Malibu Boats Inc (MBUU) 2015 Q4 法說會逐字稿

Good morning, and welcome to Malibu Boats conference call to discuss fourth-quarter FY15 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. On the call today from management are Mr. Jack Springer, Chief Executive Officer, and Mr. Wayne Wilson, Chief Financial Officer. I will turn the call over to Mr. Wilson to get started. Please go ahead, sir.

Thank you, and good morning, everyone. Ritchie Anderson, the Company's Chief Operating Officer is also on the call today. Jack will provide commentary on the business, and I will discuss our fourth quarter financials, and initial outlook for FY16. We will then open the call for questions. A press release covering the Company's fourth-quarter and FY15 results was issued this morning, 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, 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. I would like to welcome everyone to our call. Thank you for joining. Malibu had a solid quarter and results that were again in line with our overall expectations, which makes it the sixth straight quarter since becoming public that we have met or exceeded expectations. The United States, our largest market by far, continues to see a rebound and experienced the same growth. However, there remains a large degree of upside in growth, before we begin to reach the peak volume levels of 2006.

Continued strength in the US and Australian markets offset currency-related weaknesses in many of our international markets for the quarter. Overall, the US market performed consistent with our expectations, and currency hindered markets such as Canada, South America and Europe, were weak as expected. Australia was slightly stronger than expected.

This makes sense, because we sell our product to all international markets in US dollar currency, while Australia receives the benefit of lower costs by manufacturing in country versus boats that are imported. The strength in Australia led to some upside in unit volume for the quarter, and we shipped more boats than we originally projected.

Wayne will go through the numbers in more detail, but the bottom line is we continue to execute very well against our global growth initiatives, and delivered another quarter of good results despite challenges in the global market.

Our fiscal fourth quarter is an exciting and very busy period for Malibu. During this quarter, Malibu fulfilled the last of the boat show season orders, as well as early summer demand. This is also the time that we begin to transition the business to the next model year through our strategy and planning processes.

Part of our planning process involves rigorously analyzing channel inventories. We have continued to see our dealers sell through inventory, and we are very pleased with where channel inventories came in at the end of the fiscal quarter.

The most exciting aspect of the fourth quarter is new product introductions. This is when we are in the final stage of bringing new product to market, with introductions that began in early July and continue into August and September. I will speak more about our new product in a few moments.

Weather can be a factor in the spring and summer seasons which we saw last year and the year before that, but in general, we saw a more normalized seasonal pattern to the business this year. A couple of exceptions to this were the upper Midwest, which was negatively impacted by very high levels of rain in June and July, and Texas which experienced severe rain and flooding in May.

While the heavy Texas rains may have impacted the early demand trends in the number one volume state for performance sports boats, this should be a positive longer term. Lakes in Texas, some of which had public slips closed for the last couple of years are now open, and the drought is viewed as essentially over, when expected fall rains are considered. We believe Texas is set up very well for continued gains towards its peak.

We had consistent sell-through on all models, both in the quarter and the full year, but as expected, the 23 LSV, the 22 MXZ, and the 22 VLX have all been strong on the Malibu side, while the A22, T22, and T23 have been the top-selling boats for Axis. As you know, we introduce four new boats this year: two in the Axis brand and two in the Malibu brand, which also includes the Response LXR ski-boat.

We also launched more new features and innovations this year than any other time in the Company's history. The new features have been well-accepted, and have better than expected adoption rates and continue to build momentum in the marketplace.

Our 12-inch touchscreen with Viper II technology which is a standard feature has been a highlight with our dealers and customers. The ease of use and the intuitiveness of the system makes it very easy to operate a Malibu boat versus our competitors who still have very clunky, confusing systems. The Apple-like, open-ended architecture of the system allows us to continuously update and add new features every year, versus having a hard-coded, non-changing dash system like our competitors.

Adoption rates for key new features such as the Power Wedge II and the G4 Tower have been above our initial expectations, and we believe the boating consumer is just starting to understand the true performance and capabilities behind these industry-leading innovations.

On the last earnings call, we told you that with Axis now being a full brand, with five different models and the number four market share position, we will be concentrating our new model development more to the Malibu side of the Company. For the 2016 model year, we are launching four new boats, with three of them already launched in July and August. Three of the four boats are Malibu branded boats. The first introduction of our new boats, which occurred on July 20 is the Malibu Wakesetter 25 LSV. This is an amazing new product that we believe to be one of the most powerful new product introductions in the history of the industry.

Historically, the performance boat segment has struggled with getting great wakes and performance out of a 25 foot and larger boat. This includes every model on the market as of June 30. The compromise has been pervasive. Either you get a good wake and drive a dump truck around the lake, or you garner the performance and mobility while sacrificing the wake. Malibu has cracked that code, and created the best wakes and the greatest performing boat in the 25 foot or larger category our industry has ever experienced.

The 25 LSV combines the power and the versatility of a big boat, with the performance and agility of a smaller boat. This is the first time that a towboat this big has the performance to match. Whether it's a huge, barreling surf wave, a truly massive wake for wake boarding and seating for up to 19 people, it's unquestionably the most versatile, best-performing 25-foot boat on the market.

It features a reversible WakeView rear bench, action-camera mounts on the transom, a power-adjustable helm seat, and an optional rearview camera that allows the driver to easily watch what's happening behind the boat. Both Wayne and I have one of these boats and we can honestly tell you, there's nothing like it on the marketplace. We and our dealers are very excited about the launch of the 25 LSV, which we began producing in early July.

The second new Malibu boat this year is the 20 VTX. This is a crossover ski and wakeboat that is completely new from the hull up. The unique T-Cut diamond hull is specifically engineered to lay down tournament-quality slalom wakes. However, the versatility of this boat, also allows top wakes for wakeboarding and a wave for wakesurfing. The 20 VTX is ideal for those who love wakeboarding and surfing as much as waterskiing. It's one boat for all three sports, with zero compromises. Production on the 20 VTX began in August.

The third new boat that we've introduce this year is the Axis A20. Again, this is a brand new boat. The new A20 combines a lot of the new features of the A22 and T22, and puts them into a smaller boat. We have improved the running surface and the ability to surf and wakeboard in the A20. From bow to transom, this is a completely new boat.

All Axis models, including the new A20 have updated upholstery, and a brand-new windshield for model year 2016. The A20 provides the most powerful wake of any 25 foot boat on the market at an entry-level price. Production on the A20 also began in August.

The fourth new boat this year, will be a brand-new Malibu model in an existing product white space, with an approach and performance never before delivered by Malibu. This will be one very special boat, built with the same quality and performance characteristics as every Malibu boat. We will begin the unveiling of this boat to our dealers and the industry in late September or early October, culminating the full reveal some time in November before the start of the boat show season.

The other powerful piece to our industry-leading innovation strategy is new features and options. As we've dominated the innovation and product to market with boats, we've also brought more new features and innovations to the performance sports boat segment in the last three years than all of our competitors combined.

Again for 2016, we've introduce exciting new features that are exclusive to Malibu. These are new performance, experience, convenience and safety enhancing features that customers are looking for. The first one I will mention is Surf Band, an exclusive patented system that allows the rider to control the wave from a remote wrist device. From a simple and intuitive wristband, the rider can control Surf Gate, Power Wedge and speed.

We conceptualized and developed the idea of an integrated Surf Band technology, along with the Surf Gate system several years ago. With the launch of the Viper II integrated command system platform last year, we are now able to layer in the Surf Band technology to add another dimension to our total package integrated surf platform, giving what is truly the ultimate wake surf experience to our customers. Surf Band debuted at our dealers in August, and will be featured at Malibu's 2015 Evolution Pro event finale in Houston in early October.

Also new for the 2016 model year is a rearview camera option that lets the driver better monitor what is happening behind the boat. We think this is an important safety and convenience innovation that allows the driver to focus on the front of the boat, while knowing what is happening behind the boat. This is a feature everyone has become accustomed to in their cars, and Malibu has now brought it to performance sport boats. Just as with your car, this is a safety feature that helps parents always be aware of what the kids are doing.

In addition, it adds a functionality that I didn't even fully appreciate. I find myself watching the riders with a rearview camera versus the rearview mirror, due to the panoramic clarity of the camera. I can see everything going on behind the boat. Similarly, we will also be unveiling another convenience control feature to the steering wheel in Q2. Our dealers, at our regional dealer meetings in August saw it, and gave it an ovation. It is that cool on a boat.

For 2016, every Malibu Wakesetter has a new windshield. This is a sleek windshield that is gorgeous, but it also enhances the view for the driver. Each windshield is also [badged] with the model of the boat, backed with LED lighting that delivers an aesthetic no one else has, but it is likely to become another industry standard set by Malibu.

In addition to the cool tech and performance features, Malibu is equally focused on practical innovations that keep customers safe, and protect their investment. Every year we hear about customers or dealers who have accidentally left out their drain plug when the boat is in the water. This causes the boat to fill up with water relatively quickly, and can create significant damage or even sink the boat if not caught quickly.

Malibu this year has added an automatic drain plug sensor which alerts the owner through the dash, if the plug is left out. This should help the customer prevent water damage or the complete loss of a boat in such instances. It is a simple, preventative thing, but it happens multiple times every year. It also calls out the details that we at Malibu drive into when designing new boats and features.

Another feature Malibu has delivered this year is hydraulic Surf Gate. This follows the hydraulic Power Wedge we added in 2015. We are the only performance sports boat manufacturer offering hydraulic actuators, which greatly improved the quality and the reliability of the system over electronic actuators. We are very excited to power Malibu Wakesetter models with a Ford Raptor engine under our Monsoon engine brand for 2016. We have worked very closely with our Indmar, our engine partner, and we are very, very pleased with the results and the performance of this engine.

The integration of our Australian business continues to be nicely accretive, and this business is performing better than our original plans. This is due to two reasons. First, since we build in Australia, the strong US dollar certainly helps us to keep our costs lower than our competitors to export to Australia. Secondly, we have instituted many of the same processes, metrics and aggressive sales and operating approaches in Australia that has made us successful in America.

In the fourth quarter, Australia delivered 85 boats, and demand out of the region remains strong. As we've discussed before, manufacturing in Australia gives us a strategic advantage over our US export competitors by being three to four times faster to market, building boats for the Australian environment, building boats for the Australian customer, and less of a currency impact. We like the way that we are positioned in Australia, and remain excited about the longer-term growth opportunities in this market.

Our vertical integration strategy remains on track as well. The last quarter, we began manufacturing trailers in-house and this conversion has went very, very smoothly. I want to congratulate our trailer team for a very nice start-up and transition. They did an exceptional job under the leadership of Donna Tallent. We are delivering better innovation and value to our dealers through the manufacturing of trailers in-house.

In the fourth fiscal quarter, we completed the last phase of our capital expansion project. We added another 28,000 square feet of operating space and doubled our rigging and final detail line. In addition, we relocated our warehouse to be [line sided], which further improves efficiency. The old warehouse space is now available to expand lamination should we need to in a future capital expansion project. This project would further expand our capacity from 5,000 boats a year to 6,000 boats a year for a little less than $1 million.

As you know, we filed a patent infringement claim against one our largest competitors. We are limited on what we can say the claim, but can tell you that we take the time, effort and cost of our IP very seriously.

Prior to beginning this litigation, we took several months and engaged several law firms and spent several thousands of dollars evaluating the case from every angle. We feel very strongly about our IP, and are prepared to vigorously defend any infringements to the end, as we've already demonstrated with Nautique. While it is still very early in the process, we are prepared for this to be a long and drawn-out case, which could potentially take several years to render a verdict should the litigation take the full path to trial. Given our experience here, we have taken steps to limit our legal expenditures should this go through jury trial.

As we have said in the past, we think it is premature to think about the monthly [non-matured] and incomplete registration data, and we will speak to the domestic market share data on a full quarter basis. However, given what has transpired in our market, and to provide clarity from the noise that is out there, we think it is best to provide some color as to what we are seeing happening in the marketplace.

First, we believe that the performance sports boat segment continued to grow faster than the rest of the marine industry, albeit at a slightly lower pace than the last three years. Domestic registration data for the first half of the year is showing a market that is growing about 10% on a year-over-year basis.

Secondly, the performance sports boat segment is seeing a shift to the more value-oriented unit. We believe that the premium product of each of the three largest players in the performance sports boat segment lost share in the first half of the year. Some people will try to compare apples to oranges, but for those of you focused on this, we encourage you to dig into the numbers to understand what is happening by premium versus entry-level category, and by model and by length.

While our focus on developing Axis as a brand may have been strategically forward-looking, given what we are seeing in the market, the premium segment is still the larger segment and can have outsized impact on share. Hence, our excitement to pivot back in that direction.

Thankfully, our model year 2016 product plans seem to have laid out where the Malibu brand was most impacted in the first half of calendar 2015 registrations, in the 20 to 21 foot segment and in the larger super premium segment. In the past few months, we introduced the 20 VTX and the 25 LSV targeted at these segments, and our product plans are focused on continuing to hit these segments in the near term as well.

Thirdly, we believe that the June quarter numbers will reveal that the top two players in the market for performance sports boat, of which Malibu is a far and away number one, have gained share. This is coming at the expense of other competitors. Malibu has always been the industry leader when it comes to new products and innovations.

We believe our top competitor and others have been more aggressive in this area of late. There is more new product being introduced today in the industry than has been seen in many, many years. This will make for an exciting, competitive landscape, and could lead to further consolidation at the top.

Malibu leads the industry in innovation and product development, and our commitment to this position will continue. Malibu continues to hold the number one market share position, with nearly 1,000 point basis point lead, and we believe we are well-positioned to continue gaining share over time.

It takes time for new products and innovations to really take root in the marketplace. We have launched a number of incredible innovations over the past few years. But more importantly, we have fully integrated these offerings into one comprehensive system that provides unparalleled performance and convenience to our customers. A fully integrated, open-ended system that can be upgraded and expanded over time is something that our industry has never seen before, and we are setting the standard here.

We believe this is a very powerful differentiator over our competitors, but the industry remains highly competitive, and those who are committed to new product innovations are in a better position to continue gaining share over time. I will now turn the call over to Wayne to take you through the quarterly results in more detail.

Thanks, Jack. Net sales in the fourth quarter increased 13.7% to $60.7 million. Unit volume increased 13.1% to 904 units, and included 85 units from Australia. The majority of our unit upside in the quarter came from Australia and the sale of used demo boots. Both Malibu and Axis performed well in the quarter, and the mix between the two was in line with expectations at 295 Axis boats and 609 Malibu boats. This puts the full year Malibu mix to just over 68%, in line with our expectations.

Consolidated net sales per unit increased 0.5% to $67,164, and was driven by year-over-year growth in prices at our US business. This is partially offset by the inclusion of Australia in the quarter, which contributes a lower average selling price because of the elimination of previously recognized revenue in our US segment.

In our US business, net sales per unit increased 4.3% to $69,700 per unit, and was in line with our plan. Gross profit in the quarter increased 10.9% to $16.3 million, and gross margin decreased 70 basis points to 26.8%. The decrease in gross margin was driven by the inclusion of our Australian business, which saw a temporary margin pressure from the timing mismatch of our price increases versus US dollar denominated input costs. In our US business, gross margin expanded 28 basis points in the quarter on a year-over-year basis.

Selling and marketing expense increased 2.3% to $1.7 million in the fourth quarter. As a percentage of sales, selling and marketing decreased 30 basis points to 2.8%. General and administrative expenses excluding amortization decreased 89%. The decrease was primarily attributable to a $22 million change in nonoperating charges related to litigation and operating-related expenses. Excluding the nonoperating charges, G&A expenses increased 2.6% to $3.7 million. The increase was primarily driven by the addition of the Australian business which is partially offset by lower stock compensation year-over-year.

Adjusted EBITDA for the quarter increased 14.8% to $11.8 million, and adjusted EBITDA margin increased 20 basis points to 19.6%. This is in line with our expectations. Fourth-quarter non-GAAP adjusted fully distributed net income increased 17.3% to $6.5 million or $0.32 per diluted share. This is calculated using a normalized C-corp tax rate of 35.5%, and a fully distributed weighted average share count of approximately 19.9 million shares.

Just touching on the full-year numbers quickly, unit volume increased 17% and net sales increased 20%. Net sales per unit increased 2.4% on a consolidated basis, and 5.1% in the US. Gross profit increased 19% to $60.4 million, and adjusted EBITDA increased 17% to $43.6 million for the year. For a reconciliation of adjusted EBITDA and adjusted fully distributed net income to GAAP metrics, please see the tables in our earnings release.

Our fourth-quarter and full-year results were in line with our expectations, and our outlook for the new year is cautiously optimistic. As Jack mentioned, we expect favorable secular trends in the US market to continue in FY16. We cannot predict movements in currency, but at current rates this is expected to be a continued headwind to several international markets, including Canada, Europe, South America and South Africa.

While we do not provide detailed earnings guidance, our initial outlook for FY16 is based on the following factors, an increase in unit volume in the mid to high single-digits, unit volume growth to be largest in Q1 as we comp lower daily unit volume throughputs in the prior year and add Australia, with the remainder of the growth coming in the back half of the fiscal year, specifically Q3.

From a volume perspective, Axis is expected to represent a proportion of unit sales similar to FY15. Consolidated net sales per unit is expected to increase in the low single-digits for the full year. The first quarter will be negatively impacted by the lack of Australia units in the prior year, and could be down in the low-to-mid single-digits percent range.

We have seen, and continue to expect to see a modest improvement in gross margin domestically and throughout the business. Q1 expansion will be limited by the impact of including Australia, but we will see sequential improvement in Australia versus our fiscal fourth quarter, as our price increases have a full quarter impact.

Margin should be helped by the inclusion of royalty income from our litigation settlement with Nautique, as well as the in-house manufacturing of our trailers. Legal expenses relating to our competitors litigation are expected to be $1.1 million to $1.5 million for the year. Adjusted EBITDA margin is expected to grow modestly, with the majority of the growth coming in the back half of the fiscal year.

Finally, regarding capital expenditures, we are budgeting under $6 million, which includes some residual spend from our planned expansion project that was initiated in FY15. In closing, let me reiterate how pleased we were with our fourth-quarter results, and underlying trends in the business heading into FY16.

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

Thank you.

(Operator Instructions)

Tim Conder, Wells Fargo Securities.

Thank you, and gentlemen, I apologize in advance for the background noise on the road here. But, and I apologize if you addressed this, Jack, in your preamble, but any color that you can give us on the royalty income that you are currently receiving, one? And then, any color that you can give us, as far as geographic areas in the US, where you've seen some regained strength? Where you're maybe seeing still a little bit of pressure, as it relates to year-to-date rains or lack thereof? And then, just in general, some of the -- maybe the timing and seasonality in the various geographic markets? Thank you.

Okay, this is Wayne. On the royalty side, we aren't disclosing what that stream looks like. It is -- it has the potential to impact margin on a year-over-year basis in the low double-digits, from a margin perspective. So but we aren't giving specifics as to what that settlement looks like or the royalty stream.

Okay.

On -- and this is Jack. On your geographic question, I think it is pretty consistent with what we have seen. All of the geographies are performing about where they have. There has been a little bit of softness in the East. One thing I did mention that we did see, call it in the upper Midwest, is they had a very heavy rain season. And so, I think that diminished a little bit of the demand in the June time frame.

From a West perspective, that is the market that is coming back toward its peak. It is slow, but it is coming back, and despite all that we hear about droughts, we have not seen the impact on sales at retail nor wholesale.

I believe that over the time frame of the next few months, certainly with all the rains that Texas received in May, it was a little bit of a problem to begin with because of the flooding, but with the fall rains, we think that Texas is going to be very well set up to continue to grow. And then California, the second largest state, is also potentially set up to grow if the El Nino rains come through. But we have not really seen a big impact in California or the Western states.

Okay. Thank you, gentlemen.

(Operator Instructions)

I am showing no further questions. I would like to turn the call back to Jack Springer for closing remarks.

Thank you very much. In closing, I want to thank you again for joining our call. Obviously, we're very excited about the new models and the features for the 2016 boating season. As the best operators in the performance sports boat business by far, we believe we are very well-positioned to continue our trajectory of profitable growth.

Despite the currency headwinds in the international markets, we think the continued integration and development of Australia, the launch of four new boats, and the heavier mix of Malibu product will further develop -- and the further development of our vertically integrated platforms will bode well for the business going forward, as long as our domestic US market is not impacted in some way. Again, we thank you for joining the call. Good day.

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