett Andress, Analyst

That is.

Wayne Wilson, CFO

I think what you were getting at regarding April and May is that we observed retail demand in late March and April drop by about 20% to 30%. However, it has now stabilized and has shown some improvement and gained a bit of momentum. It's not in a downward trend, and that reflects our current view of the market.

Operator, Operator

And your next question comes from the line of Tim Conder with Wells Fargo Securities.

Timothy Conder, Analyst

First of all, congratulations to the entire team for the excellent execution during this challenging time. I wanted to clarify something, Wayne. Did you say that you observed the second derivative bottom in retail around the end of March and early April? Is that the right interpretation of your response to Brett's question?

Wayne Wilson, CFO

Yes. From what we observed, the lowest point seemed to occur in the first half of April. It remained at that level for some time, but we have noticed improvements over the past couple of weeks.

Timothy Conder, Analyst

Okay. And so are we yet on a year-over-year weekly basis, are we yet positive? Again, any color on that at retail?

Jack Springer, CEO

No. No. Go ahead. No.

Wayne Wilson, CFO

No, we're not seeing positive comparisons. A small percentage of the dealers are closed, and some have limited operations. So it is not positive at this time.

Timothy Conder, Analyst

Okay. And on that front, any color, Jack or Wayne, whoever wants to take this, on what dealers are fully open, what dealers are partially open of the collective network of all the brands?

Jack Springer, CEO

It's a situation that varies by state. In California and Michigan, the number of dealers open is relatively low. However, in some southern states, the dealerships are much more accessible. There was a time in Utah when dealerships could operate, but all the lakes were closed, which didn't make much sense. There are many factors affecting the dealers, but currently, approximately 20% to 25% of them still face some limitations on their operations.

Timothy Conder, Analyst

Okay. And then along that line, Jack, it sounds like it's probably going to go this way geographically. The dealers where they may be light or heavy on inventory? And then, I guess, in relation to that oil patch, can you comment on how the oil patch is doing from what you're seeing so far in the U.S. and then in Western Canada?

Jack Springer, CEO

Yes. Tim, as you know, I grew up in the oil patch. I spent the first 24 years of my life in Odessa. So I'm very well versed in that. We have to drive 3 hours to get to a lake in West Texas. So I think the number of customers that are being impacted in the oil patch, except for Canada, I will note that, pretty minimal. But at the same time, when you have a negative, you always have a positive. So you have dealers across the rest of the nation that are being able to stay in to those potential boat buyers that your fuel costs are going to be less than half what they were if you would have bought a boat last summer. So I look at things that, yes, you have some negative impacts maybe as it relates to the economy in the oil patches, but you have some very positive economic draws that are affecting a lot of other parts of the country.

Timothy Conder, Analyst

So specifically, Texas, how is that doing, Jack?

Jack Springer, CEO

And yes. Texas is very diverse. Texas is easily, probably the most prolific economic engine in the nation because of their diversity. So when you get into Dallas, San Antonio, Austin, Houston, they are not nearly impacted with oil and gas prices in Houston a little bit more so. But even through previous crises, Texas has been a tower. We saw during the Great Recession that as we were coming out of that, Texas actually went from #3 to #1. And you have some oil and gas phenomena going on at that time. So what we're seeing is that Texas continues to be very strong, and our dealers continue to be strong in terms of our overall dealer base.

Operator, Operator

And your next question comes from the line of Mike Swartz with SunTrust.

Michael Swartz, Analyst

Just to start, Wayne, with your commentary on fourth quarter revenue down 50%. I'm just trying to foot that with your commentary on production rates coming back to pre COVID levels when you've restarted. If I just do the straight math, it seems like that would incline more down into the 30s, maybe even low 40s. But is I guess is April that much more of a production base than May, June? Is that why it does skew a little down a little further?

Wayne Wilson, CFO

No. It can be a little bit, but really, you got to go back to some of the comments that Jack was making about retail demand and boats that are needing to be delivered before Memorial Day. So we came back and we may be running Fridays to get those boats out to make sure those folks have their boat before Memorial Day and frankly, we may idle a factory after Memorial Day for that week because we're going to run it hard to make sure we deliver to those customers, and we typically bleed down that number or that throughput in the latter part of June or in the June timeframe. So ultimately, it's really the combination of those types of factors. If you look at when Pursuit started up as opposed to Malibu, that's a couple of week difference. You look at how we're managing the factory dynamically to make sure we're delivering and converting those contracted sales into earnings for us and our dealers. We're just trying to optimize that, and that's why you see a little bit of a difference in those numbers.

Michael Swartz, Analyst

And then just comments about meeting the retail sold inventory and really, for now, not putting anything into dealers' inventory. You've likely done the analysis. What level of demand would raise your concern about being under inventory going into June or July?

Jack Springer, CEO

Yes. That's why I say we're venturing into somewhat uncharted territory. It depends on what we observe for the remainder of May into June. As states begin to reopen, could that situation evolve as we enter model year '21, depending on how strongly things recover? Absolutely. If we consider the shutdown period for Malibu, which can also apply to other companies, the time we've been offline will impact retail sales for the upcoming 6-week period, resulting in over 1,000 boats being removed from the market. We believe we were in a solid inventory position before the shutdown, and considering all of this, we feel confident about recovering to some extent.

Wayne Wilson, CFO

Yes. Mike, we've considered a wide range of possible outcomes. Our primary focus for Q4 is to ensure we maintain the right balance of various factors, particularly if things unexpectedly decline. We are closely monitoring the true retail activity, which includes not just the delivery of contracted boats but also the new conversions. This will provide us with valuable information to respond effectively. We have ample inventory, and as a seasonal business, our dealers were prepared for a larger year. We believe we are achieving the right balance, and the likelihood of being significantly understocked is low. We're also taking precautions to ensure that if conditions change, we won't be scrambling for inventory later on.

Operator, Operator

And your next question will come from Joe Altobello with Raymond James.

Joseph Altobello, Analyst

Hopefully, you're all. Wanted to kind of follow-up on Mike's question regarding manufacturing. With you guys resuming production in April and now into May, what kind of capacity utilization are you guys operating at in May and June?

Jack Springer, CEO

Well, at least through Memorial Day week, where operating at the same capacity utilization we were in March and February, we came back at the same production rates.

Joseph Altobello, Analyst

Okay. Okay. But no shipments until June, you mentioned, right?

Jack Springer, CEO

We are currently shipping to dealers. If we are building 22 boats a day, those 22 boats are going out to dealers, and they are already sold. It’s important to note that all the boats we’re producing have a customer assigned to them. Therefore, we are placing very few or no boats into the inventory for dealers to hold.

Joseph Altobello, Analyst

Okay. That's helpful. And then just to follow-up on that. You mentioned earlier some 3 boats coming out on the Malibu side in June and obviously, the new Pursuit boat coming out. It doesn't sound like this is impacting your plans for model year '21 at all. So I'm curious, have you heard any pushback from dealers yet? Or it sounds like it's full speed ahead for model year '21?

Jack Springer, CEO

The dealers are eager for new boats. To clarify, there are three new boats being introduced in Cobalt, and they will be available this summer, while Malibu will release four new boats. We are actively progressing with Pursuit, and that initiative will go on. Dealers are consistently keen to see new products, particularly with a new model year approaching, and we will continue to meet that demand.

Operator, Operator

And there are no further questions.

Jack Springer, CEO

Okay. Thank you very much. In summary of our quarter, we delivered strong operating margin performance despite experiencing unforeseen and unprecedented headwinds as a result of the COVID-19 pandemic. It's impressive and should inspire investor confidence that we were able to close production for 7 days in the quarter, continue to pay employees and benefits, and still generate a 20% EBITDA margin in Q3. We talk a lot about our people being our number 1 asset, and we demonstrated it by taking care of them, paying them, continuing to cover their benefits and bringing 100% of them back to work when it was prudent. We assisted our dealers. We believe better than any other marine manufacturer in getting educated and receiving the limited PPP funds. We have restarted production and are focused on prudently managing our production and delivering outstanding boats to our customers. Our core business strategy remains unchanged as we focus on enhancing our brands and market share during this period. Our vertical integration strategy and variable cost structure is a differentiator in this environment. We have taken swift action and enhanced our financial flexibility and liquidity, and our balance sheet is strong enough to weather any storm. And finally, the experience of our leadership team, combined with our industry-leading operational execution, will enable Malibu to emerge as a stronger company. I want to thank each of you for your continued support of Malibu and for joining our call today. I hope you and those around you are all staying safe and healthy. Have a fantastic day.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.