Malibu Boats, Inc.

Good morning and welcome to Malibu Boats conference call to discuss third 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 the 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. Michael Hooks, Executive Chair, Mr. Bruce Buckman, Chief Financial Officer, and Mr. Richie Anderson, Chief Operating Officer. I will turn the call over to Mr. Buckman to get started. Please go ahead, sir.

Thank you and good morning, everyone. A press release covering the company's fiscal third 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 FCC, and we encourage you to review our FCC 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 relief. I will now turn the call over to Michael Hooks, Executive Chairman of Malibu Books. Michael?

Thanks, Bruce. As you have seen from today's earnings release, we have several topics to discuss, including our results for the third quarter of fiscal year 24, which Jack and I will discuss in more detail. And as usual, Bruce will guide you through the financials. But first, I'd like to hand the mic over to Jack, who will be participating in his final earnings call with us today. Jack? Thank you, Michael. And good morning, everyone. Thank you for joining the call. By now, you know that I'm stepping down as Chief Executive Officer of Malibu Boats in the coming weeks. This was not a step I took lightly because my connection with and passion for Malibu Boats, our customers, and our teams run very deep. As CEO, I wanted to reflect on my journey with this incredible company. My career at Malibu has spanned a decade and a half through both great and challenging times. When I joined Malibu in 2009, we were in the depths of the Great Recession with volumes off by 70%, and EBITDA let them break even. While it was a risk at the time for me, the opportunity, the brand, and the people made the difference in my decision to join Malibu. We began our journey of professionalization of the company, focusing on compelling new products, embarking on vertical integration, and improving our distribution network. These initiatives, among others, have driven the dividends that we have all realized. I thank Michael for the opportunity and his support through the years. I have tremendous appreciation for all of the team members who have worked side by side with me over 15 years, and I specifically want to express my thanks to Richie Anderson, Debbie Kent, and Lane Wilson who have made MBI's success possible and who have made me better. Finally, it always comes back to the people who make the company. They have been tremendous for 15 years, and I thank the many thousands who have spent part of their lives making MBI what it is today. It has truly been an honor for me to serve as the CEO of Malibu Boats and shape its strategic course that led to our IPO in 2014, as well as the significant growth and profitability that followed. What we have achieved is only possible with the trust of our customers, our incredible dealers, the terrific work of our team members, and the support of our shareholders. I am immensely grateful. I want to thank all of you for your confidence in MBI. This team, under the guidance of Michael, Richie, Bruce, and the rest of the executive leadership team, will continue to deliver results and position the company to execute through the uncharted waters ahead. With that, I will now move on to our third quarter results. Malibu Boats executed despite another challenging quarter amidst ongoing macroeconomic uncertainty as retail activity has remained weak during the selling season. For the third fiscal quarter, net sales decreased 46% to $203.4 million compared to the prior year. Adjusted EBITDA fell 69% to $24.4 million. Gross margins decreased 650 basis points to 20% and adjusted EBITDA margin to 12% from 21.1%. Similar to last quarter, we experienced a weakened retail environment characterized by lingering uncertainty and softened retail demands. The customer continues to be very patient. They know inventory is available. They search for the best deal possible. In addition, credit buyers remain on the sidelines as interest rate pressures impact purchase decisions for entry-level boats. As we enter the peak selling season for freshwater, we will be monitoring the situation very closely. Historically, we know that the market can correct on a dime, and we will be ready to support this growth as the tide turns. We'll say that during a downturn, we expect the strength of our product development and distribution to be manifested in increased market share. We saw this occur in 2009 and 2010 when we increased Malibu's market share by almost 50%. We're seeing share gains in our brands again today. In their respective competitive segments, Cobalt has gained 400 basis points of share in the last 12 months and now commands a 35% share in the Stern Drive markets. Pursuit has gained 220 basis points of share on a trailing 12-month basis, and Pathfinder has realized over 400 basis points of market share increase in its competitive segment. Both Malibu and Cobia are equal to last year on a trailing 12-month basis, and we expect both brands' market share to grow over the coming months. As channel inventory decreases and competitors with higher weeks on hand of inventory come back to normal, the strength of our product and distribution will shine through. For example, the timing of our new product introductions for Cobia will be a prime catalyst in driving market share gains in that brand. We are also seeing some pockets of strength coming out of the Bocho season with strong ASPs across all of our brands, but even more so within our saltwater and cobalt segments, which are leading the way. This strong ASP performance, which is better than anticipated, further indicates that the premium buyer is still there. driving retail as the desire for larger boats and the insatiable demand for features and options continue. Despite these signs of resiliency within our brand portfolio, the reality is that we are currently navigating market conditions that have continued to deteriorate across the industry. Growth rates have decelerated in our key categories, notably skiway and saltwater fishing, while inventories have remained stubbornly high, making dealers reluctant to bring on additional inventory. This has contributed to an increasingly promotional environment. As a response to these heightened pressures, we have had to lower our Q3 and Q4 production and increase our promotional spending more than we previously anticipated, both of which are primary drivers in our adjusted outlook for the full year. While we are currently in our selling season, we do expect a season decline and inventories accelerate during the peak selling season, which is a positive. Dealers are now delivering boats sold over the last few months, and the selling season is in swing, each accelerating the decrease of channel inventory. We are actively monitoring the situation very closely and have taken the necessary steps to rise production levels and are prepared to take them down even further to reach our goals of continuing to optimize the channel inventory. In addition, promotional activity is increasing. We believe this will be the case through the remainder of the 2024 fiscal year. While we are not prepared to discuss our plans for the upcoming 2025 fiscal year, we believe with our focus on channel inventory reductions through the remainder of fiscal year 24, we will be in a better position to match wholesale to retail demand in fiscal year 25. Going forward, this will position MBI to accelerate our recovery as retail demands regain momentum. Our commitment to right-sizing channel inventory levels underscores our proactive approach in navigating market fluctuations, ensuring resilience and agility in the face of an evolving industry dynamic. Despite the challenges, NBI remains primed to navigate short-term fluctuations and emerge from any downturn with swiftness and strength. As we have spoken about in the past, our cost structure is highly variable, and we are demonstrating it again in this environment. Our variable cost of sales is down in the upper 80% range. This is relative to the rate of sales decline in Q3, which is in line with our expectations of an 80% to 90% variable cost structure above the gross margin line. Lastly, I would like to provide an update on the progress we have made to further streamline our production capabilities. In the third quarter, the Rome County facility experienced a significant ramp-up, marking a pivotal moment for Cobalt. As we enter the fourth quarter, we anticipate to further expand operations by adding more models as we execute our strategy to consolidate cobalt small production in Tennessee while concurrently expanding cruiser capacity at our Kansas facility. This consolidation not only streamlines our operations, but also positions us strategically to optimize future growth and margins by capitalizing on economies of scale. Once these expansions are completed, we will be able to reduce our level of capital expenditures, thus increasing free cash flow. I will now turn the call over to Michael. Thanks, Jack. Before I get started, I would like to once again thank you for your 15 years of leading Malibu. It's been a privilege to work with you. Echoing Jack, I want to reiterate that our priority has been to get channel inventories to a healthy level, and we've been working diligently to do just that. We believe this benefits Malibu, our dealers, and our shareholders. And while fiscal 24 has been a challenging operating environment, we are taking the difficult steps needed to put us in that position. While we are not prepared to provide guidance, we are confident that our actions to close out the year put us in a position to realize a meaningful recovery as the retail environment stabilizes. Assuming a flat retail environment next year, we would see substantial improvement in Malibu's financial performance and continued free cash flow generation. Notably, we expect to end this year with zero debt and a positive cash position. It is worth highlighting that we were able to achieve this all while investing approximately $64 million in CapEx in the first nine months of fiscal 24, as well as having a one-time net outflow of $55 million in connection with the settlement of the Batchelder litigation during the fiscal year. As we look ahead, it is important not to overlook the strength of our economic model. Despite the short-term headwinds and cyclical nature of the marine industry and some recent events at NBI over the last few months, the fundamentals are still here. Malibu is well-positioned with strong margins and the ability to generate substantial free cash flow in almost all environments. As of the end of Q3, we'll have a positive net cash balance of $32 million. Given where we sit in the industry cycle, we'd like to remind and illustrate for you the level of profitability and cash generation capacity of our business in more normal times. Once the industry recovers to unit volumes at the average level seen in 2017 to 2019, with our current cost structure, market position, and brand model mix, we would anticipate revenues of approximately $1.3 billion with robust adjusted EBITDA margins of 17.5%, resulting in free cash flow of approximately $130 million. This substantial cash generation, complemented by our strategic capital allocation priorities, positions us favorably to deliver strong total shareholder returns as the market recovers. As a reminder, our capital allocation priorities remain unchanged as we have consistently communicated. One, invest in high ROI internal investments. Two, pursue accretive acquisitions. Three, pay down debt and deleverage. And four, return capital to shareholders. So at this time, and in keeping with these priorities, we anticipate returning substantially more cash to our shareholders on a regular basis. Our $100 million share repurchase authorization remains in place. While we have opportunistically repurchased shares in the past, we intend to return capital more predictably going forward. Commencing with this quarter and running through at least the end of fiscal 25, we plan to return at least $10 million per quarter or a minimum of $40 million annually in the form of share buybacks and or dividends, and we are implementing a trading plan to effectuate. Additionally, we remain focused on building our M&A pipeline, and given our cash flow profile and unlevered balance sheet, we remain primed and ready to pursue accretive acquisitions as they become available. Finally, I'd like to briefly address the lawsuit filed by Tommies. Given the litigation, we are unable to provide much detail beyond what we have previously communicated, but we are encouraged by the progress we are making in establishing new dealers in the markets formerly served by Tommies, and we expect minimal disruption in these markets into our family of Malibu end users. I will now turn the call over to Bruce for further remarks on the quarter.