Malibu Boats Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
January 30, 2024

There are 8 speakers on the call.

Operator

Good morning, everyone, and welcome to Malibu Boat's Conference Call to discuss Second Quarter Fiscal Year twenty twenty four Results. At this time, all participants are in a listen only mode. As a reminder, today's conference call is being recorded. On the call today from management are Mr. Jack Springer, Chief Executive Officer Mr.

Operator

Bruce Beckman, Chief Financial Officer and Mr. Ritzy Anderson, Chief Operating Officer. Now turn the call over to Mr. Bettman to get started. Please go ahead, sir.

Speaker 1

Thank you, and good morning, everyone. On the call, Jack will provide commentary on the business and I will discuss our Q2 of fiscal year 2024 financials. We will then open the call for questions. A press release covering the company's fiscal Q2 2024 2024 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.

Speaker 1

You should not place undue reliance on these forward looking statements. We 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.

Speaker 1

I will now turn the call over to Jack Spreier.

Speaker 2

Thank you, Bruce, and thank you all for joining the call. MBI navigated a challenging quarter driven by continued economic uncertainty as retail remains suppressed and channel inventories are reverting to historical norms. For the 2nd fiscal quarter, net sales decreased 38% to 200 and $11,100,000 compared to the prior year. Net income decreased 62% to $13,800,000 while adjusted EBITDA fell 60% to $22,900,000 Gross margins decreased 4 60 basis points to approximately 18 percent and adjusted EBITDA margin decreased by 6 10 basis points to approximately 11%. We continue to experience soft retail demand as we entered our slowest time of the year.

Speaker 2

The confluence of events in coming off a pandemic retail high, Channel inventories have built much quicker than anyone imagined. A return to seasonal norms and economic uncertainty due to a prolonged elevated interest environment have resulted in channel inventories higher than we or our dealers would like to see. It is a tough market to say the least, But it is important to keep things in perspective and level set versus historical norms. While the retail environment is compressed, the biggest factor contributing to a tough year over year comparison is the normalization of channel inventory. Over the last two fiscal years, we have been focused on rebuilding our channels from historically low levels brought on by lingering supply chain challenges and unprecedented demand during the pandemic.

Speaker 2

Today, these dynamics have shifted and a level setting is going on as the inventory channels have fully recovered. We are back to natural market dynamics and MBI is highly focused on recalibrating to match wholesale production to retail demand. We are very, very committed to reducing channel inventories to lower levels that set up the dealer and MBI brands to recover more quickly once retail begins growing again. We expect channel inventory to move downward as the selling season kicks in and reduce the normal levels by the end of calendar Q2. NBI will continue to monitor the channel and take an aggressive approach with production levels as we head into the southern season.

Speaker 2

We do not shy from a downturn or a recession. We welcome the opportunities that are presented with it. Our variable cost structure and world class operational capabilities set us up extremely well to execute in driving the most profitability profitable possible and continue to invest in the business. The investment in the business, whether it be new product and features, vertical integration or capacity will drive market share increases and the realization of higher revenues and margins quickly once retail comes back. The investment in the Rome County, Tennessee expansion for Cobalt is a great example of this commitment.

Speaker 2

Demand for our 30 foot and over cruisers has consistently outpaced our production capability and with the addition of new models over the past couple of years more coming. This expansion positions Cobalt to be able to build to demand as we exit the downturn and see demand growth. Had we waited until after the downturn, we would be sacrificing 1 to 2 years of revenue growth as we added the capacity. MDI will be well positioned to exit this downturn more quickly and be even stronger than we were when entering it for all of our brands. From the retail lens, the sense of urgency from customers to buy a boat has largely disappeared.

Speaker 2

The consumer is being very patient. They know inventory is available and they are looking for the best deal. To address this latter retail environment, we introduced a program earlier this month, which we've been working on since early 2023 to introduce a Malibu and an Axis at entry level pricing. The Malibu LXR is offered at $99,995 the first time that a 21 foot or larger Malibu can be purchased We're under $100,000 in many years. The Axis T220R is a 22 foot boat with a nationally advertised price $89,995 We expect pricing on these two boats will draw customers who've been waiting for lower prices to dealers.

Speaker 2

The goal is to have this customer exit the sidelines, go to the boat shows or dealerships and purchase. With these boats, we are also targeting smaller and less jet boats for the cost conscious wake sports enthusiasts. Finally, we believe this is a great opportunity consumer to get a Malibu or Axis at a price less than a Tier 2 or a Tier 3 wake brand. We also believe that we will not only sell these boats, will lead to further opportunities to upsell by our dealers into other models, driven by the consumers' desires for more features and options. We have already seen this occurring in the January boat shows that have taken place thus far.

Speaker 2

A customer segment that has remained strong is the premium segment. Cash buyers who are looking for larger, feature rich premium boats. We have several new offerings targeting these consumers that we are excited about. Our brands through boat shows are focusing on the new M242 Malibu, the most premium boat in the Malibu line. Cobalt has introduced a new R33 Served Cruiser and Pursuit will leverage the new OS405 and VC 306, both premium boats over 30 feet.

Speaker 2

As you see by their names, these models are targeting the imported offshore and dual console segments saltwater outboard category or Pursuit. As always, the boat show season is very important and will be the measuring stick for the rest of fiscal year 2024. While the general consensus is that we are at or near the bottom for retail demand, as Finland Shift, and as interest rate pressures are forecasted to subside, data from the selling season will be the first sign of the trajectory. We are already seeing positive signs following our year end sales event for Malibu. This event, which we've been doing for the last decade and a half, saw Malibu and Axis performing better than we had expected.

Speaker 2

This further demonstrates the strength and resiliency of our premium suite of brands. As we reported on our last call, Fort Lauderdale was a fantastic show for Pursuit, setting all time records and was also a very good show for Cobalt exceeding last year. That position the focus of the calendar year 2024 shows that began the 1st week of January. The Atlanta Boat Show was the 1st weekend of January It is always an important guidepost. That show, which is run by our partner, One Water, through their Singleton Marine Group was a bright spot for Malibu and was well ahead of last year for Cobalt.

Speaker 2

Minneapolis was another good show, especially for Malibu and Axis. Last weekend, the New York Boat Show took place. This is both a freshwater and saltwater show. Looking back at the results over the previous 5 years, This was a very good show for MBI Brands. All brands were at the higher end of sales compared to the previous 5 years and Cobalt had an excellent show.

Speaker 2

Not only was the volume of sales for Cobalt very good, but the composition included a preponderance of the 30 foot and over cruisers that are new to the market. In summary, both shows have been decent. They have not been record breaking shows, but they have also not been bad shows. After the 1st 3 weeks, we were on a par with unit sales for all of our brands for 2023. Miami, of course, will be the bellwether show for our saltwater brands and we are placing a lot of focus on making Miami the best show possible.

Speaker 2

Looking ahead, We are optimistic about the outlook for the marine industry. Cost increases are stabilizing, creating a more favorable pricing environment as we look at fiscal year 2025. Overall, this coupled with the lower interest rate environment, which is predicted to occur, will relieve pressure on the entry level buyer and help drive a recovery in marine. Despite the macro conditions we are faced with today, we remain in an optimal position to deliver results. As we have said many times, improving the Q4 of 2020, we are confident even in a 25% to 30% down revenue environment, we can maintain 15% or above EBITDA margins.

Speaker 2

While we are projecting revenue will finish down more than 30% for the year, the relationship remains intact. This is due to our highly variable cost structure that flexes in line with market conditions. In addition, we have spent the past couple of months ensuring cost efficiencies throughout our organization. Based on our forecast, despite lower than anticipated revenue, we maintain our conviction that what we will continue to deliver operationally that we will continue to deliver operations with our strong margin profile. Our winning strategy and durable business model are what truly differentiates us.

Speaker 2

We will continue to stay nimble, advance our innovation and product development, leverage our vertical integration footprint, capitalize on market opportunities and enhance operational excellence initiatives to ensure we remain on top market conditions improve. I will now turn the call over to Bruce for further remarks on the quarter.

Speaker 1

Thanks, Jack. In the 2nd quarter, net sales decreased 37.7 percent to $211,100,000 and the unit volume decreased 43.7 percent to 13 73 units. Decrease in net sales was driven primarily by decreased unit volumes across all segments, resulting from soft retail demand and lower wholesale shipments. The volume impact was partially offset by a favorable model across all segments and inflation driven year over year price increases. The Malibu and Axis brands represented 44.1 unit sales were 606 boats, saltwater fishing represented 29.5% for 405 boats Cobalt made up the remaining 26.4 percent or 3 62 boats.

Speaker 1

Consolidated net sales per unit increased 10.7% to $153,732 per unit, primarily driven by inflation driven year over year price increases and favorable model mix within our Malibu, Saltwater Fishing and Cobalt segments. Gross profit decreased 50.5 percent to $37,500,000 and gross margin decreased 460 basis points to 17.8%, driven primarily by lower volume and an increased mix of the saltwater fishing segment and increased dealer flooring program costs. Cost of sales decreased by 34% in a period when revenue decreased by 37.7 percent demonstrating our operational excellence and highly variable cost structure. Selling and marketing expense decreased by 9.5 percent to $5,600,000 Decrease was driven primarily by lower marketing spending. As a percentage of sales, selling and marketing expense increased 90 basis points to 2.7 percent of sales due to lower volume.

Speaker 1

General and administrative expenses decreased 19.0 percent to $15,400,000 The decrease was driven primarily by lower personnel related expenses. As a percentage of sales, G and A expenses increased 170 basis points to 7.3% sales due to lower volume. In total, Q2 operating expenses declined by $4,200,000 as we made necessary store cost structure while preserving our capacity to innovate. Net income for the quarter decreased 72.1% to $10,100,000 Adjusted EBITDA for the quarter decreased 60.2% to $22,900,000 adjusted EBITDA margin decreased to 10.9% from 17.0%. Non GAAP adjusted fully distributed net income per share decreased to 69.4% to $0.57 per share.

Speaker 1

This is calculated using a normalized C Corp tax rate of 27.8 and a fully distributed weighted average share count of approximately 21,100,000 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. Turning our attention to the balance sheet. We invested $12,600,000 in CapEx in the quarter driven by investment in our new Roan County Tennessee manufacturing facility. We paid down $30,000,000 of debt bringing our outstanding debt balance down to $35,000,000 at quarter's end.

Speaker 1

And we repurchased 226,100 shares or $9,900,000 of stock in the quarter. Even with these actions and in a challenging operating environment, we increased our cash balance by $10,300,000 in the quarter, demonstrating the strong cash generation potential of our business. As Jack mentioned earlier, the retail environment continues to be challenged by broader uncertainty and the prolonged interest rate environment. As a consequence, dealers are looking to bring their inventories down Pre COVID levels were lower. While inventory started to recede in the quarter, we expect more time will be needed for channel inventories to fully normalize.

Speaker 1

We now expect the lower sales levels of wholesale shipments to persist through the end of the fiscal year. With this in mind, we are revising our fiscal 2024 outlook. We anticipate a year over year decline in annual net sales ranging from a mid to high 30s percentage point decrease. We expect Q3 revenues to be down mid-40s percentage points. Consolidated adjusted EBITDA margin is expected to decline 800 to 900 basis points for the year with Q3 slightly below Q2 on a margin percentage basis.

Speaker 1

Before opening up the call for questions, I want to say how excited I am be joining Malibu. Despite our near term challenges, I'm excited about the potential for growth of our company. We have market leading brands, the best operations team in the industry, a strong balance sheet and many avenues for growth. I look forward to partnering with Jack and the rest of the management team

Speaker 2

to

Speaker 1

drive the company forward and create long term value. With that, I'd like to open up the call for questions.

Operator

And our first question this morning comes from Craig Kennison from Baird. Please go ahead with your question.

Speaker 3

Hey, good morning. Thanks for taking my question. I wanted to ask about dealer inventory. Is there a way to frame, I guess the number of excess boats you see in the channel that you'd like to see come out?

Speaker 2

Craig, we always talk about it, about it in terms of weeks on hand of inventory, not necessarily units, it's hard to get down to that level. But from a weeks on hand basis, I think The overall industry and we're seeing the same thing is around 5 weeks too much on hand inventory. And there's a little bit dependent upon the segment, but that's a

Speaker 3

Okay, thanks. And then you had mentioned ASPs, you've got some product coming out at some sharper prices. I'm wondering if you could help us think through your ASP by segment going forward given that lower price product and some of the promotions that you also have in place?

Speaker 2

Yes. There's a little bit of a balancing act. What we're missing is that typical market that we've seen in the past, which is going to be the lower Link size, less feature appointed segment, they're sitting on the sidelines. And so that's been missing and it's had a positive impact on our ASVs. What I would tell you is that on the Malibu Active side with the addition of that R series, the objective is to bring that consumer back in the market.

Speaker 2

I don't see a downward push from that. I we're back in the market. I don't see a downward push from that on ASPs. What we are seeing is that premium buyer being out there and largely our ASPs are maintaining at about the same level, perhaps Little bit higher.

Speaker 4

Got it.

Operator

Thank you. Our next question comes from Eric Wold from B. Riley Securities. Please go ahead with your question.

Speaker 5

Thanks and good morning both of you. So Jack, you mentioned the weeks on hand, about 5 weeks on hand too much. Is that was that specific To Malibu and then what are you seeing with other peers in this space that may be pressuring Demand at your dealers, are you seeing other competitors kind of leaning into price a little bit further, given where their inventories are and how is that playing in your dealer actions?

Speaker 2

Yes. We have seen that especially during the fall. I think if we look across the entire landscape In marine, OEMs and their dealers had too much channel inventory on hand. So there's been a promotional environment for They're locked into a promotional environment. And I think that's going to continue.

Speaker 2

Obviously, when you have Competitors that are also trying to lower inventories is a hand combat type of environment at the dealer level and we have seen that. We would expect to continue to see that.

Speaker 5

Thanks. And then just last question. I know it's probably a little early, But with the expectation that we could see rates come down in 2024, what are your dealers hearing from potential buyers? Are they likely willing to get ahead of the rate declines by buying for this boating season, obviously adjusting Their loans later or do you think they're more likely to wait until actually the lower rates become reality before pulling the trigger?

Speaker 2

No. I think that's what we're seeing in the boat show, frankly. You think about the entire retail environment, it has been soft More promotionally, I think dealers have had some success. What we're seeing today is the dealers, at least in the boat show, Are coming back willing to buy. Our dealers, I believe, are doing a great job from an F and I point of view of trying to get the lowest interest rate Numerous resources that they may have.

Speaker 2

As we look at the environment, if you depending on the banks and the various As you talked to, I think generally speaking, the expectation for 2024 is 2 to 3 rate decreases, 100 basis points to 125 basis points over the course of the entire year, primarily falling in the second half of the calendar year. And The consumer is not waiting for rates to go back to 2%. I think there's a realization they're not going to be there anytime in the near future. But there's a psychological advantage to that 1st rate decrease. And then you have a couple more on top of that.

Speaker 2

I think that It helps the market come back and it will be come back quickly.

Operator

Perfect. Thanks, Jack.

Speaker 2

Thank you.

Operator

Our next question comes from Joe Altobello from Raymond James. Please go ahead with your question.

Speaker 4

Thanks. Hey, guys. Good morning. A couple of questions on the guidance. I guess first, if I look at your EBITDA and revenue guidance, it implies an EBITDA margin this year of around 12% give or take, which is below the margin that you delivered in the June 2020 quarter On a similar unit decline when production was shut down for several weeks, why has your cost structure Shifted a little bit more fixed versus variable.

Speaker 2

It really hasn't, John. I mean, if we did the comparison again Q4 of 2020, there was a difference there from a cost perspective in that we shut our plants down for 6 weeks. And so we are going to continue to invest. We're going to continue to run the company and prepare for exiting the downturn. So shutting down completely.

Speaker 2

And that's what I would tell you had a significant impact on it being different than that.

Speaker 4

Okay. Because I'm looking at your slide and it looks like the percentage of costs that are variable went from 82% last year to call it 77% this year. So it's about a 500 basis point decline.

Speaker 2

I mean, I think that's fair, but I think that's just continuing operations reality.

Speaker 4

Okay. And then maybe in the second half, the margin decline you're looking at, how much of that is coming from higher promotions and discounting?

Speaker 2

Yes. The promotional activity is largely at that bigger level. What we said, we don't expect it to change in the second half. The impact from an MBI perspective is under 100 basis points. So we will supplement and we'll help our dealers from a promotional aspect, but largely evolved on them.

Speaker 2

And they're coming off of a 2 to 3 year environment where The margins were extremely high and so the pencils have sharpened.

Speaker 4

Okay, great. Thank you.

Operator

Our next question comes from Jamie Katz from Morningstar. Please go ahead with your question.

Speaker 6

Hi, thanks. Good morning. I actually want to carry on with that line of questioning on the flexible cost structure because not only does the EBITDA margin looks bad maybe relative to 2020, but I don't think the implied EBITDA margin has been this low and maybe over a decade. So can you just reconcile maybe Was it the magnitude of the change? Is it that the conditions declined too fast to react?

Speaker 6

Or are there other sort of one time items like investing in factories that are really leading to that, adjusted EBITDA margin compression because saying that there is flexible cost structure and then generating EBITDA margins where they're going to be is sort of in conflict a little bit. Thanks.

Operator

Yes. I think a couple

Speaker 2

of things you pointed at, Jamie, are accurate. You did see a change very, very rapidly of Moving from a high wholesale production environment to a low general inventories, flipped very quickly. The softness of retail occurred. But one thing and I'll let Bruce chime in here is that we are hyper focused. I mean, if you look at what our goals are for the rest of this year, channel inventories have to come in line.

Speaker 2

And so we have taken production down More significantly than more probably anybody could have ascertained or predicted. And we are going to get inventory levels where they need to be to support our dealers. And honestly, I think dealers advertise right now, they don't want it to be historic channel inventory. They would like to be at least we're a little bit lower than general inventory historically.

Speaker 1

Yes. And from an EBITDA margin perspective, It's not really a complicated story. It really is fixed cost deleverage coming down. We are still seeing year to date expecting to see for the remainder of the year our variable costs structure above the gross margin line to be in that 85% to 90% range that we talked about previously. So it really is about the magnitude of the revenue guidance James that's driving the EBITDA margin decline.

Speaker 2

Yes. One other thing that I'll point out too, Jamie, I think it's really important to understand. We have a long, long history of driving the margins with Malibu and the differential between the Malibu entity, Malibu Axis Margins and COBOL, Pursuit, NVG, there are 100 of basis points of difference and now you've seen a flip that Malibu is more impacted. I think we're down well under 50% now as a part of the total. And so that impact from a margin aspect is going to be greater than if it were even across the board, if that makes sense to you.

Speaker 2

Sure.

Speaker 6

Thank you. That's really helpful. And then as you think about Cleaning up the inventory channel, assuming that the other OEMs are behaving rationally, Does that imply and I know this is early that like fiscal 2025 would go back to some sort of normal growth algorithm and it would be much easier to recapture some of that operating leverage? Or Is there some transitory sort of slope back to normal to get back to where we were?

Operator

No, I

Speaker 2

think you nailed it. I think you nailed it. That's exactly right. And that's what we're positioning for. Even what I'm seeing is people are being very possible with channel inventories and that's what we're hearing from our dealers.

Speaker 2

I think that will continue. But even absent that, We are positioning ourselves so that we come out of this and we can recapture that growth much quicker than anyone else if they're not being as responsible as we are. But We have to get the challenge produced out.

Speaker 6

Okay. Thank you.

Operator

Our next question comes from Brandon Rolle from D. A. Davidson. Please go ahead with your question.

Speaker 2

Good morning. Thank you for taking my question. Just on your updated guidance, what gives you confidence you fully kind of reset the bar for the remainder of the year? And is there any upside being baked in for the last two quarters of the year? Or would you say this is a conservative guide?

Speaker 1

Would tell

Speaker 2

you it's a conservative guide. We had as you can imagine, we've had a lot of discussion on it. There is not any upside baked into the second half of the year for us. So that would be welcome certainly, but there's nothing to say there'll be a We believe that this, as we say, is conservative in that if we see some positive tailwinds, that it will be beneficial. Great.

Speaker 2

Thank you.

Speaker 5

Thank you.

Operator

And our next question comes from Noah Zatzkin from KeyBanc Capital Markets. Please go ahead with your question. Hi, thanks for taking my question.

Speaker 1

Most of it might have been asked and answered, but just wondering, just in terms of capital deployment, particularly in terms of maybe greenfielding or acquiring a pontoon brand. Has anything kind of changed there and just maybe any updates around that process? Well, I'll maybe let Jack comment on the pontoon. But from a capital allocation priority standpoint, our capital allocation priorities haven't changed. I mean, first, we look upon organic growth initiatives such as the Roan County, Tennessee facility.

Speaker 1

We have an active share buyback program And we're always on the lookout for M and A opportunities. And as you can understand, we are not able to dictate the timing of when those opportunities present themselves. But our strong balance sheet gives us the opportunity to move quickly when they do.

Speaker 2

Yes. Brandon commenting on pontoon, I guess M and A in general, Yes, pontoon has been something we've talked about. I've been consistent we've been consistent on this. We would much rather make an acquisition Then greenfield, but that greenfield is absolutely an option for us. Expanding it a little bit is The market with what we're dealing with, I think that prompts potential sellers to come to the market.

Speaker 2

They don't want to go through this. And so we're seeing more activity and it's across the board. So I would tell you that from an M and A point of view, we are paying a lot of attention not only to buy into it, but we're paying a lot of attention to the outboard, saltwater outboard market and categories like that, that we're not in today that we can get into.

Operator

Thank you. And our next question comes from Fred Wightman from Wolfe Research. Please go ahead with your question.

Speaker 7

Hey guys, good morning. I just wanted to come back to the mix question. I mean, as it was Pointed out, I mean, the Malibu access as a percentage of mix was down almost 10 points. How do you sort of see that trending in the back half of the fiscal year just given some of the capacity that you guys have coming online for the other brands? That'd be helpful.

Speaker 2

We see it probably trending down a little bit more What I would tell you that is that Cobalt has been surprisingly strong for us. I think it continues to be. We saw it, as I mentioned in the New York boat show again. And so I think from a freshwater perspective, they're going continue to capture more of the brand share and then we expect saltwater to be a little bit stronger than the Malibu Active segment. That makes sense.

Speaker 2

And then

Speaker 7

just a clarification, there was comment about EBITDA margins for 3Q being slightly below 2Q, was that an absolute comment? So the actual reported EBITDA margin will be slightly lower than 2Q or was it a year over year comment?

Speaker 1

It was versus Q2, so slightly lower than Q2.

Operator

Perfect. Thank you. And ladies and gentlemen, at this time, we'll be ending today's question and answer session. I'd like to turn the floor back over to Jack for any closing remarks.

Speaker 2

Thank you very much. Despite the softening retail demand and being in our slow season, we to see success at our year end sales event and the boat show is a testament to our durability of the business and a dominant position in every market that we serve. While channel inventory levels are higher than we want to see, we expect to see downward movement as we get into the selling season and normalize Over the course of the next 6 months, we are focused on driving channel inventories to sort norms and we'll continue to adjust production, up or down accordingly to make that occur. Our strategic planning, operational excellence and supply chain management continued to support our margin and our vertical integration has enabled us to remain resilient. Despite the challenges, we remain optimistic as we look at the back half of this year, We're positioned to grow and recover as retail demand recovers.

Speaker 2

We relish this environment. This is when we fine tune our model We positioned for a strong recovery. We did it back in 2,009 through 2011, not only driving recovery, but capturing market share and exiting the downturn even As I always do, I want to thank you for your support and for joining us today. Have a great day.

Operator

Ladies and gentlemen, this concludes today's conference call. We thank you for participating. You may now disconnect your lines.

Powered by Quartr
Earnings Conference Call
Malibu Boats Q2 2024
00:00 / 00:00