Malibu Boats, Inc.

Good morning and welcome to Malibu Boats conference call to discuss first quarter fiscal year 2024 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. 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, Mr. David Black, Interim Chief Financial Officer, and Mr. Richie Anderson, Chief Operating Officer. I will now turn the call over to Mr. Black 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 2024 financials. We will then open up the call for questions. The press release covering the company's fiscal first quarter 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, and 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.

Thank you, David, and thank you all for joining the call. Malibu both delivered solid first quarter fiscal results that surpassed our expectations despite a rapidly evolving operating environment. For the first fiscal quarter, net sales decreased 15% to $255.8 million compared to the prior year. Net income decreased 42% to $20.8 million, while adjusted EBITDA fell 31% to $39 million. Gross margins decreased 250 basis points to 22%, and adjusted EBITDA margins decreased by 370 basis points to 15%. In 12 short months, we went from unprecedented demand and navigating supply chain constraints while shipping every boat possible to to an incredibly volatile environment flush with rising interest rates and decreasing demand levels. Our team has taken this fluid environment in stride. However, over the last several months, the retail market notably deteriorated, and as that happened, we continued to showcase our durability as a business and prove our dominant position in every market we serve. Channel inventories across our brands are now back to or above pre-COVID levels, and we have worked diligently to match wholesale supply to retail demand by quickly aligning production levels throughout the quarter, which accounts for the decreases versus last year. While the softer retail demand levels are being driven by macro factors, they are being exacerbated by the return to a more normalized seasonality. In addition, the sense of urgency from customers to buy a boat has largely disappeared. The silver lining is that across all of our brands, those customers that are looking to buy are continuing to gravitate toward larger, more feature-rich boats, supporting higher ASPs. Importantly, these sales are often nearly all cash. Those customers utilizing significant financing when buying a boat are sitting on the sidelines in this more challenging interest rate environment. This is very evident in recent metrics. Historically, Malibu, Cobalt, and Pursuit consumers have averaged about 50% in those that pay cash for 75% or more of their purchases of those brands. Through October, 65% of Malibu customers, 59% of Cobalt customers, and 55% of Pursuit customers are paying cash for at least 75% of their boat purchase. Tobia, which averages about 40% of the customer base paying 75% or more of their boat purchase in cash, has come in at 57% in the last four months. Access was a surprise to me. Historically, that average for consumers paying cash for 75% or more of their purchases was has averaged 25 to 30%. Now, Axis is averaging 45% of buyers paying in cash for 75% or more of their boat purchase. There is little doubt in our minds that the person buying on credit and buying next-tier boats in terms of brand recognition and quality are remaining on the sidelines. As we discussed last quarter, we have continued our aggressive introduction of new product into the market. In Q1, we have introduced the four new Malibu and Axis boats discussed in August, and we have also introduced four new Cobalt boats that are shipping to dealers now. One of the Cobalt new boats is the new R33 Surf, the largest surf boat ever designed and introduced by an MBI brand. The R33 Surf will utilize SurfGate and all of our surf technology, making it the largest, most incredible wave-generating machine over 30 feet. This will continue to capture the surf craze and drive sales. Dealers are currently standing in line to get their first one. At Pursuit, we have introduced the OS405, and it was on display for the first time at Fort Lauderdale, generating rave reviews, but more importantly, in a fantastic success of a boat show, it generated orders. As we have seen historically, all of this new product will lessen the impact of any downturn we are in. Speaking of Fort Lauderdale, we have spectacular results that were surprising in this environment. Pursuit was exceptionally strong. Last year, Pursuit set a record for sales at Fort Lauderdale at just over 30 units sold. This year, we blew that record away. Pursuit saw sales of 49 units, and undoubtedly we expect to close a few more this week. The metrics behind the sales were interesting and provides credibility to what we are seeing and have said in the past and on this call. Large premium boats led the way, with 34 units sold being over 30 feet in length. and 11 units being over 40 feet in length. This is one of the highest concentrations of larger boats I remember seeing for pursuit. Another key indicator of the premium focus was the richness of the ASP. Our ASP on the boat sold was nearly $520,000 versus a normal year-round ASP of $325,000 to $350,000. Tobias cells, which were right on top of last year's record cells, also bore out the larger premium nature of the show. Almost 80% of the boats sold were over 30 feet in length and carried an ASP of over $300,000, which is nearly $200,000 more than normal ASP year-round. Fort Lauderdale was a surprisingly strong show for us, and although only one data point provides a positive vibe in the saltwater environment. Market share for all of our brands continues to be a very positive story. On a 12-month basis, Malibu and Axis is up 300 basis points in share. Cobalt's Stern Drive share is up 280 basis points. Pursuit has gained 205 basis points of share. Pathfinder has gained 210 basis points of share to its credit, and Kobe is slightly up at 10 basis points of share gain. We fully expect this to continue throughout a downturn. A monumental strength of MBI, and one that I believe is greatly overlooked, is our variable cost structure and the ability to generate free cash flow. There are very few companies that have the capability we do in achieving this. Since 2017, every year our variability of cost of goods sold has ranged from the high 80% range to 90%, and in fiscal year quarter one, it was no exception coming in at 88.4% variable cost down to the gross margin line. This leads to very strong cash generation. In 2023, our free cash flow was nearly $130 million, and our free cash flow conversion for the last three years has averaged 60%. This gives us extreme confidence that we can be very profitable and capable of investing in strategic opportunities at any point in time and in any cycle. We have been through these cycles before, and each time we have emerged stronger. Our operational capabilities are unmatched, and our innovation continues to set us apart. An important element to our playbook is successfully matching production to retail demand, not only to protect our margins, but also to protect our dealers and make sure they stay healthy. Malibu's ability to remain agile and flexible has always been and continues to be a key differentiator for Malibu. I will say it again. Our cost structure is 80% to 90% variable, which allows us to execute quickly and and outperform. Our vertical integration allows us to control key components of our boats from concept through delivery to the customer. Our operational excellence makes us nimble and capable of strong performance in any environment. While channel inventories, including saltwater, normalize much faster than anyone anticipated, our nimbleness to slow down our build schedule has helped our dealers to have healthy inventories, enabling them to sell through model year 2023 inventory more quickly. We are certainly laser-focused on inventory levels and believe most marine OEMs are as well, which will ultimately lead to a quicker recovery once demand increases. Looking ahead, the retail environment continues to weaken, driven largely by dealer concerns around the broader economic and interest rate environment, and as a result, they are being extremely cautious around inventory levels. Further, we had expected to see improvement in the second half of the year. but based on what we are seeing today, that is not likely to be the case. Instead, we expect wholesale demand across our brands to remain pressured. As such, we are revising our fiscal year 2024 outlook and now expect sales to be down from a high teens to low 20s percentage versus fiscal year 2023. While it is a challenging environment, my confidence in this team, our dealers, and the strength of our brands is unwavering. I can't say it enough. We have managed through challenging times before and we will do it again. In these moments, the companies that can leverage a strong balance sheet and continue to invest in the future while adeptly and strategically managing the business are the ones that emerge stronger than ever. And that has and will be Malibu. We have a strong track of outperforming the industry and everything we have done from an operational excellence and vertical integration standpoint will protect margins even in a downed environment. A great example of this is our rollout of the monsoon engine for Cobalt, which we will continue to scale over the next few years. Additionally, we are very excited about the build-out of our Cobalt operations in Roan County, which will increase our volume capability and efficiencies for this brand. We are confident we will begin producing small boats in this facility in the first quarter of calendar year 2024. We have our eye on the prize with a winning strategy. We will stay nimble, advance our innovation and product development, leverage our vertical integration footprint, and enhance operational excellence initiatives to ensure we remain on top as market conditions improve. I will now turn the call over to David for further remarks on the quarter. Thanks, Jack.

In the first quarter, net sales decreased 15.3% to 255.8 million, and unit volume decreased 24.1% to 1,698 units. The decrease in net sales was driven primarily by decreased unit volumes across all segments, increased flooring program costs across all segments, resulting from higher interest rates and increased inventory levels, partially offset by a favorable model mix across all segments, and inflation-driven year-over-year price increases. The Malibu and Access brands represented 47.3% of unit sales, or 804 boats. Saltwater Fishing represented 29%. or 491 votes, and Cobalt made up the remaining 23.7, or 403 votes. Consolidated net sales per unit increased 11.5% to approximately 150,000 to 665,000 per unit, primarily driven by year-over-year price increases and favorable model mix within all segments. Gross profit decreased 23.9%, or $17.8 million. to 56.8 million and gross margin was 22.2%. This compares to a gross margin of 24.7% in the prior year period. The decrease in gross margin was driven primarily by a decreased mix of our higher margin Malibu segment and increased dealer flooring costs. Selling and marketing expense increased 10.9% in the first quarter. The increase was driven primarily by increased promotional events and an increase in compensation and personnel related expenses. As a percentage of sales, selling and marketing expense increased 50 basis points to 2.2% compared to 1.7% in the prior year period. General and administrative expenses increased 7.7%, or 1.5 million. The increase was driven primarily by an increase in compensation of personnel-related expenses. As a percentage of sales, G&A expenses increased 170 basis points to 8.1 compared to the prior year period. Net income for the quarter decreased 42.5% to $20.8 million. Adjusted EBITDA for the quarter decreased 31.7% to $39 million, and adjusted EBITDA margin decreased to 15.2% from 18.9%. Non-GAAP adjusted fully distributed net income per share decreased 36.9% to $1.13 per share. This is calculated using a normalized C-Corp tax rate of 24.5%. 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. As Jax mentioned earlier, the retail environment continues to weaken, driven largely by dealer concerns around the broader macro and interest rate environment. While we had originally expected to see improvement in the second half of the year, we are now revising our fiscal year 2024 outlook to account for softening conditions in light of the weakening retail environment that has disrupted seasonality heading into Q2. We anticipate year-over-year decline in net sales ranging from high teens to low 20s percentage. We expect Q2 revenue decline of approximately 35%. Consolidated adjusted EBITDA margin is expected to be down 350 to 450 basis points year over year, with Q2 down approximately 700 basis points. We remain incredibly proud of our team's continued execution at MBI and our ability to navigate through any down cycle we may face. Our variable cost structure and strong cash flow generation has allowed us to execute quickly and outperform. all while maintaining strong workforce and relentlessly pursuing vertical integration and strategic acquisition opportunities. Regardless of the environment, we are excited and optimistic about the future here at Malibu. Our team is strong, our business model is battle-tested, and we continue to be positioned well strategically for fiscal year 2024 and beyond. With that, I open up the call for questions.

To ask a question, please press star then 1 on your touchtone telephone. If your question has been answered or you wish to withdraw your question, please press star, then two. Please stand by while we compile the Q&A roster. And our first question will come from Mike Schwartz with Truist Securities. Please go ahead.

Hey, good morning, guys. Maybe just to start off on the retail environment and some of your commentary around retail being softer and being one of the rationale for why you brought down your guidance. I mean, we've obviously and everyone's seen the retail over the past couple months, and I think most people would say the numbers were actually decent. You're talking about Fort Lauderdale. Some others have talked about how strong Fort Lauderdale was, yet you're kind of using that to take down guidance. Maybe just help us understand and clarify what exactly you're talking about. Is this more to do with the dealer's psyche than the actual retail demand that we're seeing? Any color would be great. Thanks, Jack.

Yeah, I think it's the dealer's psyche. It's also the consumer's psyche. And I can't belabor enough that anyone that's going to be purchasing on interest rates, they're probably sitting on the sidelines. If you look back to 2021, 2022, the interest rates that they're paying are up to four times more than what they were paying back then. So I think that's a big impediment to the retail consumer's psyche. The dealers are certainly paying more. They want to carry less inventory. That factors into it. And ultimately, I think every single OEM company that is talking about this, they're looking at their order backlog versus previous years and what they think it will wind up being. What I hope, frankly, is that Fort Lauderdale proves to be a shift or a change in the environment that we have been in and think that we're going to continue to be in versus an aberration because it was so, so strong. And it was clearly evident that if you were an oem that sold smaller boats or so less premium boats you did not do as well and it was that premium like the pursuits of the world the kobias of the world that did very well and and that bodes extremely well for that salt water environment but ultimately i think that you know what we have coming at us mike is you have you know year-end sales events that will take place in fresh water through the rest of the year then you hit that fresh water boat show cycle Miami, of course, as always, is going to be very important. So by the time that we get to reporting on the second quarter, I believe we'll have a much better feel for what the year is going to turn out to be.

Okay, that's helpful. And then just with regards, I know Malibu kicked off its annual year-end factory event, I think it was a week or two ago. Maybe just give us a sense of how that program compares to years past and maybe what you've seen thus far. from a demand or an order perspective?

You know, from what we've seen, it's really too early to tell. A lot of times that starts happening in that November and leading all the way up to the December 15th timeframe. What I would tell you on the program itself is, and I think that everyone is experiencing this, is it is richer this year than in previous years. I think in that towboat and freshwater environment, we are in a more promotional mindset, and we're seeing that with our competition as well. And so, you know, to drive some of the volume, we're going to have to be more promotional, and we certainly took that attack path into the year-end sales event.

Okay, thank you.

And our next question will come from Eric Wold with B-Rally Securities. Please go ahead.

Thank you. Good morning. Just one point of clarification. On the updated net sales guidance for the year, what is the implied retail market change that you're using there?

Yeah, so we're expecting high single digits to low double digits in our implied guidance.

Okay. And then on the... Jack, you talked about those credit buyers that are relying on credit are the ones staying on the sidelines. Are they, in your opinion, are they purely staying on the sidelines because of that interest rate cost? Or are you seeing any reluctance from lenders, this environment, or any inability for those buyers to get credit, even if they wanted to step off the sidelines and make that boat purchase?

Yeah, in terms of order, certainly they're just staying out of the environment because they're not going to pay those interest rates. And it's so different than what it was. If we go back to 2021, the end of 2021, the interest rate was 0.25%. By the Fed, now it's 5.25%. And so that has a huge impact on them. Of course, in this environment, there is some level of people that are looking for credit, but it's more strenuous to get it or they cannot get it. But I would put that at the bottom of the category in terms of versus people who just are sitting on the sidelines. Got it.

Thank you very much. Helpful. Appreciate it.

Sure. And our next question will come from Craig Kennison with Baird. Please go ahead.

Hey, thanks for taking my questions as well. I wanted to ask about your dealer network and the health of that network. given carrying excess inventory maybe and facing higher interest expense. Any concerns about your network or the broader marine dealer network?

Largely no, Craig. I mean, you always have some that you watch a little bit more closely. We're very in tune with Wells Fargo and what they're seeing. And the early warning systems that are in place that did not exist in 2008 and 2009 So we feel pretty confident. We're actually looking to expand our dealer networks, and we're working on that today. The one thing I would point to, though, that we're focused on is during COVID, when the tier one builders, OEMs, could not build enough boats, dealers took on tier two and tier three brands. And so that needs to go away, frankly. I mean, there's floor plan that's being tied up with with garbage brands, and so we need that floor plan, so that is a focus area of ours.

And then could you just comment on the age of inventory and whether you see any issues with non-current model year inventory?

For us, no. In fact, if we look at it across that freshwater environment when we had the promotion back in July that was so successful, a lot of that 23 inventory was moving. There's very, very little, as you can imagine, 22 inventory. And so that's a little bit of a difference from the last decade, if you look at it that way. On saltwater, I think that we were highly successful in any remaining aged inventory moving through that at Fort Lauderdale. So if I look at it over a, call it a five to seven year timeframe, I would say that from our standpoint, The inventories are as fresh as they've been with the exception of during those COVID years. Great.

Thank you, Jack.

Thank you.

And our next question will come from Joe Altobello with Raymond James. Please go ahead.

Thanks. Hey, guys. Good morning. So it seems pretty clear there's some affordability issue among a large portion of your buyers. You know, given the percentage of cash buyers you're seeing, particularly among your core Malibu access buyers. And a lot of that's higher rates, as you mentioned, but some of it might be pricing as well. So as a manufacturer, what can Malibu pages sort of address that beyond pricing?

You know, Joe, I think beyond pricing, I think that we are going to see a more promotional environment in that regard. But one thing that I would point out on the Malibu access side is we have been because of our vertical integration, because of the way that we manage our business against our primary competitors, we're $20,000 and $30,000 less than what they are. So the value proposition that we offer, the best boat on the market at a lower price because of the way that we manage our business, that's one of the reasons you see a 300 basis point gain in share. And I think that in that equation, you have them with some higher levels of inventory that they're going to have to move through. And so that's going to have an impact somewhat for a while. But I am supremely confident that with our model, with the way that we're able to build boats at the cost that we're able to build them, we're going to win over the long term. They just can't get there. They can't compete in a normalized environment. On the Cobalt side, Cobalt continues to show the incredible strength of the brand. And what I mean by that is the holding of price in whatever we come out with from a Cobalt standpoint continues to be a strength. And of the brands, at least up until Fort Lauderdale, Cobalt has remained the strongest throughout at least the first three months of this year. So, you know, I think more for us, frankly, is a focus on next year. We have to have suppliers that are coming back to earth and coming out with costs that make sense and have the increases very minimal and It's time to get out of this inflationary mindset that many suppliers are in, and let's get the pricing back to where it needs to be.

Got it. Very helpful. And maybe just to follow up on that, you mentioned field inventories are at or above pre-COVID levels. And I think on your last call, you mentioned you wanted them to be a tad below that. Do you still think a tad below that is the right level, given the current demand environment? And what's baked into your guidance?

Given, and I'll let David answer the last part of the question, but given the current environment, I think it is a tad below COVID levels, pre-COVID levels, would be the right amount of inventory.

Yeah, and embedded in our guidance, we are using the pre-COVID levels on a sell-through perspective. So that's where we feel like the appropriate level is, and we baked it into our future forward-looking outlook. Okay, thank you.

And our next question will come from Jamie Katz with Morningstar. Please go ahead.

Hi, good morning. I guess it would be helpful to hear how you guys are thinking about the split in profit pressure between gross margin and OPEX this year, and then maybe if there's a way to quantify what the floor and cost impact might be that might help us frame that metric a little better. Thanks.

Yeah, so on the gross margin side, obviously, you know, embedded in our guidance is more weakness on the towboat side of the business. And so you saw kind of in Q1 a further shift out of Malibu, and that is creating a little bit of pressure on the gross margin. And so you'll see that continue throughout the remainder of the year. And then on a flooring perspective, I'd say that's worth about 150 basis points of pressure.

Okay. And then I think you guys said 700 basis points of EBITDA deleverage in the second quarter. Is there anything idiosyncratic in that, or is it just deleverage from lower volumes? Thanks.

It's predominantly the deleverage from lower volumes and a shift in mix as well.

Helpful. Thank you.

And our next question will come from Brandon Rolley with DA Davidson. Please go ahead.

Good morning. Thank you for taking my question. Just circling back to the pricing conversation, I know in previous calls you had voiced some frustration that suppliers may not have given as much pricing concessions that you're looking for. Could you update us on your recent conversations and kind of how do you expect pricing to trend here over the next, I would say, six to nine months? Thank you.

Yeah, Brandon, I mean, we've had some success. I think suppliers are, it's a natural environment, right? When you have high volumes, they're going to raise prices. When the volumes start coming down, they're going to start getting competitive. And we've introduced competition into the mix. in some cases, because we're very, very focused that the consumer is speaking. We have to listen to it. The suppliers have to listen to it. So I would tell you that we expect marginal success going forward until we get to that next budget cycle, which is going to be in that March timeframe of next year. And we're going to be extremely focused and putting a lot of pressure on the costing aspect because I do firmly believe that we need to have a price increase that's relatively minute next year versus the previous four years.

Great, thank you.

And our next question will come from Noah Zatzkin with KeyBank. Please go ahead.

Hi, thanks for taking my question. Maybe just one for me on capital allocation priorities. I guess, does the current environment change how you're thinking about priorities? I know you had mentioned looking to acquire a pontoon brand or greenfield ones. Just trying to get updated thoughts around that here. Thanks.

Right now, what we've done is our capital allocation has been to product. It's been to the Rowan County facility, which will be doing small boats for cobalt. It's been for our tooling design center that is a you know it's going to be a big important vertical integration for us going forward across all of the brands and what i would tell you is that you know that doesn't change our mindset uh product is critical you know back in 2009 time frame in a two-year period of time we took market share of 900 basis points because we were the only one bringing out product so we're always going to be progressive and aggressive in bringing out new product new innovations we think that's a core lifeblood of the business. And we put some in the PowerPoint this morning. You'll see some information on cash, and I talked about it as well. I think one of the blessings or benefits that we have is because we are such strong cash generators, we don't have to look at an environment and say, hey, we need to pull back. We don't need to make this acquisition. I will tell you that from an M&A standpoint, If the right asset comes to market at any point in time, be it midnight or noon, we will be in the market for that acquisition because we can be. We have that capability. We also have three or four initiatives, strategic initiatives, that we're going to be embarking over the next two, three, four years that really have no relationship at all to what economic environment we're in because once we emerge from that, we will be stronger and we'll have higher market share.

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Jack Springer for any further remarks.

Thank you, Joe. Appreciate it. In summary, Malibu's fiscal first quarter results surpassed our expectations, supported by our team's superior execution, combined with the inherent strength across our lineup of brands, despite a rapidly evolving operating environment. As we move through the quarter, the retail environment markedly deteriorated, and the sense of urgency customers had over the last few years largely was gone, coupled with a challenged interest rate and macroeconomic landscape. However, those customers in the market are continuing to support elevated ASPs as they look for feature-rich boats. Our variable cost structure and ability to create significant free cash flow ensures a strong balance sheet, quicker recovery, and ability to invest in important strategic opportunities. Our strategic planning, operational excellence, and supply chain management continues to support our outperformance of the broader industry, and our vertical integration has enabled us to remain resilient. We are confident that this team will once again exercise its operational prowess to navigate the current environment, while at the same time advancing our innovation, our manufacturing capabilities, and our vertical integration footprint to ensure we once again emerge stronger as the market conditions improve. As always, I would like to thank you for your support and for joining us today. While we are in a challenging retail environment, especially compared to the COVID years, we will continue to thrive and grow with continued excellence in fiscal year 2024. Have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect your lines.