Malibu Boats Inc (MBUU) 2014 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Malibu Boats conference call to discuss second fiscal quarter results. (Operator Instructions) 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, this call is being recorded. From management on the call today are Mr. Jack Springer, Chief Executive Officer, and Mr. Wayne Wilson, Chief Financial Officer. I will now turn the call over to Mr. Wilson. Please go ahead, sir.

Thank you, and good morning, everyone. Welcome to Malibu's first earnings call covering the fiscal second quarter ended December 31, 2013. Also here with us this morning is Ritchie Anderson, the Company's chief operating officer. Jack will provide commentary on the business and I will discuss the fiscal second quarter results in greater detail. We will then open the call to questions.

Before we get started, I want to remind everyone that a press release covering the Company's fiscal second quarter financial results was issued this morning, and a company of that press release can be found in the Investor Relations section of the Company's website at www.malibuboats.com. 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 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 margins, and adjusted fully distributed net income. Reconciliations of these non-GAAP financial measures to GAAP financial measures are included in our earnings release. Now, let me turn the call over to Jack Springer.

Thank you, Wayne. Welcome to everyone on our first earnings call as a public company. I am excited to be speaking to you today representing Malibu Boats. As most of you know, we completed our initial public offering on February 5, and we used the proceeds to pay down long-term debt and purchase stock from existing owners. Retail sales in the boating industry generally peak in the February to June time period and trough from October through December. However, October through December is an important period for Malibu. This is a period where dealers are evaluating our new model year products, assessing their inventory levels, and planning their businesses for the upcoming boating shows and retail selling season. This is also when we hold our annual dealer meeting, educating our dealers on our new products and building excitement in the marketplace.

By October, we have taken initial orders and are fulfilling demand on new models of boat show products. We work with our dealers in building our inventory level and planning their business for the upcoming retail selling season. It is an important quarter for Malibu, and it really positions us well for the boating year.

On every front we had a phenomenal fiscal second quarter. Net sales were up over 16%, driven by strong increases in both unit volume and average selling price. Our margins improved across-the-board, and we generated the highest second quarter adjusted EBITDA margin in the Company's history. Our new product introductions, which include the 23 LSV, the Axis A24, the Axis T22, and the addition of Surf Gate as an optional feature on all Axis boats have been very well received by our dealers and created a lot of excitement in the market. The demand for these new products has been greater than we even expected.

The 23 LSV is a Malibu Wakesetter, and has sold more at retail than any other model in the Performance Sports Boat segment. The 23 LSV for model year 2014 was completely changed from the hull up, in addition to a versatile wake and surf hull which performs both sports equally well, the freeboard and the entire deck was improved. Strong demand for this boat has caused us to add another set of tooling in our operations about five weeks ago.

The A24 is our first 24-foot Axis boat, and it targets a consumer who wants a larger size boat with top performance capabilities, but doesn't need all of the features offered in our Malibu line. The performance, quality and versatility are there but at a much lower price point. We launched the A24 to the world in August and our dealers really began seeing this new model in our fiscal second quarter.

The T22 was launched at a national dealer meeting in November to rave reviews. It was the most well done, exciting product introduction since I've been with Malibu and Axis. The T22 is a 22-foot traditional bow boat, and it's the first traditional bow design in the Axis line. With the introduction of these two models in Axis, we have doubled the Axis lineup for the current model year.

The addition of SURF GATE as an optional feature to the Axis line of boats for 2014 is something our dealers are extremely thrilled about. We were the first to market with a completely automated electronic surf-wake system. With the addition of new features every year, we continue to hear that SURF GATE remains the best system on the market. While SURF GATE is an optional feature, the historical take rate on Malibu Boats has been close to 100%, and we are seeing a very similar trend for Axis.

I will discuss the market trends for a moment for fiscal Q2 and January. Based on the market data that we have from Statistical Surveys, Inc., I will note the following, which continues to support our excitement for the Performance Sports Boat segment and Malibu. For fiscal Q2, which is October through December of 2013, we had 38 states reporting. Performance Sports Boat units were up 15% over the previous year. Malibu and Axis units combined were up 30% over the previous year.

We have just received January numbers as well, and for January 2014, based on 20 states reporting, Performance Sports Boat units were up over January of 2013 by 25%. The combined Malibu and Axis units were up 58% over January of 2013 at retail. The fiscal Q2 and January preliminary results continue to point to a Performance Sports Boat segment that is significantly outperforming the marine industry in general. Malibu continues to strengthen its number one position and lead the way with performance that more than doubles the rest of the Performance Sports Boat segment.

New product launches and the excitement around our brands led to continued strong demand in the fiscal second quarter, as we have seen, and positioned us well for the boat show season. Starting with New York, the major boat shows began in early January and run through April. The boat shows are where local dealers showcase Malibu and Axis products and interact with retail consumers.

In support of our dealers, we have representatives at many of the boat shows, including factory personnel, but we are really there to support our dealers. This is our dealers' time to work with new and existing customers interested in shopping the market and potentially buying a new boat. Now, with that said, the major boat shows are obviously important events for Malibu, and we've been very pleased with the feedback, the retail sales contracts, and the customer leads coming out of the shows this year.

Except for shows with bad weather, almost all of the boat show venues have seen increased traffic and customers ready to buy versus past years. Malibu has experienced very good results in Minneapolis, Nashville, Dallas, Atlanta, Calgary, Denver, Portland and Seattle, among others.

The surging popularity of lake surfing is continuing to broaden the customer base, shopping the performance sports boat market. And when they see our Malibu and Axis boats offer the best wake innovation, performance, styling and versatility of any boat on the market, they are almost sold on one of our boats. If they are not sold on the boat show floor, we only need to get them on the water at one of our post-show lake events. Once they are on the water and they experience the performance and handling of one of our boats, it's typically game over. As one customer told me at one of these events, why would I buy a station wagon when I can have a Porsche at a better value?

Our boats do everything that a typical person or family would want to do in a boat today, and they do them very well simultaneously. By controlling and even customizing the size and shape of the wake, our boats can accommodate everyone from the beginner to the professional behind the boat. A family can switch between tubing, surfing, wakeboarding and skiing all day long, and at the end of the day with meal on their boat or just by cruising around their lake.

When it comes to on-the-boat activities, the interiors of our boats are specifically designed to accommodate larger groups with more usable space in the key areas of the boats, such as the bow and the stern areas. Our larger boats can comfortably and accommodate up to 18 people in the boat, and they offer customizable interiors that can be modified instantly. Whether you are looking to tow the kids, engage in water sports, or just kick back for a day of leisure on the water, our boats are the most versatile boats on the market.

In summary, we had a very strong fiscal second quarter and are very positive about our momentum and positioning heading into the peak retail selling season. We believe we have the most dynamic and innovative lineup on the market today, and we know how to drive demand through a well defined new product introduction strategy.

Before I turn the call back over to Wayne, I would like to thank our dealer partners. Their passion and their partnership is integral to Malibu's success, and we appreciate them very much. I also want to thank the more than 400 dedicated and passionate people who work at Malibu and live the Malibu lifestyle. They are committed to making the best boat on the market every single day. Thank you. Our boats and the Malibu lifestyle are all about bringing people together. Life without women and freedom are some of the mantras that we have. I am blessed and I am proud to be a part of the Company that values and embraces this lifestyle and has such a passionate group of dealers and employees. I will now turn the call over to Wayne for a more detailed review of our fiscal second quarter results.

Good morning, everyone. It's nice to be talking to you on our first earnings call. As Jack mentioned, we completed our initial public offering, which closed on February 5, selling 8.2 million shares to the public and raising total net proceeds of $170 million. Of this amount, we retailed approximately $70 million, which was used primarily to repay the Company's term loan, and we returned approximately $37 million to a combination of our selling stockholders and member owners.

In conjunction with our IPO, we created an LLC structure to capture certain tax benefits that would have otherwise been lost. The financial implications of the offering are reflected on our pro forma balance sheet and income statement in our press release. I won't walk through all the details because it is fully explained in our IPO prospectus, which is available through our website. But, in essence, the IPO and offering transactions created a holding company that sits the operating company. The holding company is the publicly traded C corporation with a partial ownership interest in our operating company, which is a limited liability company.

For financial reporting purposes, we will be reporting on a consolidated basis. Our GAAP tax expense will appear quite low based on the fact that our C corporation only pays income taxes on a (inaudible) portion of ownership in the LLC. The portion of the LLC owned by our C corporation will vary over time as LLC member-owners exchange their LLC units into Class A common shares of the C corporation as described in our prospectus. This will cause both outstanding Class A common share count to increase as well as our tax liability.

In an effort to provide clear, consistent and comparable communication around our financials, we will supplement our GAAP financials with a presentation of earnings using a non-GAAP metric, adjusted fully distributed net income. Adjusted fully distributed net income is calculated assuming the C corporation owns 100% of the LLC operating company, and therefore reflects a normalized tax structure and tax rate. We believe adjusted fully distributed net income will assist our board of directors, management and investors in comparing our net income on a consistent basis from period-to-period because it removes noncash and nonrecurring items, and eliminates the variability and tax rates and noncontrolling interest as a result of that C structure.

In addition, we will be providing fully diluted share count that assumes all LLC units are exchanged for Class A common shares to be used in conjunction with adjusted fully distributed net income. For example, in today's release, our 22.4 million share count was calculated by adding 11,054,830 Class A common shares in Malibu Boats, Inc. that are currently outstanding, and the 11,373,737 LLC units that are currently owned by LLC members and are subject to exchange into Class A common shares. We believe dividing adjusted fully distributed net income by this share count is the most comparable metric to [other company] earnings per share. With that out of the way, let me review our strong second quarter fiscal 2014 results.

Net sales in the quarter increased 16.2% to $43.9 million. The increase was driven by strong increases in both unit volume and net sales per unit. Unit volume increased 10.1% in the quarter, and we sold 662 boats compared to 601 boats in the same quarter last fiscal year. The increase in unit volume was the result of strong continued consumer demand for our boats, which in turn was bolstered by the introduction of our new models and features that Jack discussed.

Breaking down the unit volume between Malibu and Axis, Malibu units were 493, or 74.5% of total units in the quarter, while the Axis units were 169, or 25.5% of total units. This compared to a unit mix of 80% Malibu and 20% Axis in the second fiscal quarter last year. The [shipment of units for Axis] was in line with our expectations and primarily the result of strong demand for two new Axis models and the introduction of SURF GATE as an optional feature to that supply.

Net sales per unit increased 5.5% to over $66,000, and was primarily the result of a high mix of larger boats and increased sales of our proprietary SURF GATE system. Gross profit in the quarter increased 25.8% to $11.7 million, and gross profit margin increased over 200 basis points to 26.6%. The increase resulted primarily from production efficiencies on the increased volumes, fixed cost leverage on higher than average selling prices, and product cost reductions from our ongoing initiatives.

Adjusted EBITDA was $8.7 million in the quarter compared to $6.8 million in the fiscal second quarter last year, an increase of 28% driven by both higher volumes and improved gross margins. Non-GAAP, pro forma, adjusted fully distributed net income totaled $4.4 million, or $0.20 per share. This is calculating using a normalized C corp. tax rate of 37.3% and a fully distributed diluted share count of 22.4 million shares. Comparisons to year-ago results are not meaningful since we had no comparable shares outstanding nor were we a corporate taxpayer under the historical business model. For reconciliation of adjusted EBITDA and adjusted fully distributed net income-to-GAAP metrics, please see the tables in our earnings release.

Turning to the balance sheet, pro forma per IPO, cash and equivalents were $7.1 million at the end of the second quarter. I would also note that prior to IPO, we paid a $3.2 million tax distribution to our member-owners for income allocated to them during calendar 2013 that is not included in the pro forma second quarter cash balance. The other significant adjustments to the pro forma balance sheet include elimination of our long-term debt and a long-term asset and payable related to the tax benefits derived from the up C structure.

Looking forward, we believe the current median estimates for revenue and adjusted EBITDA for fiscal 2014 represent reasonable targets of our performance for the full fiscal year. Our second quarter results and trends were in line with our expectations, and our outlook for the remainder of the fiscal year is unchanged.

In our outlook, however, there are some differences between the first and second halves of the fiscal year that are worth noting for modeling purposes. The first of these is unit volume mix between Malibu and Axis. With a strong reception of our two new Axis models and the addition of SURF GATE as an optional feature to all Axis boats, we expect strong Axis sales to shift the unit mix in the 28% to 30% range in the second half of the year. This compares to 16% in the second half fiscal 2013, as we purposefully limited shipment volumes to reduce channel inventories prior to the introduction of SURF GATE on Axis.

The second difference between the two halves of the year had to do with production and productivity rates. As you know, we do not produce any speculative inventory, and all of our boats are built pursuant to a purchase order from a [dealer]. These purchase orders ebb and flow throughout the year based on demand trends and the normal seasonality of the business. We obviously cannot be changing the production side of the business based on the daily workflow, and we generally set our production schedule 6 to 12 months in advance. This allows us to better define our costs and drive higher production efficiencies over time. Beginning with the third quarter of fiscal 2013, we set the production levels by approximately 15%. On a year-over-year standpoint, this means the first half of fiscal 2014 benefited from higher production rates relative to the first half of fiscal 2013. In the back half of fiscal 2014, the year-over-year production comparison is relatively flat. Therefore, we have planned business around a greater benefit to gross margin in the first half versus the second half of 2014.

As I said, all of these factors were fully built into our expectation starting the fiscal year and the way we are projecting the business has not changed. We simply wanted to give you some additional color around these trends to help us better understand some of the planned differences in the first and second half of the business. As Jack said, we feel very good about the momentum of our business and the recovery in the Power Sport Boat segment both in the second fiscal quarter and coming up boat shows. We are continuing to drive demand, renew product introductions, and believe we are well positioned to continue gaining market share. With that, we would like to open the call to your questions. Operator?

(Operator Instructions) . Our first question will come from the line of Joe Hookah from Raymond James. Your line is open.

Thanks, guys. A couple of quick questions. First, you mentioned you set your production volumes 6 to 12 months in advance, but if retail continues to be as strong as what we're seeing in January and in the back of -- well, the fiscal second quarter, how quickly can you take advantage of that and kind of match you production levels with demand? And then I have a quick follow-up after that.

We can adjust very, very quickly, as soon as those orders come in. We have -- currently we are operating at about 14 boats per day, and we can take our count up. And in addition to that, we work a 4-by-10 workweek, so therefore we can add additional Fridays. So, we feel like we can take advantage of that very quickly.

And I know SURF GATE has been pushed down to the Axis brand. Are the take rates the same on Axis as it was on Malibu, or similar?

Yes, we are nearly 100%.

Great. That's all I had for now. Thanks.

Thank you. Our next question will come from the line of Tim Conder from Wells Fargo Securities. Your line is open.

Thank you. Jack, you gave us color on what was going on at retail through January, but just from in conversations with your dealers, what's the feedback on February. Obviously, January was not too impacted by weather; just any color on February that you would have there, sir? And then, Wayne, thank you for the color on the mix of Axis going forward here in the balance of the year. Longer term, do you see at some point the mix of Axis versus Malibu plateauing? And then I have one other question after that, gentlemen.

Okay. In speaking to February versus January, it is still a very positive scenario for our dealers. As an example, the Dallas show, the Calgary show, the Seattle show were all a part of those February numbers, and they had extremely good boat show season. We're still seeing others that are not in the boat shows that are having retail sales. There seems to be a tremendous amount of demand for the new product, for Axis for the 23 LSV. And, as I mentioned, we had to add another set of tooling for that 23 about five weeks ago. So, the weather really impacted only two to three shows with New York being the primary one at the very beginning of the season.

And, Tim, good morning. With respect to the mix of Axis, we have historically seen a mix of Axis in the high teens or 20% range, and as we brought out two new models, it [means] where they are targeted in terms of the position in the market. We can see that -- you know, our goal for market share there is to increase it, and it's not to increase it one percentage point, so we can definitely see Axis in the top end of the 20% range, kind of 25% to 30% is a ballpark right now. The strong acceptance of those new models right now is something that we are pleasantly surprised by and we'll monitor.

Okay, okay. And then, gentlemen, zooming out a little bit more here on the fiscal year, any color that you can give us from the perspective of where you're looking at for adjusted EBITDA range on that or margins, or any color on that, or just total revenues for the fiscal year?

I think what we said was there is clearly a bunch of estimates out there. We're comfortable with the median of the analyst estimates on revenue and adjusted EBITDA as a reasonable target for the year.

Okay, great. Thank you, gentlemen.

Thank you. (Operator Instructions) Our next question will come from the line of Mike Swartz from Suntrust. Your line is open.

Hey, good morning. I just wanted to touch on the, maybe the capacity, the production question earlier just maybe in a different way. I mean, given some of the strength you've seen in early 2014 here, and the commentary around some extra tooling for the Malibu product that you mentioned, is there a scenario where maybe some of that demand is still left on the table as we move through 2014?

This is Ritchie. No, we've got that covered and that piece of tooling that took those extra orders that we have off the side, so we will not be leaving any of those on the table.

And I think one thing I think that is important to note is that we manage our business and plan our business to an annual number. So, in the July time frame, when we're starting our fiscal year, we're putting a volume target out there with model mixes and we're making sure over the course of the year -- because the boats that we're building from July through June are really fulfilling a lot of orders that are in retail demand from October through September. And so we feel like we've reacted to the market demands and the needs so far, and then we're well positioned to be able to take advantage of opportunities if they present themselves.

Great. And since you're shipping and maybe touching on, I know there's a pretty big regional or geography aspect to this, the wake in power sport boat market, anything you're seeing in that core, kind of Southwest US region thus far that gives you more kind of excitement about the year ahead?

I think the year continues to be very strong. That is a very strong region for us, about 39% market share. We are hearing from our dealers at the boat shows on the West Coast, Denver, for example, have all been very strong. The Texas boat shows are also very strong. So, we believe that we're continuing seeing an uplift in that Southwest region, and really as well as all the regions.

Great. Thanks for the color, guys.

Thank you. Our next question will come from the line of Gerrick Johnson from BMO Capital Markets. Your line is open.

Hey. Good morning, everybody. I was just wondering if you could talk about channel inventory, what it looks like out there at the dealers right now. Are we lower than last year, higher, sideways? And I have a few follow-ups. Thanks.

Channel inventory we track both on a micro basis quarterly, bottoms up buildup, and a macro basis top down monthly. And we are from a dollar perspective up year-over-year. When you adjust that for both market growth and what we expect our market share to be and ASP. So, on a unit basis we're in line with 2012 and 2013 in terms of the amount of inventory that is in the channel.

Okay, that's great. Thank you. And on ongoing plan expansions, is there any incremental expense in the quarter from that activity, and what should we expect going forward on that? Thanks.

Not a huge expense flowing through in the quarter there. There's a little bit of labor -- there is a little bit of labor that is uncapitalized that is going to flow through in the quarter, but it's not a meaningful number. And on a go-forward basis will be -- we'll probably experience a little bit of labor flowing through the P&L with respect to that, but any material will be capitalized (inaudible).

Okay, great. And lastly, with the big shift to Axis, yet you saw a 5.5% increase in sales per boat, I guess we could probably do the math on our own. But just in general, what would the sales per boat have been, what would that growth have been in each of your brands if you kind of isolate them and isolate the mix shift?

Great question. I'd like to follow up with you just on the specifics of it. In general there is also an impact of SURF GATE on Axis, right, and so that's another element of that. But I'd love to follow up and just give you the actual precise numbers.

Okay, sounds good to me, thanks.

Thank you. (Operator Instructions) Our next question will come from the line of Joe Hovorka from Raymond James. Your line is open.

Thanks, guys. Just a couple quick follow-ups, particularly on the dealer inventories. So, your retail was up 30% in the fiscal second quarter, and wholesale shipments were up 10%. So, clearly, retail grew much quicker than wholesale. Two things -- one, that would suggest that retailer or dealer inventories are coming down. I know there is a seasonal difference here between wholesale shipment and retail sell-through. But then I guess the second question would be, we would expect that on a full year basis that retail and wholesale should match relatively closely; is that correct?

Our goal would be for retail and wholesale to match over the course of the year. There will, you know, add some tiny puts and takes between wholesale, but, yes, absolutely, the goal over time is for that retail to match that wholesale.

I think with respect to specifically to the fiscal second quarter registration statistics in January, what you see there is really the (inaudible) small numbers, right? They are just relatively small. Those four months that we talked about are relatively small months from a registration perspective. A small amount of boats can do a big move, but I think the reason why we included that as part of our conversation is that we think it's, you know, indicative. I think those growth rates are really out there a bit, and I think over the course of when you start to get into the months of larger registration, you'll see it more accurately reflect kind of what we are seeing in our volumes.

Yes, sure. I'm not implying that that should be flat line throughout all of '14, but just wanted to kind of get that. We did start the year last year if I recall, being very poor weather and even the ski business, if I remember correctly, had a difficult start to the year because of weather. So, the first six months of fiscal or rather calendar '14 would be relatively easy comps?

From a registration?

Yes.

Yes, from a registration perspective, there was a modest delay in deliveries, and so if you looked at the quarter calendar 2013 quarterly registration growth rates, they accelerated throughout the year, and call it Q1 low, Q2 was a bit faster, and Q3 and Q4 were better. So, yes, there is probably a little bit of a low comp in Q1, '14 versus '13.

Okay. I think you mentioned that you bumped production about 15%, I think was it almost four quarters ago. Was that the last time you bumped production?

Yes.

Great. That's all I had.

Thank you. Our next question will be coming from the line of Tim Conder from Wells Fargo Securities. Your line is open.

Thank you. On that production thing, gentlemen, Ritchie, you mentioned that you've added the tooling here on Axis in the last five weeks. And, Jack, you said also that you do have some flexibility here with the work schedule. So, 14 boats per day now, just remind us, I guess, where your plan is for the year, and then how quickly you can take that to 15, 16, 17 boats per day here as the current configuration of the plans stand.

Yes, Tim, let me correct something very quickly. The additional tooling was added for the 23 LSV, so that's on the Malibu Wakesetter side, and that was a good event for us, certainly. In terms of responding to the demand, we can very rapidly take it up to 15 or 16. We don't believe that we have to add a number of people to do that. But what we do is we utilize Fridays, as an example, to have those peak build times, and then if it's going to be a longer term scenario is when we add people. But ultimately, going back to the first of the year ,we have largely predicted and planned our business around the uplifts. And so we're managing on that full year basis, so we don't believe we'll be surprised.

This is Wayne. In terms of that planning cycle, we are -- we build various plans off of the baseline, so that we don't have to chase that retail demand too much, right? To Jack's point, if we need to stop at 15 or maybe stop at 16, we can do that and add Fridays. We can do all of those things, but it's all based off of beginning in July, what is that number [out at the end of the year] so that those step functions that we have to perform to meet any fluctuations in demand are less in magnitude.

Okay. And then I guess from one other modeling question here, gentlemen, how should we think about growth in your diluted share base from an option, as options would flow in over time? Just any color that you can give us there, Wayne.

So, as of now we have 7.5% of the total diluted number outstanding for grants. But they are ungranted at this point in time, so it should be relatively modest from here on out. Anything that was granted prior to the IPO is calculated in that 22.4 million share base.

Thank you for the clarification. Appreciate it.

Thank you. And at this time I'm not showing any further questions. I would like to turn the call back over to management.

This is Jack. Thank you for your participation. We look forward to speaking to you again on our next earnings call. Have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.