Malibu Boats, Inc. (NASDAQ:MBUU) Q4 2023 Earnings Call Transcript

Malibu Boats, Inc. (NASDAQ:MBUU) Q4 2023 Earnings Call Transcript August 29, 2023

Malibu Boats, Inc. beats earnings expectations. Reported EPS is $2.98, expectations were $2.33.

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

David Black: Thank you, and good morning, everyone. On the call, Jack will provide commentary on the business and I will discuss our fiscal fourth quarter and full year 2023 financials. We will then open the call up for questions. A press release covering the Company’s fiscal fourth quarter and full year 2023 results was issued today and a copy of that press release can be found on the Investor Relations Web site on our 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 the 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 measures are included in our earnings release. I will now turn the call over to Jack Springer.

Jack Springer: Thank you, David. And thank you all for joining the call. Fiscal year 2023 was another impressive year for Malibu, which included fourth quarter and full year results that exceeded expectations despite an increasingly challenging environment. Our unique operating model, vertical integration capabilities and a world-class leadership continue to shine through, allowing us to take a leading position in the marine industry no matter what the market condition we find ourselves in. For fiscal year 2023, net sales increased 14% to a record $1.4 billion, gross margin remained strong at 25% and adjusted EBITDA grew 15% to a record $284 million, while adjusted EBITDA margin increased to 20.5%. ASPs across all brands continue to be extremely strong, driven by Cobalt and Pursuit.

During the fiscal year, we made great strides to match wholesale production to retail demand, which we believe is important and responsible for our investors and our dealers. The first three quarters of the year saw us matching our production to a deficient channel inventory environment to reach more normalized channel inventory levels. The normalization occurred faster than anticipated and in the fourth quarter, we took production down in our freshwater brands to match where channel inventories were at that point. We continue to monitor retail sales and channel inventories closely and are prepared to make adjustments quickly. As we have said repeatedly over the last several quarters, we believe the supply chain would normalize by the end of fiscal 2023 or the beginning of fiscal 2024.

We can now officially say that these challenges have largely abated. While occasional pockets of weakness still exist as a normal course of doing business, we remain committed to working with our supply chain partners to ensure normalized supply going forward. While the retail environment remains uncertain, we are leveraging our culture of operational excellence to successfully navigate any lingering supply chain headwinds to provide the highest quality boats on market. The supply chain area that has not corrected is [pricing] from suppliers. We were surprised to see the increases this spring and it is an area that we will continue to work on with our suppliers. With a more normalized supply chain, OEM production capabilities have also normalized and the retail environment is now the largest contributing factor to our channel inventories’ faster than anticipated recovery.

In general, our freshwater segments are at pre-COVID levels or even higher in some cases. Conversely, saltwater channel inventories are still slightly below the pre-COVID inventory levels but within five weeks on hand. We are seeing that nearly all manufacturers have had to cut back production to some extent due to weakening demand consistent across the broader marine industry, which resulted in a softer fourth quarter from a retail perspective. This is primarily due to dealers expressing caution in taking on new inventory amid rising interest rates, more normalized channels, recessionary concerns and weather driven order delays. Regarding interest rates, dealers have faced the effect of higher inventory levels on their lots, compounded with paying higher interest rates on that inventory which has driven their cost higher and made the more passive about carrying higher levels of inventory.

On the consumer side, we are seeing through the customers’ delayed bulk purchases in what historically has been a strong season for them to buy. For example, our freshwater segment, particularly in the Ski and Wake category, experienced weakness as a result of unseasonable weather conditions across the country through June. The cool rainy spring across the country, along with drought conditions in certain regions of Texas, which is the number one state for wakeboats, delayed the customers’ appetite to purchase. However, despite the slow start to the selling season, we have continued to gain share across the board in all of our brands. Year-to-date, through July, Malibu and Axis has gained 320 basis points of share with Malibu and Axis both having the largest share gains by large margin over competitors.

The trailing 12 month share has increased to 180 basis points again with Malibu and Axis being the far and away leaders of share gains. The January through July market share has been exceptionally strong and in some months exceeding 35% for our Malibu and Axis brands. Within Cobalt, in our sterndrive segment, we have gained 180 basis points of share over the trailing 12 month period. And year-to-date, our sterndrive share is up 240 basis points, topping 35% and increasing our share lead over the nearest competitor nearly 1700 basis points in the 23 foot to 36 foot segment where we play. In the saltwater segment, we’re gaining share in all of our brands across our competitive segments. Year-to-date, Pursuit has gained 270 basis points of share against its competitive segment and Cobia has gained 80 basis points of share.

Pathfinder continues to perform extremely well, extending the share lead in its competitive segment. The trailing 12 months and the year-to-date share gain is 300 basis points for Pathfinder. Fiscal year 2023 has been very strong for all of our brands and picking up market share as we continue to stand out with purchasers proving that we are winning the competitive battle with great products, better dealers and a much better value proposition. This also goes to show that our customers remain fiercely loyal while we are being successful at converting buyers to our brands. With our longstanding experience successfully navigating through challenging market cycles, we are confident in our operational capabilities coupled with our ability to execute in any environment, all the while continuing to push the pace of innovation.

New products are the life blood of our brands and we continue to rev our engines and push full throttle when it comes to delivering premium products for all MBI brands. Our actions have allowed us to maintain our dominant position in every market we serve and we continue to invest in products that make us the strongest player in the marine industry. Our model year 2024 lineup only raises the bar further on the innovation our customers expect from us. To that end, we are extremely excited to announce of exceptional 2024 product lineup. For Malibu and Axis, we are again, once again, introducing four new boats, which is far more than any other competitor. This includes the all new 23 LSV, the best selling towboat of all time, the new and highly anticipated M242, which takes our M Series to the next level of premium features and performance.

For Axis, we have our new A245, which is one of the best selling Axis models. With these new additions, we believe the Malibu and Axis brands will continue to perform strongly and build upon their leading position. Turning to Cobalt. We are replacing our most dated series of boats with an all new Cobalt sport series in the 22 to 23 foot segment. This will include both two sterndrive boats and a new surfboat featuring Malibu’s proprietary Surf Gate, which completely transformed the surf industry over the last decade, first in wakeboats and then in the sterndrive segment. We are also introducing a new R33 surfboat, our largest surfboat ever at 33 feet, which will feature Surf Gate and all of our proprietary technology. Additionally, the rollout of the Monsoon engine to Cobalt boats has begun and we will scale this opportunity over the next few years.

At Pursuit, we are introducing the brand new OS 405, the smaller brother to the highly successful OS 445, as well as a new center console that will be introduced in the first quarter of fiscal year 2024. Paired with a successful build out of our 100,000 square foot tooling design center on Pursuit property, which is part of our multi-year plan to bring product tooling in house, we are extremely optimistic and excited about the future of the Pursuit brand. For Maverick Boat company, we’re developing much needed new products for Cobia and Pathfinder. Between the two brands, we will introduce four new models, which will bring the portfolio more current and compel buyers with exciting new features while retaining the attributes that have made Pathfinder and Cobia top of the segment performers.

As we look ahead, the outlook remains mixed, driven largely by dealer concerns with retail and channel inventories reaching adequate inventory levels. It is important to remember that for the last three years we have been building every boat we possibly could due to the COVID generated demand and the supply chain issues everyone encountered. Now we are very focused on matching our supply with the retail demand environment. We currently expect fiscal year 2024 to be down versus fiscal year 2023. In 2023, channel inventories were still too low and production was in full throttle building boats to return back to where inventories have historically been. We also expect dealer headwinds throughout fiscal year 2024. Dealers are currently displaying a lack of confidence due to delayed retail and interest rates that are more than double for dealers and consumers versus two to three years ago.

Based on what we are currently seeing, we expect wholesale demand to be decreased across all of our brands. David will discuss this as part of our full year outlook in a few minutes. As we have stated, dealers are concerned about the retail environment. However, I want to be very clear that this is not 2009 when the customer disappeared. What we have been able to confirm is the retail customer is still there and willing to purchase. In September, we had planned to have a Labor Day promotion for Malibu and Asix to keep channel inventories in check and assist dealers in moving 2023 product. We decided to move this event up to July, beginning the 4th of July weekend. Despite seeing lower retail in May and June, we were astounded at the positive results of this event.

Unit sales were 52% more than what we had projected. This led to our warranty registrations being the highest in the last six years except for 2020 when anything that had an engine sold. Registrations were 151 units ahead of 2019, which we have been benchmarking against for a while. This convinces us the customers are out there. We and our dealers have to be creative and reach them. Overall, our teams’ hard work, commitment to excellence and agility in the midst of an ongoing challenging environment has delivered superior results. As we embark in fiscal year 2024, we believe we will only further our track record of success. Our unbeatable culture of operational excellence combined with our loyal customer base, introduction of our new model year 2024 product and vertical integration efforts will allow us to successfully navigate any choppy waters we face and extend our industry leading position.

This will undoubtedly leave us extremely well positioned to drive substantial growth and profitability, all the while delivering long term value for our shareholders in fiscal year 2024 and beyond. I will now turn the call over to David for further remarks on the quarter.

David Black: Thanks, Jack. In the fourth quarter, net sales increased 5.4% to $372.3 million and unit volumes decreased 1.8% to 2,550 boats. The increase in net sales was driven primarily by increased unit volumes in our saltwater fishing segment and a favorable model mix across all segments, partially offset by lower unit volumes in the Malibu and Cobalt segments and by increased dealer flooring program costs, resulting from higher interest rates and increased inventory levels. The Malibu and Axis brands represented approximately 49.1% of unit sales or 1,253 boats. Cobalt represented 22.4% or 571 boats and saltwater fishing represented the remaining 28.5% or 726 boats. Consolidated net sales per unit increased 7.3% to approximately 146,000, primarily driven by year-over-year price increases and favorable model mix, partially offset by increased dealer flooring costs.

Gross profit increased 14.3% to $102.5 million and gross margin was 27.5%. This compares to a gross margin of 25.4% in the prior year. Selling and marketing expenses increased 1.8% to $5.4 million in the fourth quarter. As a percentage of sales, selling and marketing expenses were flat year-over-year at 1.5%. General and administrative expenses increased 587.3% or $100.8 million. The increase was driven primarily by settlement of product liability cases for $100 million. The remaining increase in general and administrative expenses was driven by an increase in compensation and personnel related expenses. As a percentage of sales, G&A expenses excluding amortization was 31.7%. Net income for the quarter decreased 136.3% to a loss of $18 million.

Adjusted EBITDA for the quarter increased 21.9% to $90.1 million and adjusted EBITDA margin increased 330 basis points to 24.2%. Non-GAAP adjusted fully distributed net income per share increased 22.6% to $2.98 per share. This is calculated utilizing a 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 tables in our earnings release. Our performance in fiscal year 2023 reaffirmed our role as industry trailblazers, emphasizing our dedication to innovation and operational efficiency. We focused on navigating a volatile retail environment but we are confident in the foundation we have built operationally along with the strength of our premium portfolio and the agility of our entire team.

Our premium boats continue to be highly sought after by consumers and our 2024 model year introduction will continue to push the limits and strengthen our market leading position. This combined with our previously outlined plans to increase our manufacturing capacity, expand our vertical integration footprint, grow our distribution network and bring key capabilities in-house, leaves us extremely well positioned to drive market share gains as we enter fiscal year 2024 and beyond. Looking at full year numbers, net sales increased 14.3% to a record $1.39 billion and unit volumes increased 6.6% to 9,863 boats. Consolidated net sales per unit increased 7.2% to $140,765, driven by increased sales of new, more expensive models, high optional feature revenues and inflationary year-over-year price increases, partially offset by increased dealer flooring program costs.

Gross profit increased 13.3% to $351.3 million, net income for the year decreased 34% to $107.9 million and adjusted EBITDA increased 15.2% to $284 million for the full year. For the full year non-GAAP adjusted fully distributed earnings per share increased 16.2% to $9.19 per share. Echoing Jack’s sentiments, while the outlook for fiscal year 2024 presents some uncertainties, our unmatched innovation, product quality and team agility position us at the forefront of the marine industry. Despite this uncertainty, we will continue to showcase our best-in-class operational capabilities, matching wholesale to retail demand as we launch our new model year lineup. Highlighted by our unmatched innovation, quality and feature-rich boats, we believe we are positioned extraordinarily well within the marine industry as we continue to gain share and deliver for our customers.

Based on our current operating plan, our expectations for fiscal year 2024 are as follows. We anticipate a year-over-year decline in net sales ranging from mid to high teens percentage. In terms of cadence, we anticipate a first half revenue decline approaching 20%. Consolidated adjusted EBITDA margin is expected to be down 300 to 400 basis points year-over-year with first quarter headwinds of double the annual rates. In closing, fiscal year 2023 was another momentous year for Malibu. We continue to navigate retail uncertainty in an evolving operating environment while delivering solid quarterly and full year results, proving that no matter the challenge, we have the visionary leadership, tried and trued strategy and unmatched production capabilities to push the throttle forward in the year ahead.

Our differentiated best-in-class portfolio continues to perform at the top of the marine industry and our fiscal year 2024 lineup will only drive up further market share growth and profitability in each of the markets we serve. Overall, we remain extremely confident in our ability to extend our leading position and deliver long term value for our customers and shareholders. With that, I’d like to open the call up for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question today comes from Michael Swartz from Truist Securities.

Michael Swartz: Maybe just to start on retail demand. Obviously, we’ve all seen the numbers year-to-date and obviously, the Ski Wake or towboat segment has been one of the softer areas within the industry. So maybe Jack, I guess, what do you attribute that to, is that just the impact of pricing over the past couple of years or is there something something more to that? And I guess any commentary on what you see maybe in the retail trends over the past maybe four to six weeks?

Jack Springer: Yes, Mike, I think there are several elements to this. One would be pricing, although, I wouldn’t say that pricing in the Ski Wake segment has been outpacing other segments. What I think that we’re seeing a little bit more than anything is maybe people are waiting a little bit longer to trade in their boat and buy their boat. Some other factors that I believe certainly exist is you do have some segment of that, especially on the active side. The consumer is dependent upon interest rates and it’s become very apparent that interest rates are an issue for our dealers as well as for consumers in certain markets. The third thing I would point to is weather. And although we hate to point to weather, the simple fact of the matter is that in May and June, it was a cooler spring.

And then one thing that you haven’t heard a lot about and no one has really talked about it, is there is a drought going on in certain sections of Texas and that being the number one Ski Wake segment, I think, is having an impact. In terms of what we’ve seen over the last six or eight weeks and I alluded to this in the remarks, but a little bit of the concern is always, hey, are we dealing with a scenario where the customer has disappeared. And with the program that we ran over the 4th of July and for the month of July, that showed us that they’re not. To have warranty registrations 156 more than 2019 was pretty staggering for us. And so I think more than anything that just showed us we have to figure out the way in all of our brands, not just Ski Wake to reach that consumer and entice them to buy.

Michael Swartz: And then just on the guidance, the 300 to 400 basis points in EBITDA margin decline year-over-year, I guess, it was a little more than I had anticipated. So maybe walk through that range that you gave us. How much of that is volume related versus maybe dealer support versus presumably, I would anticipate that saltwater outpaces the rest of the business. I guess, how much of a mix drag would that be, is that the correct way of looking at it?

Jack Springer: No, you’re hitting on the right points. I would tell you that the great majority of it is volume driven. And the volume is going to come out of all the brands, not evenly, but all the brands are going to be down. The supporting of the dealers, I don’t think that’s going to be a huge marginal item, certainly less than 75 basis points and probably around 50 basis points. So it’s not going to have that much of an impact. It’s going to be mainly volume related. The thing that I think is important to understand is we’ve been preaching for five years now that in a down environment, in a 30% down environment, we can still be above 15% of margins. And even though this may look a little bit less than what you had anticipated, looking at 18% to 20% down type of environment and still maintaining an above 17% EBITDA margin, just continues to drive home that we can be extremely profitable even in a prolonged downturn.

Operator: Our next question comes from Jamie Katz from Morningstar.