Malibu Boats, Inc. (MBUU) on Q2 2021 Results - Earnings Call Transcript
Operator: Good morning, and welcome to the Malibu Boats Conference Call to discuss Second Quarter Fiscal Year 2021 Results. At this time, all participants are in 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. As a reminder, this call is being recorded. On the call today from management are Mr. Jack Springer, Chief Executive Officer; Mr. Wayne Wilson, Chief Financial Officer; and Mr. Ritchie Anderson, Chief Operating Officer.
Wayne Wilson: Thank you, and good morning, everyone. On the call, Jack will provide commentary on the business, and I will discuss our second quarter financials. We will then open the call for questions. A press release covering the company's fiscal second quarter 2021 results was issued today, and a copy of that press release can be found in the Investor Relations section of the company's website. I also want to remind everyone that management's remarks on this call may contain certain forward-looking statements, including predictions, expectations, estimates or other information that might be considered forward-looking and that actual results could differ materially from those projected on today's call. You should not place undue reliance on these forward-looking statements, which speak only as of today, and the company undertakes no obligation to update them for any new information or future events. Factors that might affect future results are discussed in our filings with the SEC and we encourage you to review our SEC filings for a more detailed description of these risk factors. Please also note that we will be referring to certain non-GAAP financial measures on today's call such as adjusted EBITDA, adjusted EBITDA margin, adjusted fully distributed net income and adjusted fully distributed net income per share. Reconciliations of these non-GAAP financial measures to GAAP financial measures are included in our earnings release. I will now turn the call over to Jack.
Jack Springer: Thank you, Wayne, and thank you for joining the call. Our team posted incredible fiscal second quarter results once again exceeding expectations. Leveraging the strong retail environment and our previous planning and preparation for COVID-19, we significantly performed ahead of planned sales. We delivered exceptional gross margins and realized historic adjusted EBITDA results. Our results and view into the second half supports an increase in our full year fiscal 2021 guidance and Wayne is on the call. Customer interest for new boats and demand for larger boats with upgraded features and options remains very strong. Our backlog of orders is historic for all of our brands. ASPs are increasing, vertical integration strength is being realized with unparalleled execution and we yielded a 320 basis point year-over-year improvement in gross margins for the quarter. This exemplary performance during the quarter further solidifies our position as a trailblazer and innovator in the marine space, as well as demonstrating our ability to adapt and grow in the current environment.
Wayne Wilson: Thank you, Jack. In the second quarter, net sales increased 8.6% to $195.6 million and unit volume decreased 3.4% to 1,742 boats. This decrease was primarily driven by lower production levels in our Cobalt segment, but as Jack mentioned, we expect Cobalt’s production to ramp up during the second half following the completion of its expansion and improvement project. The Malibu and Axis brands represented approximately 63% of unit sales or 1,101 boats. Cobalt represented 28% or 489 boats and Pursuit made up the remaining 152 boats. Consolidated net sales per unit increased 12.5% to approximately $112,000, primarily driven by a favorable mix across all of our brands and an increase in options and features in our Malibu segment. Gross profit increased 241.1% to $49.5 million and gross margin was 25.3%, an increase of 320 basis points from the prior year period. Selling and marketing expense decreased $0.7 million or 14.3% to $4 million in the second quarter of 2021 compared to the 2020 period. As a percentage of sales, selling and marketing expense decreased 60 basis points. General and administrative expenses increased 49.2% or $5 million. The increase was primarily driven by acquisition-related costs. As a percentage of sales, G&A expenses, excluding amortization, increased 210 basis points to 7.7%. Net income for the quarter increased 25.8% to $22.1 million. Adjusted EBITDA for the quarter increased 27.5% to $39.1 million and adjusted EBITDA margin increased 300 basis points to 20%. Non-GAAP adjusted fully distributed net income per share increased 31.2% to $1.22 per share. This is calculated using a normalized C Corp tax rate of 23.6% and a fully distributed weighted average share count of approximately 21.5 million shares. For reconciliation of adjusted EBITDA and adjusted fully distributed net income per share to GAAP metrics, please see the tables in our earnings release. Our healthy balance sheet supported our continued disciplined deployment of capital through the acquisition of Maverick Boat Group during the quarter, an acquisition that we think fits our playbook of aggressive investments, operational enhancement and robust growth on the top and bottom lines. At the same time, we continue to invest in our current brands where we are focused on setting up for substantial retail demand-driven organic growth and continued margin expansion. As Jack mentioned, we expect a robust second half of the year for fiscal 2021. That said, we will remain attendant to the retail marketplace and nimble in the phase of an ongoing global pandemic to quickly address any potential volatility that manifests as a result. Nonetheless, we expect strong demand to continue for our premium brands and now expect full year revenue growth of greater than 35% year-over-year and adjusted EBITDA margins of approximately 20.5%. In terms of cadence for the remainder of the year, we believe revenue will be generally consistent throughout the second half and margins will slightly increase as the second half progresses. These estimates include the impact of our acquisition of Maverick Boat Group for the second half of the fiscal year and continue to include a modest amount of cushion given pandemic-related uncertainty. In closing, our team continues to post incredible results and surpass expectations. We believe in our ability to continue to deliver strong returns on our investments, both organic and inorganic. Our prior investments, industry positioning, and record momentum provide an attractive set up to drive significant revenue and profitability gains through fiscal 2022 further solidifying Malibu as the industry leader. With that, I'd like to open the call up for questions.
Operator: Your first question comes from Mike Swartz from Truist. Your line is open.
Michael Swartz : Hey guys. Good morning.
Wayne Wilson: Good morning.
Michael Swartz : Maybe just want to touch on your new guidance here. Obviously, this is the first time you’ve formally incorporated Maverick in that guidance. And I guess, you are under the assumption that Maverick’s margins were in the mid-teens that you are taking your consolidated EBITDA margin guidance up. So can you help us think about the puts to takes there? And maybe you can back out the contribution from Maverick specifically?
Wayne Wilson: Yes. I think you are thinking about it correctly that ultimately the implied guide excluding Maverick is meaningfully up from a margin perspective. And so, what we continue to see really strong margins. We talked about it in fiscal Q1 that the strength of the margins in the business. We continue to see that. We see that continuing through the year in terms of what we are seeing both from a volume perspective and margin performance and the cost profile in the business. That embeds some headwinds that you see in terms of some inflationary cost pressures, all of those things. But we are not going to give specific guidance that excludes Maverick. But I think your math and the way you are looking at it is correct. So its underlying margin performance and it’s really driven by Pursuit and the Malibu business. I would tell you all three of the pre-existing businesses are outperforming margin expectations both most meaningfully, it would be on the Pursuit side with the addition of the new factory and Malibu where you are seeing the benefit of the engine business.
Michael Swartz : Okay. That’s helpful. And then, just given the strength of retail demand and what you see in your order, but can you talk about, maybe how much flexibility you have in the year to take on new orders in your businesses and talk about competitors and other players in the industry moving their model years forward and doing some different things with the timing, variant, have you given any thought to that? Or how you are going to proceed going into model year 2022?
Jack Springer: No, I mean, we will keep the model year as it historically has been. Last year, as you recall, we did moved the model year up one month and that was based on a scenario where we thought that we are going to need to increase demand and get newer product out there quicker. You flipped on us here and that did not materialize but certainly did not hurt. But going back to a more recognizable cadence, I think is the right thing to do. We will sell throughout the end of the year. In terms of ratcheting up, we have done that all year along whereas you know, Mike, we take commitment from our dealers before the beginning of the fiscal year and we are going to surpass by a large margin for all of the brands, the commitments that we took in at the beginning of the fiscal year and as I’ve talked about in the call, we have taken production count up substantially and we will continue to do that on an as needed basis as we can.
Michael Swartz : Okay. Great. Thank you.
Operator: Your next question comes from Joe Altobello from Raymond James. Your line is open.
Joseph Altobello : Thanks. Hey guys. Good morning.
Jack Springer: Good morning.
Joseph Altobello : Just want to stick on the guidance – on the EBITDA margin guidance for a second. Obviously, if you look at fiscal 2021, you are benefiting from a lack of discounting, a very strong features uptake and a number of other items. But is this the new base the 20.5% that you think you could potentially grow off of next year? Or are there some headwinds that come back into play in fiscal 2022?
Jack Springer: Go ahead.
Wayne Wilson: Arithmetically, you obviously in fiscal 2022 have the inclusion of Maverick for additional six months. And so, that creates a natural headwind. I would still – I think it’s a little early to go out there and give 2022 guidance, but I think – and Jack can affirm this which is, I see it as the new base. Now, growing off of this, I think everybody needs to keep in mind that you are going to have the six months – is the six months of Maverick added to fiscal 2022 and that’s going to be a headwind that’s going to be measured in probably 50 basis points or so. So, is that exactly the baseline? I mean, 20%, 20.5% will be kind of my baseline prospectively, Jack?
Jack Springer: I agree. I think it’s sustainable. I think that everything we model says that it is even with Maverick coming into play.
Joseph Altobello : That’s helpful. Thank you. And just a second question, if you look at your production capacity, you guys have increased significantly across the portfolio. If one would index what would your capacity will be in 2022, let’s call it ex Maverick versus 2019. How much of an increase have we seen over the last three years?
Jack Springer: Over the last three years?
Joseph Altobello : Yes. From fiscal 2019 as a base?
Jack Springer: Doing some quick math here, Joe.
Joseph Altobello : I mean, is it 15%, 20%, somewhere in that neighborhood?
Jack Springer: Sorry, that’s going to be 30% to 40% over a three year period. We’ve put in a lot of improvements in place, expansions in place and so the result, if you look at it cumulatively for all the brands, it will easily be in that 30% to 40% range.
Joseph Altobello : Okay. Great. Thank you guys.
Operator: Your next question comes from Jamie Katz from Morningstar. Your line is open.
Jamie Katz : Hi, good morning. Working die shack some of the Cobalt information a little bit more, and I think what was in the print was that, units would be increasing in the second half of the fiscal year, but I think what I heard in the commentary was that that might not happen until the end of the fourth quarter. And so, we may not see actual positive unit volume growth until fiscal 2022 on that. Am I thinking about that the right way?
Jack Springer: No. We’ll have unit growth increase in Q3 and in Q4. My point, Jamie was that, with this expansion and improvement coming into place, that’s going to allow that process increase our production even more up to 50% over time.
Jamie Katz : Okay. And then, given there were so many positive commentary factors coming out over the quarter, can you guys sort of give us the inverse perspective, what do you see as the biggest risk that would really derail the company’s ability to outpace the market at this point?
Jack Springer: We will outpace the market. There is no question.
Jamie Katz : Okay. So nothing keeps you up in night.
Jack Springer: No, I mean, other than politics.
Jamie Katz : Okay. And there was one last thing. In the slide deck, there was a point on custom boats becoming a bigger percentage of sales and I am curious whether that’s something sort of secular that you’ve seen over the last few years. What was that maybe in 2018 and what do you expect that to be in 2021, because it seems like that could be a potential shift to maintain higher gross margin performance over time?
Jack Springer: I think the big driver has been over the last year and it has been the COVID pandemic. And seeing the inventories drop to the low channel inventory levels we are, if you think about it normally, and just to break it up a little bit, in the course of the normal year from July to June, the first half of the year is typically 60%, 65% and I am speaking of retail now. Our dealers sell 60% to 65% stock boats and then 30% to 35% custom order boats. With the lack of inventory and with the COVID pandemic and people just buying boats that we have not seen in a number of years or that are new to the market, that channel inventory has caused it to swing the other way. And I will give you an example, I’ve spoke to our yearend sales event, last year in our yearend sales event, 44% of the boats that were sold were channel inventory boats or stock boats at the dealer. This year it’s 18%. And so, you have these customers that are coming in and they are buying boats, because they don’t see what they want on the floor at the dealer or they are – they want more features, more options, larger boats. And so, I think ultimately, that’s driving it. I do think it sticks even after we get past the pandemic a little bit. But I think it will revert more to a normal 50:50 split over the course of the year.
Jamie Katz : Thank you. It’s really helpful.
Operator: Your next question comes from Alex Maroccia from Berenberg. Your line is open.
Alex Maroccia : Good morning, guys. Thanks for taking my questions.
Jack Springer: Good morning.
Alex Maroccia : It looks like one of the biggest drivers of margin expansion, at least this year and probably into next year a little bit is a reduction in sales and marketing expenses primarily driven by this lack boat shows. Are you thinking about 2022? And are there any cost reductions you can think can repeat when boat shows do return, and I know you gave some good information about that yearend event you held. So, is that more in your plans going forward?
Wayne Wilson: Alex, I would say that, of all of the factors that are generating the margins that are the discounting is probably one of the smallest, it’s not smallest. And if you look at the larger boats and the features and the options, the new products that Cobalt and Pursuit and Malibu being a higher margin profile, all of those I think are bigger drivers. I do think that, once we get back to a more normalized basis next year, we’ll see it tick back up a little bit. But if this demand continues and no reason to expect that it won’t, I think discounting will continue to be low going forward.
Jack Springer: Yes, I would also envision that there is an element of that, right. So, you are talking about less than 20% of the margin pick up and I would tell you that, probably half of that’s a fundamental shift and a permanent variance and lower travel and going about business the different way.
Alex Maroccia : Okay. Great. And a second question is just a bit more forward-looking, how are you thinking about the next capital initiative once the Maverick projects complete? Is Malibu indexed for another expansion? And so another vertical integration opportunity or is there something else out there that we are not thinking about?
Jack Springer: No. That’s a very good question. I think, we are looking at Malibu if the pace continues and we go to 14,000, 15,000, 16,000 over the next couple of years in the performance sports boat segment we already having plans in place and we will start a process of the small expansion project that will effectively get us about 20% more boats.
Alex Maroccia : Okay. That’s great. Thank you guys.
Operator: Your next question comes from Brett Andress from KeyBanc Capital Markets. Your line is open.
Brett Andress : Hey, good morning.
Jack Springer: Good morning.
Brett Andress : Sorry if I missed this. Hey. But do you have any channel inventory stat for us? Just maybe weeks on hand or year-over-year inventory declines?
Jack Springer: Yes. So, what I would tell you, I would frame it the same way we’ve framed it in the past, which is, the size of the whole. And so, obviously, with the addition of Maverick, they have a whole as well. So that number that we quoted that was north of a 1,000. In August it is up. Ultimately, we’ve grown channel inventories in the last three months since we last communicated with folks. But that’s generally a seasonal increase. And so the good news – the bad news is that, there is still a really big whole relative to the seasonally adjusted appropriate level. The good news is, that’s being driven by a white hot retail environment. So, the short takeaway is that, for the full year, it continues to go like it is at retail. I don’t think we are making up any of that whole and – but that means retail is just absolutely on fire.
Brett Andress : Got it. Okay. And then, so, when you think about when retail starts to seasonally ramp up here, right, into the spring, and the summer and given where inventories are at, I mean, are you and your dealers going to have to operate it differently? I guess, how are you comparing to that is like everything just going to be deposit based in pre-sales as we get into the selling season here?
Jack Springer: I think, certainly, by the time we get to the end of this fiscal year in that post-Memorial Day timeframe, it will be deposit based. Our share will length, that it’s going to be very difficult to make up channel inventory this year as high it was in this, but with the volume that we are putting on, we will be putting up in model year 2022. I think that will grow those channel inventories over the course of that model year.
Brett Andress : All right. Thank you.
Operator: Your next question comes from Eric Wold from B. Riley Securities. Your line is open.
Eric Wold : Thank you. Good morning. Couple questions. I guess, one, on the Cobalt improvement program, you talked about getting to a 50% capacity improvement over time should you need it. Is that solely through process improvements and higher staffing or would there be kind of another kind of capital spending need to get there? And then, you look at, kind of where Cobalt will be post this expansion program and prior to it in the efficiency improvements what could you see in terms of margin expansion between the two?
Jack Springer: The three phases of the improvement that we’ve done and we are concluding the third one this quarter, Eric. That’s what allows the 50%. So there is no further expansion projects that are needed. At that point, it simply becomes a matter of getting the people in place as we go up in count, we will add people. And so, it’s just a function of people at that point in time. The second question, and I am sorry, say it again.
Eric Wold : What could be the margin benefit or expansion kind of prior to this and post this at Cobalt?
Jack Springer: Let me – I guess, I am struggling with the prior. I mean, the post, look, there is a lot of capital that’s been spent there relates to optimizing the flow and reducing rework and improving quality. And so, the prior portion of the question, I don’t necessarily understand, but the – on a prospective basis, what I would tell you is, within that business itself, there is hundreds of basis points of margin expansion opportunity related to efficiency improvements as that volume goes up.
Eric Wold : No. That’s perfect. That’s what’s I was looking forward. I guess, and then a second question, obviously, tons of demand coming in for new boats, backlog historic highs, how do you think the kind of the puts and takes of trying to do, all can to ramp production, push out older boats as fast as possible including production, price all that versus, particularly straining the manufacturing system or the labor force in the process of doing so?
Jack Springer: We think that we are benefited to engage that than almost anybody else out there. And I think one of the things yet to be very careful about and we always are and we’ve done this in a very measured basis this year is to do it in at the pace that you can accommodate it, that you can hire the people, that you can train the people. But I can tell you what’s going on out there right now is there are a lot of people that are rushing to get boats out there and their quality of work. And so, we work very hard to bring production up in a measured basis with people that are very well trained and we can keep our quality while also accelerating the increase in the number of boats.
Eric Wold : Perfect. Thank you both.
Jack Springer: Thank you.
Operator: Your next question comes from Gerrick Johnson from BMO Capital Markets. Your line is open.
Gerrick Johnson : Hey. Good morning. Now we have some time to analyze the Cobia deal and can you identify any expansion opportunities. I am not sure if that’s your primary focus at this point, but further down a road, how much larger can that network be? And looking at the overlay between it and Pursuit, maybe there are opportunities for a consolidation as well. So, if you just talk about Cobia. And then, also I am just wondering your thinking on the bay and flat boats and how they fit in your portfolio?
Jack Springer: So, I’ll answer the last question first. From the flat boats, it’s in this segment, we are not in that segment. So it puts us into an immediate category that’s a smaller outboard boat. It’s small and I think it will continue to be small as somewhat you are dealing with a different competitive set there that are smaller builders are building one at a time. So, I think it fits, but it’s not anything that we would see a big growth item. As it relates to Cobia, Gerrick, the answer to both those questions are yes. There are absolute opportunities with Pursuit and that’s one of the attractors for us. When you look at a Pursuit the routing deck is about three or four feet. It is a premium higher priced model. Now we have a Cobia that index is as below Pursuit at a price point that’s a little bit different and it’s the point that we’ve been making, it gives us a full gamut of products. We have the entire product range from a length and from a price point of view now in both the center console and the dual console segments. On the distribution side, there are opportunities, but our biggest challenge right now is to start building more and more and more boats. Very similar to what we entered when we acquired Pursuit, we have a shortfall and we need to get our current dealers as much inventory as we possibly can and that’s why we are going to add a plant and expand the plant on phase two. And increase substantially the number of boats that we are getting out. Until we do that, I don’t think it’s prudent for us and it’s up there, frankly, the other dealers for us go out and find other distribution. I don’t see necessarily consolidation and I’ll go back to when we acquired Cobalt. We will always have the best dealer in the market. We want the best dealer for every individual market and if they happen to be an existing dealer, they are going to continue to be our dealer. And if there is an opportunity to improve at some point, because the market share is low and the service of the consumer is not as good as we would want it to be, that’s when we would look to make a change.
Gerrick Johnson : Okay. And on the bay and flat boats, wondering if there is an opportunity there to maybe, I don’t exit that business and move that production capacity to bigger more feature rich boats like your Pursuits or your Cobias or something like that?
Jack Springer: No plan to do that now. I mean, when we look at Maverick, we saw all four segments as an opportunity for us. On the bay boats, frankly we have been thinking about getting in the bay boats from a build scenario. So what that does for us is that puts us into that segment right now right away.
Gerrick Johnson : Okay. All right. Great. Thank you, Jack.
Operator: There is no further question at this time. I will turn the call over back to Jack Springer.
Jack Springer: Thank you very much. In summary of our quarter, leveraging our premium product lineup and our industry-leading operational excellence, we capitalized on the strong retail demand to deliver revenue ahead of plan, access new gross margins and historic adjusted EBITDA results in the second quarter. And we do believe that this will be sustainable. We expanded our brand family with the acquisition of Maverick Boat Group and its complementary lineup of brands further adding to our diversification strategy and brand variability. Our strategic planning, operational excellence and supply chain management continues to support our outperformance of the broader market. We have the capability, and capacity to deliver more boats than competitors, selling more to retail customers, and increasing the inventory at our dealers more quickly. Vertical integration continues to drive higher margins and overcome many of the issues our competitors face who did not vertically integrate. And given our extraordinary first half of the year, we remain confident in our ability to deliver value to our shareholders while outperforming our peers to solidify the dominant industry position. As always, we want to thank you for your continued support and we want to thank you for joining our call today and our journey towards growth and continued excellence. I hope you and those around you are all safe and healthy and hope you have a fantastic day. Thank you.
Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
