Malibu Boats Inc (MBUU) 2014 Q4 法說會逐字稿

Welcome to the Malibu Boats conference call to discuss fourth quarter and FY14 results.

(Operator Instructions)

Please be advised that the 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 Jack Springer, Chief Executive Officer; and Wayne Wilson, Chief Financial Officer. I will turn the call over to Mr. Wilson to get started. Please go ahead, sir.

Thank you. Good morning. Welcome to Malibu's earnings call covering the fourth quarter and fiscal year ended June 30, 2014. Also here with us is Ritchie Anderson, the Company's Chief Operating Officer. Jack will provide commentary on the business. I will discuss the fourth quarter and fiscal year results. We will then provide some commentary on FY15 and open the call to questions.

Before we get started, I wanted to remind everyone that a press release covering the Company's fourth quarter and FY14 financial results was issued this morning. A copy 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 may 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. 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. We encourage you to review our SEC filings for a more detailed description of these risk factors.

Please note that we will be referring to certain non-GAAP financial measures on today's call, such as adjusted EBITDA, adjusted EBITDA margin 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 everyone to our call. We had another very strong quarter, which capped off a remarkable year for Malibu Boats.

Our fourth quarter results are particularly noteworthy, given the strength in the business last year and the challenging comparison that we were up against. Nonetheless, we delivered on every metric. We were very pleased with the way the business performed and for our momentum into the new year.

As we have discussed before, we are committed to driving profitable growth through a balanced approach to managing volume, mix, productivity, expenses and inventory. Our fourth quarter results were another example of this. We drove strong sales growth of 9% through solid increases in both unit volume and average selling price. This also benefited our margins and drove strong adjusted EBITDA margin of 19.4%, which remains at the top of our peer group.

Both our Malibu and Axis brands performed very well in the quarter and for the full year. Our new product introductions continue to create a lot of excitement in the market. With the launch of two new Axis boats in FY14, the A24 and the T22, along with the offering of Surf Gate on all Axis product, we have seen significant growth in the Axis brand. Axis sales were phenomenal in the fourth quarter, outperforming our expectations and driving a lot of momentum in the brand. In just three years, from the period 2010 through 2012, Axis became the Number Six market share leader.

We believe with the new models in Surf Gate, we will propel Axis to the Number Four or Number Five market leader position in the near future. Our dealers continue to tell us that the ability to offer both Malibu and Axis is a powerful combination, which allows them to sell to just about any customer in the marketplace. Whether it's a first-time buyer on a budget or a longtime boater looking for the best performance sports boat that money can buy, our two brands cover the entire spectrum of buyers.

Our fiscal fourth quarter runs from April through June. As you know, that is the peak of the boat buying season. This is when customers want to get their boats on the water and begin to live the Malibu lifestyle. It's a critical time of year because the industry is moving very quickly. We and our dealers are doing so many different things to service our customer base.

Malibu is shipping our highest volume boats for the year during this time, monitoring inventory levels in the channel, finalizing new product introductions, evaluating dealers and working through budgets and plans for the next year. As you know, new product development and innovation is one of the key variables that drive our organization. We have always led the industry when it comes to innovation. We know how to drive demand through the continuous flow of new products.

We are very excited about our lineup for FY15. For starters, we will be offering four new or completely redesigned boats this year, two on the Malibu side and two on the Axis side.

In July, the first of those boats began manufacturing. It was the Malibu 22 VLX. This boat replaces the 21 VLX but is a completely new boat. It is 22 feet in length. Everything from the hull to the deck to the dashboard and the gel schemes are all brand-new. Annually, the VLX is our second best selling boat behind the 23 LSV, which as you know, we redesigned last year.

On August 1, we began manufacturing our new Axis A22. The A22 was our flagship Axis boat. It has been our best selling Axis model. This has been our third best-selling boat between Malibu and Axis since 2010. We expect the redesigned to be very popular.

We previewed the new 22 VLX and the A22 at a Top 10 dealer meeting in early June. Both boats were extremely well-received. The feedback from our regional dealer meetings that we held in mid-August was also very positive. This was the first opportunity for sales personnel from dealerships to be in the new boats and experience the rich, new features that we were offering. They and we are very excited about the new models this year.

We will also have two additional boats, one Axis and one Malibu, launching right before the boat show season. We look forward to sharing more information with you on a later call regarding those boats. Including the new Axis boat to launch later this year, we will have five different models in the Axis line-up. In just 15 months, we will have taken the Axis brand from just two models and developed it into a full brand covering the full spectrum of lengths and styles.

In addition to the new models, we have a number of new features and innovations that we will be launching this year. In fact, we will be launching more features and innovations than any other year in the Company's history. These features and innovations are not just small changes either. We have introduced cutting-edge new features that impact the performance of the boats, the aesthetics and the reliability of every boat.

Let me just touch upon a few of the biggest new features for this year. First, we are launching brand new towers for both Malibu and Axis. The G4 is the new Malibu tower. It is unlike any other tower in the market. It is 100% machined aluminum with an internal honeycomb design and contains no tubes or welded parts. It is, without a doubt, the most advanced tower in our segment today and can be lowered and raised with just 30 pounds of pressure.

It also features a new state-of-the-art latching system. The G4 will be an optional feature on all the Malibu Boats this year. Dealer feedback on the new G4 tower has been overwhelmingly positive. We expect this to be a popular option. We have also upgraded the standard G3 tower this year and added its own latching system, which had been requested by a number of our customers.

As you know, we have a history of launching industry changing technology and features. In 2006, we launched the Power Wedge, which gave boaters the ability to customize the size and the shape of the weight by adding 1,200 pounds of simulated ballast. In 2012, we launched Surf Gate, the industry's first and best dedicated surf technology, that allows the user to surf either side of the wake and transfer the wake with a touch of a button.

For the FY15 model year, we will be launching our most advanced surfing and wakeboarding technologies yet, for an integrated solution that is totally unique to the marketplace and keeps us well ahead of the competition. The system features a new hydraulic power wedge, called the Power Wedge II, that uses a larger reengineered foil to create an additional 300 pounds of simulated ballast. This will create a total of 1,500 pounds of weight creating water displacement, making for the biggest and smoothest wakeboarding wake in the industry.

In addition to a larger wake, the new Power Wedge reduces the planing time of a fully loaded boat by more than half to as little as four or five seconds. Now, this is very important to our customers because getting a boat on plane allows activities to occur more quickly and substantially reduces fuel burn. I'm very excited with how the Power Wedge II and Surf Gate systems are now integrated and will work together with our versatile hulls to create the most advanced weight control system across the industry. The integration of the two systems for wakesurfing allows for the ultimate customizable way for both wakeboarding and wakesurfing allowing users to adjust the size and the shape of the wake.

When you add the convenience of being able to lock in a rider's preference with our preset feature, surfing has never been easier nor better. No one offers such an integrated surfing solution. Without a doubt, this is the best surfing experience on the market.

We will also be introducing and have introduced a new dash with Viper 2 technology platform this year. This is an outstanding achievement by our team. We are very proud. Our dealers are ecstatic about it. Features of this dash and system include the markets first 12 inch swivel touchscreen, that has LED light quality. Unlike previous screens, this large state-of-the-art screen can be seen from almost any angle and is not impacted by ambient light as with previous screens.

I liken it to the visibility improvement of having a plasma screen on a TV and skipping all other versions directly to an LED type of quality. In addition, it has a completely redesigned user face that allows the driver to control every major function from the home screen. This compares to our competitors, which will require you to scroll through many screens and many paths to adjust a particular feature. People who have sat in our Wakesetter 2015 models have raved about the intuitiveness and the ease of use.

The new dash also use what I call the Viper 2 technology. This is the technology platform. This platform has new features available for the first time this year. It will allow us to add features to the system for years to come with minimal cost.

We also have an optional sport package on our new dash that we believe will be a high demand feature. It replicates major functions with a manual dial and includes an adjustable cell phone holder for easy access and play of music from your phone.

This year, we will also be advancing our dual engine strategy. If you recall, this was an important strategic initiative that we began last year. In 2015, we have two suppliers delivering our proprietary Monsoon engines versus a single supplier two years ago. Indmar will be supplying engines for Malibu. PCMW will be supplying the Axis and Response series engines, both under the Monsoon proprietary brand.

In July, we completed the second phase of our planned expansion in Loudon, Tennessee. We added a new mezzanine and moved all of our upholstery, cutting and sewing into that mezzanine area. This completed the build-out. Then we also completed the build-out of our brand new distribution center. The third and final phase, now that distribution has been moved, will be to enlarge the capacity of our rigging and final detail lines by expanding into the previous distribution footprint.

We are on schedule to complete the project by year-end. Our manufacturing capacity at that time will be raised from 4,000 boats per year to a capacity of 5,000 boats per year.

We continue to work on the closing of our Australian license business. Internal due diligence has been satisfactorily completed. External due diligence is on schedule. There have been no revelations that would preempt our planned close of this acquisition.

The acquisition represents an important next step in our international growth strategy. Australia is an important region to the boating industry, not only because of the size of the market, but because of its proximity to Southeast Asia and its ability to serve that region of the world. This acquisition will give us ownership of our brand worldwide and take our international distribution to approximately 15%, providing a platform with which to continue to grow our Australian and New Zealand business. Another advantage is that it will allow us build a stronger presence in Asia.

We also continue to expand our grassroots marketing across the globe. A new event that we will be sponsoring in a couple of weeks is a brand new wakeboarding competition that will feature top ranking professional men and women competing for huge prize money and celebrating the 25th anniversary of the World Wakeboard Association. It's called the WWA Cancun Pro. It will take place in Puerto Cancun, Mexico from October 3 through October 5. We are the lead sponsor and all of the competitors will be pulled by the 2015 Malibu Wakesetter 23 LSV. The Cancun Pro will be the industry's biggest event of the year. It will pay tribute to the sport of wakeboarding. This event will have a large reach and prominence in Mexico, the United States and South America. It should generate a lot of attention.

At this point, I want to turn the call over to Wayne. I will come back for some final commentary.

Good morning, everyone. We had a very strong fourth quarter and fiscal year. Net sales in the quarter increased 9% to $53.4 million. The increase was again driven by solid increases in both unit volume and net sales per unit. Unit volume increased 5.8% to 799 units. Net sales per unit increased 3% to nearly $67,000 per unit. Both Malibu and Axis performed well in the quarter. As we discussed previously, we expected Axis sales to make up 28% to 30% of unit volume mix in the back half of the year.

Axis sales were very strong in the quarter and ran slightly ahead of the second half expectation at 247 units and 30.9% of unit volume mix. Strong demand for our two new Axis models and the introduction of Surf Gate as an optional feature to the Axis line continued to propel the Axis brand.

In addition, as we mentioned on last quarter's earning call, we purposely limited shipment volumes on Axis in the fourth quarter of FY13 to reduce channel inventories prior to the introduction of Surf Gate on the Axis line. This skewed the unit volume mix towards Malibu in the fourth quarter last year and benefited average selling prices and margins.

Gross profit in the quarter increased 5.3% to $14.7 million. Gross margin remained very strong at 27.5%. Gross margin was above our expectation and what we discussed in the third quarter earnings call. If you recall, we expected gross margin to be relatively flat with the third quarter and down year-over-year -- on a year-over-year basis as a result of the difficult unit mix comparison to last year. Partially offsetting the negative impact of the mix shift were higher volumes and higher average selling prices in the quarter.

Fourth quarter selling and marketing expense increased to $1.6 million from $1.1 million last year. As a percentage of sales, selling and marketing increased 80 basis points to 3.1%. The increase was primarily the result of shift in timing of marketing expenditures within the year and marketing related events.

Fourth quarter general and administrative expenses, excluding amortization, increased $1.8 million to $4.7 million on a GAAP basis. The increase was primarily related to public company costs and higher litigation expenses. Fourth quarter adjusted EBITDA was $10.3 million. Adjusted EBITDA margin was again very strong at 19.4% and was above our expectations. Fourth quarter non-GAAP adjusted fully distributed net income totaled $5.5 million or $0.24 per share. This is calculated using a normalized c-corp tax rate of 36% and a fully distributed diluted share count of approximately 22.5 million shares.

Just touching on the full-year numbers quickly. Unit volumes increased 9%. Net sales increased over 14%. Margins increased across the board, with adjusted EBITDA increasing 17.4% and the Company achieving adjusted EBITDA margins of 19.5%, a record for any Malibu full fiscal year. For a reconciliation of adjusted EBITDA and adjusted fully distributed net income to GAAP measures, please see the tables in our earnings release.

With that, I want to hand the call back over to Jack. I will then finish up with some commentary on our outlook for FY15.

Thank you, Wayne. We have a couple of updates regarding our ongoing litigation with Nautique and PCMW. We are obviously very limited in what we can say here, given the ongoing nature of both of these cases. In the Nautique litigation, there are a couple of summary judgment motions that are before the court at this time. In addition to that, depositions are scheduled to begin in October. The trial is scheduled for February of 2015.

Regarding the PCMW IP litigation, as a part of the court order on August 22, denying the Company's summary judgment motion, the District Court ruled that if successful at trial in proving that the Company infringes on the design patent, PCMW would be allowed to seek recovery of Malibu's profits from the sale of the boats, using the alleged infringing windshield and not merely the profits from the windshield. The Company has estimated that as total profits on those sales are approximately $8.6 million excluding prejudgment interest and PCMW has alleged that such profits are approximately $155 million including prejudgment interest. As of the 2014 model year introduced in mid-2013, the Company's product lines no longer include boats using the alleged infringing windshield.

Notwithstanding the foregoing, the Company believes that PCMW's claims are without merit and intends to continue to vigorously defend the lawsuit. I know there may be some other questions around these two cases but we are not at liberty to comment on this any further. We appreciate your understanding to the sensitivity of this matter.

As you know, at the end of each fiscal year, we go through an extensive planning and budgeting process for the upcoming fiscal year. This is where we look at industry trends, inventory in the channel, new models and features, production capacity and a number of other items to finalize a detailed annual budget. We then use this budget to plan the production schedule. We are very disciplined with this process.

Our goal is to drive profitable growth and market share gains over the long-term. We take a very balanced and calculated approach to doing this. Our operating margin is one of the highest in the industry. This can only be achieved by maximizing productivity across the entire supply chain and executing against a rigorous balanced operating plan.

FY15 is no different. We have been very disciplined in developing our plan. We are very optimistic about our business and our positioning within the industry. The boating industry as a whole continues to recover. The power boat segment continues to gain market share in the stern drive segment. We are Number One and the market share leader in the power boat sector and should continue to benefit from these trends.

We have the best dealers in the performance sports boat segment. Together, we believe we are well-positioned to continue to grow profitably and gain additional market share over time. I will now turn the call back over to Wayne for a few details on our outlook for this year.

Thanks, Jack. As you know, we do not provide detailed earnings guidance. Like Jack said; however, we do go through a rigorous planning process and look to execute throughout the year against a very detailed operating plan. This plan is finalized in the weeks preceding the end of the fiscal year and may vary from materials we had initially laid out earlier this year with our IPO. Let me provide some basic commentary on a few things that may be helpful in thinking through your models for this fiscal year.

First, we are initially planning our annual production schedule around a mid to high single-digit increase in unit volume. As Jack mentioned, we will be launching four new or remodeled boats this year, two on the Malibu brand and two on the Axis brand. The Malibu 22 VLX and the Axis A22 boats are both in production now. We will begin production of the third and fourth boats later in the calendar year. For this reason, we expect unit volume growth to accelerate through the third fiscal quarter, peaking in the low to mid double-digits.

From a mix perspective, the split between new Malibu and Axis boats will not be as skewed this year. Axis should be in the low 30% range over total volume. This unit mix combined with our standard price increases and increased selection of optional features, like the G4 tower, should continue to benefit average selling prices. We think net sales per unit will likely be up somewhere in the low to mid single-digit range this year. For the full year, we expect to see a modest improvement in gross margin, driven by productivity gains in the quarters with the highest year-over-year volume growth.

On the expense side of the business, we are preparing to possibly go to trial in two different court cases and could incur a substantial increase in legal and professional related fees. We are limited to what we can say here, but I hope to put these cases behind us and for professional fees to begin moderating later this year. At the moment, we believe professional fees could be $1 million or $2 million higher in FY15 than they were in FY14 or in the $3.5 million to $5 million range. Based on the current trial dates, we think professional fees could be much higher in the first and third fiscal quarters than the second and fourth fiscal quarters, with first quarter being the highest at over $2 million.

As Jack discussed, we will be the lead sponsor of the WWA Cancun Pro tournament and industry celebration October 3 through 5. This will shift some additional marketing dollars and G&A expenses to the first and second fiscal quarters versus last year.

Net-net, we expect adjusted EBITDA margin to be up slightly for the fiscal year. This is despite the fact that this will be our first year with a complete 12 months of public company costs. On a quarterly basis, we think adjusted EBITDA margin could decline slightly in Q1, due to the incremental public company costs, be relatively flat in the second quarter and then improve sequentially on a year-over-year basis in the third and fourth quarters.

As far as Australia is concerned, we will look to provide you with some commentary on how to model this business after the acquisition closes. However, to give you some perspective here, Australia sold approximately 300 units in the latest fiscal year.

In closing, we are very pleased with our fourth quarter and full-year results. We feel very good about the trends both across the industry and in our business. We believe, we have a compelling lineup of new models and features to drive demand in FY15. We expect to continue gaining market share.

With that, we would like to open the call to your questions. Operator?

(Operator Instructions)

Joe Hovorka, Raymond James.

A couple quick questions, one, did you guys give a retail sales number for the June quarter? What the increase was?

Repeat the question, Joe?

Did you give a retail sales increase number for the June quarter?

No. We did not.

Could you?

I don't think that we have final numbers yet.

Okay.

I mean, so the retail sales number for the quarter in terms of what you're seeing from registration perspective domestically is in the mid double-digit range.

Mid double -- like, mid-teens?

Mid-teens, yes.

Okay. A couple of the options that you've announced, the new tower which is -- you said it was an option. What is going to be the price to the consumer? Your idea on what percent uptake you'll get on something like that?

The approximate retail price to the consumer is going to be about $5,000. We've planned for a fairly small uptake in the 25% range, I believe is where it's at, just to go forward with that. So far the demand coming in has been about at that rate.

Okay. The Power Wedge II -- is that also an option?

It is not. I mean it is an option -- the Power Wedge II is an option. But we expect that take rate to be very, very high.

The Power Wedge II replaced the Power Wedge as the option. Our take rate on the Power Wedge historically has been in the high 90%s.

Okay. I think that's what I have for now. That's all I've got for now guys. Thanks.

Thank you.

(Operator Instructions)

Mike Swartz, SunTrust.

I think you made some commentary in your prepared remarks about Axis and seeing that maybe go from the Number Six brand to Number Four or Five over the next -- I don't know what time horizon was. But as you think about the business, I mean, what does that mean for incremental sales? Is that going to be cannibalistic at all to the Malibu business? Or are you planning for that to be entirely incremental to that additional unit base?

We're not planning for it to be cannibalistic. We've not seen that with Axis since its inception. There are some specific tech competitors that we have targeted. I will say that just based on the preliminary numbers, we are seeing that as Axis grows, those competitors are decreasing in market share in number of units, which would be what we would want out of Axis.

Okay. Great. Then just with the Australian acquisition, I know there's little you're going to say right now until that deal closes. But just as we think about that business and the start-up as you get in there, assuming it does go forward, are there any heavy -- is there any heavy lifting or investments that are needed in that market? How quickly can you start manufacturing some of the larger models out of that facility?

It is not really going to be around equipment or investment. They have manufactured -- they manufacture the 23 LSV today. So as we receive demand for those larger models, I think it's just a matter of training and doing things somewhat a little bit differently. Day One, this will be accretive for us. This is a business -- this is one of the reasons that it makes so much sense -- it's a business that manufactures our boats and does exactly what we do. So from a Day One point of view, we can just go in and continue business as usual. That's very, very attractive.

From a capital investment standpoint, they have invested substantially in their infrastructure over the past 12 months. It's actually pretty impressive, the amount of money that's been put into the infrastructure that exists. We've been pleasantly surprised by that capital investment.

Just to clarify, the guidance of -- or the general view of FY15 that you laid out for us at the end of the prepared remarks, that does not include the Australian business. Correct?

Correct, sir.

Okay. Wonderful. Thanks, guys.

Tim Condor, Wells Fargo Securities.

Thank you, gentlemen for the good explanation during your preamble there. Just if you could revisit where -- I know the final second quarter calendar numbers are not in from SSI for the industry, but revisit where you think your market share is specifically for Malibu and Axis?

Then the closer date, are you still anticipating here at the end of September on the Australia acquisition?

The numbers are not in yet. Tim, we really don't want to share the difference between Malibu and Axis. What I will say is that based on the indications that we're seeing -- we look at it again over that 12 month period. It's very important to look at it on that trailing 12 months. Malibu as a Company has continued to grow its market share in that TTM scenario.

Okay. Okay. Then the closer date on Australia, gentlemen?

Still projecting toward the beginning of the first quarter -- second quarter, excuse me. So in the October 1, timeframe.

Okay. Okay. Thank you. I look forward to seeing you guys early next week.

Thank you.

(Operator Instructions)

Gerrick Johnson, BMO Capital.

Just a quick question on payables. It looks a little low. Why were they low?

Payables were low -- because of our capital investment projects here, we actually took some -- our plan was to have a longer shutdown this year, in terms of the number of days that the factory was down so that we could -- instead of trying to cohabitate with a production with a capital investment project, we took some days out of that production schedule. So we shutdown a few production days earlier. What that resulted in was payables decreasing. You saw a little bit of the same phenomenon on the AR side.

Okay. Makes sense. Thank you. Then Wayne, could you just comment on inventory in the channel? Where do we stand in the channel?

Inventory in the channel is -- when we look at it compared to our historical levels, very consistent with prior years that we think are healthy, not dissimilar to other years -- how we manage the business, there's always pockets of strength and weakness and dealers that you're managing situations. Whether it's the dealer performance, something specific to their local economy or whatever, but nothing out of the norm and consistent with what we've seen in the past couple years.

Okay. Is your dealer count higher this year than it was last year at this time?

It's approximately the same number. We've added a couple of Axis dealers.

Okay. Okay. I'm just going to squeeze one more in there. The June quarter still saw some weather-related issues and I'm thinking primarily rain in some key markets in the Midwest. Did that have a big impact on your retail sales? Could you just talk about that real quick?

No. It didn't. I would put the weather-related impact more in that April/May timeframe. Once the June period hit, we saw very strong retail demand in that June/July/August timeframe. We are very pleased with the sell-through.

Okay. Great. Thank you guys.

Thank you.

Thank you, I'm showing no further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Have a great day everyone.