MBUU - NASDAQ

Good morning, and welcome to Malibu Boats Conference Call to discuss First Quarter Fiscal Year 2023 Results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] Please be advised that reproduction of this call in whole or in part is not permitted without written authorization of Malibu Boats. And as a reminder, today's call is being recorded. On the call today from management are Mr. Jack Springer, Chief Executive Officer; and Mr. Wayne Wilson, Chief Financial Officer; and Mr. Ritchie Anderson, Chief Operating Officer. I will turn the call over to Mr. Wilson to get it started. Please go ahead, sir.

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 2023 financial results. We will then open the call for questions. A press release covering the company's fiscal first quarter 2023 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 for his commentary.

Thank you, Wayne and thank you all for joining the call. Malibu Boats kicked-off fiscal year 2023 with a splash, as our continued momentum was supported by ongoing demand strength in both our fresh and saltwater businesses. We not only maintained our record-setting results, but we surpassed expectations despite impacts from Hurricane Ian late in the quarter. It goes without saying our hearts are with each and every person that was impacted by the devastation in Florida in the aftermath of Ian. I spoke with several of our dealers who stated that pictures and videos just do not do injustice. You have to be there to appreciate the devastation. I personally could not be more proud of the MBI team that rose to the occasion to support communities and the rebuilding efforts. Turning back to our results for fiscal year -- for the fiscal quarter of 2023. We continued our record-setting pace with net sales increasing nearly 20% to a record $302 million over the prior year. Net income grew 29% to $36.1 million, while adjusted EBITDA rose 28% to $57.1 million both records for the first quarter as well. Gross margins increased 110 basis points to 24.7%, while adjusted EBITDA margin improved 130 basis points to 18.9%. We continue to showcase our durability and resiliency as a business despite supply chain pressures persisting across the broader marine industry. Many have asked about the impact of Hurricane Ian on our performance. Ian struck the last week of the quarter and did have some impact, which we believe will be made up in the second fiscal quarter. More specifically, our saltwater brands lost about $5 million in revenue and $1.6 million in contribution margin all of which would have increased adjusted EBITDA for the quarter. We fully expect to recognize all of the impact in our second fiscal quarter. As you may have noticed, when visiting our website, we recently rebranded the Malibu Boats Inc. or MBI for short. Symbolically, we believe that MBI, as an enterprise is greater than the sum of its individual parts. Our products give people dream days on the water, across multiple boating segments and our scale makes us unstoppable in the marine industry. Our renewed company identity is reflective of a credible, modern and growing company that has progressed well beyond our founding brand. In addition, this eliminates any confusion between the corporate identity and the Malibu brand identity. Retail demand continues to be strong, although we are seeing a return to more normalized seasonality, which everyone should expect. That said, our early saltwater shows have been very encouraging. Our saltwater brands are increased over last year and what is striking is that Pursuit is up 40% in show sales this year versus last year. At Fort Lauderdale, Pursuit sold more boats than in 2021. We also saw 74% of the Pursuit Boats sold at Fort Lauderdale beat 30 feet in length or over. Cobalt was also at the Fort Lauderdale show and saw a 25% increase over 2021 show sales. We are experiencing that our customer is doing quite well and is very resilient. We expect the premium boat buyer, which is the customer for our premium brands to continue to be in the market and the early boat shows are punctuating that with the next imation point. There has been $43 trillion of household wealth created in the last three years and people remain willing to spend it in our customer demographic. Further, ASPs remain elevated across the board, as we satisfy customer demand for our boats. Customers continue to demand larger boats as evidenced by Fort Lauderdale and also continue to have an insatiable demand for features and options. In particular, this bodes well for our first full year for the Axis T25, which was introduced last year and is the largest axis ever built, as well as the Malibu 26 LSV, which is the largest Malibu ever built, Cobalt's R33 sterndrive and outboard and R35 sterndrive and outboard, as well as the new OS 445 per pursuit, which is the largest pursuit boat ever built. Impressively, the R33 and R35, as well as the Pursuit OS 445, all have backlog extending well into the second half of fiscal year 2024. Said another way, Malibu remains a premier course in the marine industry, as well as the entire leisure space, led by our premium suite of award-winning brands, which we believe will continue to drive growth as we navigate through fiscal year 2023 and beyond. While we are excited about the emerging opportunities ahead, we remain acutely aware of the headwinds facing consumers and the industry more broadly. Marine-wide supply chain issues have not abated. In fact, they have worsened in certain areas, while some areas indeed have improved. We continued the issues, coupled with the elevated demand levels, is limiting our ability to see channel inventories build across our brands from historically low levels. As you know, we have been able to consistently increase production volumes in both Malibu and Cobalt, to keep pace with strong retail orders and these efforts have resulted in some inventory build. The second half fiscal year demand will determine whether adequate channel inventory is in place for these brands by the end of the fiscal year. We will also keep a watchful eye on our annual year-end sales event and series of boat shows to further evaluate near-term inventory build capabilities. On the other hand, our saltwater brands continue to see a higher-than-normal retail sold order book. As a result, Pursuit and MBG are still unable to take the same step forward as Malibu and Cobalt and channel inventory remains very low. Thus, we believe adequate channel inventory for our saltwater brands will not be realized until sometime in fiscal 2024. Additionally, as I said earlier, supply chain disruptions continue to hinder our efforts to normalize production, with the biggest issues remaining with engines across all manufacturers, windshields and electronics. We continue to believe that any real improvement in the supply chain will not begin until the first half of calendar year 2023. Turning to our market performance. Our teams continue to push boundaries across our brands and our customers are gobbling it up like occasion fried, deep fried turkey dinner at Thanksgiving. Malibu and Axis are outperforming on every metric, supported by the incredible reception of our new model year lineup, demand remains strong. Further, our team continues to earn accolades as best-in-class as they get boats out the door for our waiting customers and dealers. Cobalt has maintained its momentum into the first quarter. Not only are the new R35 stern and R35 outboard boats exceeding every customer's wish as well as our expectations, but the operational capabilities of the team at Cobalt are allowing them to expertly navigate complex supply chain and labor headwinds. We have seen the Cobalt leadership and team grow expansively, through supply chain and labor issues and this testing by fire has forged a strong results-oriented team. I am very proud of how far Cobalt has progressed. At Pursuit, we are seeing better availability of labor and importantly retention has improved. They are performing well, with further efficiencies and improvements to be gained and with the shortage of inventory they have in the channel. The second half of the year is shaping up to be very good for Pursuit. For Maverick Boat Group, we recently unveiled the highly anticipated 2023 Pathfinder, 2400 PRS and 2400 Open at the Maverick dealer meeting in August. While Cobia and Pathfinder each are significantly short in channel inventory, we expect inventories to marginally increase as we move throughout the year. Additionally, we are reaping the benefits of our Maverick Plant two expansion, as this will only add even more production capacity and expand margins in our saltwater segment. As we kick off yet another fiscal year, every one of our brands are incredibly well positioned for stellar performance. Our secret sauce, the It factor is our ability to not only invest in innovation, but also leverage our vertical integration in our strategic expansion of production capacity. While I know the barriers out there are zeroing in on the RV industry as a bellwether to the turning side of demand, let me remind you that there are distinct differences in marine. Looking at recent industry data from September 2022 versus comparable September data in 2019, RV weeks on-hand of inventory is up high single digits to low double digits on a percentage basis. Conversely, Marine on-hand inventory is still down by 34% across all of Marine. And to put a finer point on this, as it relates to MBI, freshwater channel inventory at MBI is consistent with their respective markets, but our saltwater channel inventory is substantially lower than the industry and both combined provide us significant runway. While we are cognizant that this is a dynamic environment, one that is not necessarily reflective of any previous cycle, we know MBI is poised for continued performance and even outperformance. However, we will move quickly, as we have in the past, should we see any material shifts in these trends. Back to our superior start to the year, in our unparalleled track record of success, we remain confident in our ability to deliver short – long-term value and profitability to our shareholders as we pave the way through fiscal year 2023. I will now turn the call over to Wayne for further remarks on the quarter.

Thanks, Jack. In the first quarter, net sales increased 19.2% to a record $302.2 million, and unit volume increased to 10.5% to a record 2,237 units. The increase in net sales was driven primarily by increased unit volumes in our Malibu and saltwater fishing segments and inflation-driven year-over-year price increases. The Malibu and Axis brands represented approximately 54.4% of unit sales, or 1,218 boats. Saltwater fishing represented 24.5% or 548 boats, and Cobalt made up the remaining 21.1% or 471 boats. Consolidated net sales per unit increased 7.9% to approximately $135,000 per unit, primarily driven by year-over-year price increases and a little bit by favorable model mix within the Cobalt segment. Gross profit increased 24.9% to $74.6 million, and gross margin was 24.7%. This compares to gross margin of 23.6% in the prior year period. The increase in gross margin was primarily driven by favorable labor and material margins. Selling and marketing expense increased 1.3% in the first quarter. The increase was driven, primarily by travel expenses slightly offset by decreased promotional events. As a percentage of sales, selling and marketing expense decreased 30 basis points to 1.7% compared to 2% in the prior year period. General and administrative expenses increased 19.4%, or $3.1 million. The increase was driven primarily by an increase in compensation and personnel-related expenses, professional fees and travel expenses. As a percentage of sales, G&A expenses, excluding amortization remained flat compared to the prior year period. Net income for the quarter increased 29.3% to $36.1 million. Adjusted EBITDA for the quarter increased 27.6% to $57.1 million and adjusted EBITDA margin increased to 18.9% from 17.6%. Non-GAAP adjusted fully distributed net income per share increased 30.7% to $1.79 per share. This is calculated using a normalized C-Corp tax rate of 24.3%, and a fully distributed weighted average share count of approximately 21.3 million shares. For a reconciliation of adjusted EBITDA, and adjusted fully distributed net income per share to GAAP metrics, please see the table in our earnings release. As Jack mentioned earlier, we had a tremendous start to fiscal year 2023, with our MBI team delivering strong results and exceeding expectations despite a dynamic operating environment. While supply chain headwinds remain, we believe our ability to produce more units will build channel inventories setting our dealers up to win the retail bottle. Based on our current operating plan, our expectations for fiscal year 2023 remain unchanged, and are as follows. We anticipate net sales growth in the mid to high single-digit percentage growth year-over-year. In terms of cadence, Q2 revenue growth should approach 20% year-over-year. Consolidated adjusted EBITDA margin is still expected to be down slightly. We expect Q2 adjusted EBITDA margins of approximately 17%. We are incredibly proud of our team's continued execution at MBI. We continue to post incredible results and surpass expectations each quarter, which is a testament to their discipline and resilience in the face of the continued tough operating environment. While we have channel restocking tailwinds and we remain mindful of the potential for a shifting landscape that will require attentive discipline to navigate. As always, regardless of the environment, we are excited about the future at Malibu. Our team is strong, our business model has proven and MBI continues to be positioned well strategically. We look forward to producing a strong financial performance in fiscal 2023 and beyond. With that, I'd like to open the call up for questions.

Thank you. [Operator Instructions] One moment please for the first question. Our first question will come from Michael Swartz of Truist Securities. Your line is open.

Hey, guys. Good morning.

Good morning, Mike.

Quick question on guidance. Wayne your guidance for the second quarter revenue is up 20%, which I think is well ahead of consensus and EBITDA margin of 17% is I think well below. Maybe walk through the puts and takes why we're seeing that kind of discrepancy between earnings and revenue during the quarter?

Yes. I mean, part of that is going to be the timing of the way some price increases come in. Some of it is going to be related to the mix shift within the business both on the face of call it business unit or segment mix shift that may have some differential in margins as well as mix shift in terms of product within individual business units. So I think there's a number of things along those lines that are impacting that and kind of drive that difference.

Okay. Great. And then maybe just given where interest rates are given some of the macro concerns out there and understanding that inventory in certain of your businesses are coming back what's the dealer appetite to carry inventory in the off-season right now? Are you providing any flooring support, or just any comments you can provide around that?

In terms -- I'll let Wayne talk to the flooring support. But in terms of the dealer sentiment today we've just come off of all four of our dealer meetings that began in August and just finished up with Malibu last week. The dealers are certainly watching everything and it's a different environment, but they realize that they have to take inventory. And we talked a lot about that in the dealer meeting. The winners are going to be, the dealers who have inventory. The fallacy balance of thought that somehow we're in a completely retail sold environment and 80% of the people are going to be willing to wait for boats it is just fallacy. We are back to a normal environment in which in a given year 50% will be stock boats and 50% will be retail sold boats. And I think our dealers realize that. And actually I would say that across the board and everyone with dealer meetings there was optimism and almost the demand to get more inventory. Wayne, do you want to talk about the floor plan?

Yes. With respect to flooring, depending on the different brand and its programs, ultimately there is some flooring support being provided and it kind of moves a little bit from year-to-year and across brands, but there is absolutely some flooring support being provided.

Okay. Great. Thank you.

Thanks Mike.

Thank you. One moment please for our next question. Our next question will come from Joe Altobello of Raymond James. Your line is open.

Thanks. Hey, guys. Good morning.

Good morning.

I want to ask a few questions on retail. You mentioned on the last call, I think your outlook for this year was for your retail to be down, call it, high-single-digits for fiscal 2023. Is that still the case? And what did, call it, Q1 and October look like?

Yes. Joe this is Wayne. Ultimately, we have not modified that projection, right? Our last our last conversation with you all was approximately eight or nine weeks ago, and it hasn't moved dramatically. Our projection internally hasn't moved, right? We haven't seen a big change in the retail activity. There's a lot of assumptions other than just total market growth. But it's only been eight or nine weeks, and those are weeks that are kind of in the slowing time period. So we -- at this point in time, we don't really believe that makes sense for us to make a big alteration, because what we are seeing across look, the highest retail activity that you're seeing right now is kind of saltwater fish, right? And Jack talked about Fort Lauderdale, where we saw some real strength at the higher end. And so, I think we're consistent on that high-single-digit kind of market decrease on a fiscal year basis.

Okay, okay. And just a follow-up on that. If your retail is down high-singles this year and your shipments are up call it, low to mid-singles in terms of units, where would that put you in terms of turns on the dealer level versus historical?

We don't -- I don't really think of it in turns just because turns is -- but we think about it in terms of weeks, right? And we're tracking that on a by business unit basis. And our projection for the freshwater businesses gets us close to more normalized inventory levels today. Like I said, given the number of inputs that goes in, you tweak any number of those and it can move the needle, but it's getting much closer to appropriately inventory by the end of the year. In the assumptions for the saltwater segment in those businesses, the reality is that you're still under inventory coming into fiscal 24. And it's going to really depend on the fine-tuning of what's happening internationally and those types of things.

Okay, great. Thank you guys.

Yes.

Thank you. One moment for our next question. Our next question will come from Craig Kennison of Baird. Your line is open.

Hey, good morning. Thank you for taking my question, and I will say I like the new corporate brand strategy. It does help us differentiate your corporation from brand, so thanks for that. Question on just affordability. I mean, I realize you have a more affluent consumer, which may help explain the strength that you're seeing relative to maybe other parts of the economy, but we continue to hear pushback just on affordability, the cost of boats has moved up significantly. There's scarcity out there, so dealers can charge a premium and now the Fed has come in with higher rates. Just curious how you think about that trend of affordability? And whether ultimately it could become a headwind even for that more affluent consumer?

Yeah, Craig one of the things we've heard back for 13 years is that the boats are getting too expensive. And the thing that I'll point to is I believe we'll always hear that. And there's no doubt. I'm not discounting that, prices have gone up, the inflationary pressures have been astronomical more than we've ever seen before. That's what's driving the price increases. But I think there are several factors at play here. One, you're seeing these price increases across the board in any type of a luxury item. It's happening and this is a reality in the world today and people I think are realizing it's not -- people taking profits, but it is that inflationary factor. Secondly, I'll point out that if pricing were really a concern, we would not see these boats continue to be loaded out. On every single one of our brands, you can take tens of thousands of dollars off of the cost of a boat or the price of both by not taking features and options yet every single boat continues to be loaded up, which says that there's a lot -- there's concern and there's discussion around pricing but people are still buying the boats. I think I pointed this out in the commentary when you have in a three-year period of time, $43 trillion worth of wealth has been created. And in 2004, the grand total was $41 trillion. You've seen a lot of wealth created. In the stock market we've seen that in the last 30 days, it has come back over 10%. So the consumer has the money. And I think that our consumer specifically the demographic is that they will continue to spend money and pursue their passions. So moving to the dealer framework. I think that one of the things that we've taken out of our dealer meetings is they realize, they've been in a very unique heady environment of capturing MSRP or close to MSRP on boats for a two-year period, a 24-month period. But with more inventory coming into the channel with more competition that is taking place there is a realization in the dealer base that that can't continue. And so some of the pricing is going to come back naturally as a result of there being more inventory in dealers not taking the higher margins that they've been taking.

Thanks. And is there a way to compare the rate? The average rate of consumer is facing today for interest versus maybe a year ago. Just curious how that has played out?

Yeah. In terms of the rate, I would -- look in terms of the buy rates that dealers are getting, they are moving meaningfully and what we're hearing and those are going to coincide largely with the Fed rate moves maybe a little bit less than the Fed rate moves. That being said, dealers are as we had anticipated taking less both in terms of a markup in their F&I business. And so I think it's a triple-digit move. I'm not sure it's north of 200 basis points at this time.

That's helpful. Thanks Wayne. And finally just with respect to Hurricane Ian, just curious if you have any expectation or a way to frame the level of replacement demand created by that catastrophe.

I think it's early, Craig. We're already starting to see a couple of signs but it's very early in spares. Over the next year, I think we'll see that come to bear. You have people that are living in Florida, and boating is a huge part of their life. And so once that the insurance settlements are made, I think that we'll see some demand that we had not anticipated.

Great. Thank you.

Thank you. One moment please for our next question. And our next question will come from Fred Wightman of Wolfe Research. Your line is open.

Hi, guys. Thanks for the question. Just to follow up on the Hurricane Ian impact. You gave some numbers as far as the saltwater revenue and then also operating income contribution. What exactly are those numbers? Were those just shipments that got pushed specifically, out of the last week? What exactly falls into that?

That's, exactly what it is, Fred. What transpired is the hurricane hit that last week of the month. It was hit in South Florida. And so, dealers that were scheduled to take boats. They had called and they said hey, well we can't take them at this point in time, because they may just get destroyed. And so it's that last week of shipments or some subset of that last week of shipments that did not go out.

Makes sense. And then just following up on the comments about dealer promotions starting to normalize, as inventories come back and that potentially helping affordability. Is there any way that you could sort of give a brush stroke about where you think the average discount might be today in the retail channel? And sort of, how that might trend over the next, I mean pick a horizon six months 12 months versus sort of historical norms?

I think, it today is still above norm and in Fort Lauderdale, I believe prove that out a little bit. So meaning above norm that is not -- the discounting is not where it was call it three years ago. But as we progress through the boat show season, as more inventory is coming to the channel, I think it gets more competitive. And so we'll see that come back more to -- I don't even know that it gets back to the 2018, 2019 time frame. It may still be not as significant as it was then, but the market is going to determine that.

Perfect. Thanks, guys.

Thank you

Thank you very much, Chris. In summary, we delivered a record-setting first quarter to kick off fiscal year 2023 once again, demonstrating the inherent strength and capabilities of Malibu's brands. We remain exceptionally resilient quickly dodging and overcoming pertinent of schools in our industry that our industry is facing, and coming out on top against our competitors. This provides us with immense confidence, that we will reach our goals and outperform in the year ahead. We continue to capitalize on the solid retail environment with demand for our new model year boats driving ASP growth across the board. Our tried and true strategy around vertical integration and operational excellence, in combination with our best-in-class products and distribution, will enable us to deliver on our strategic vision. Our competitive differentiators are allowing us to achieve long-term sustainable success, and I am confident in our ability to deliver value to our shareholders while outperforming peers to solidify our industry-leading position, in fiscal year 2023. As always, I would like to thank you for your support and for joining us in our continued realization of growth and excellence in fiscal year 2023. Have a great day.