Malibu Boats Inc (MBUU) 2017 Q1 法說會逐字稿

Good morning and welcome to Malibu Boats's conference call to discuss first-quarter fiscal-year 2017 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'll 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 first-quarter financials and outlook for fiscal 2017. We will then open the call for questions.

A press release covering the Company's first-quarter fiscal-year 2017 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 distributable net income. Reconciliations of these non-GAAP financial measures to GAAP financial measures are included in our earnings release.

I will now turn the call over to Jack Springer.

Thank you, Wayne. Good morning, and welcome to our call.

Malibu yet again has met our financial objectives. Net sales increased 8.4%, adjusted EBITDA increased to $9.9 million, and adjusted fully distributed earnings increased 4% to $0.26 per share. All three of these metrics represent new fiscal first-quarter highs for Malibu. We continue to meet expectations and operate at a high level despite international economic uncertainties. Most importantly, since our IPO 2.5 years ago, we have consistently met or exceeded what we have said that we will do.

Market share is an important primary metric for us, and it always will be, no matter the trend. Although our stated goal is to move market share approximately 30 basis points per year on average, Malibu has experienced much greater market share gains this year. We are very happy with the calendar year 2016 results, which showed more than a 100 basis points share gain for Malibu.

Because of these gains, we finished our fiscal 2016 year, which was in June, with the highest share in the Company's history. We believe the market share strength for Malibu will continue, and we will end the calendar year with the highest market share in history as well.

We believe our market share growth is due to two key factors: first, our product strategy and introducing product that the customer wants. This principle also applies to innovations and features. We bring more product to market and features that really work -- not just features that are marketing high. Malibu is the leader in innovation, and we are committed to continuing to be the leader.

The second factor is having solid distribution in all areas, with great dealers selling Malibu boats. We value our dealers. We partner with them, and as a result we believe they are more profitable than other competitive dealers.

As an example of distribution strength, in the latest fully developed SSI data as of June 30 for all markets selling 15 or more boats, our dealers are number-one or number-two share in 84% of the markets. Malibu dealers are the market leaders and control 8 out of the top 10 markets in the United States.

Finally, our dealers are number one in share in over 50% of the 48 relevant states and are number-one or number-two share in over 80% of the 48 relevant states. Malibu continues to be the leader in market share for the premium segment, the entry segment, and the total performance sports boat segment -- all by significant margins.

As we have discussed on the last several earnings calls, the US market as a whole remains healthy. After unit growth in the low double digits from 2013 to 2015, we expected about 7% to 8% for calendar year 2016 after we saw calendar Q2, which is our largest retail quarter, and it grew at 8%. We have been positively surprised by the higher growth as calendar three has developed and now believe that the growth rate for calendar 2016 will be greater than 10%.

Warm temperatures have lingered into the fall throughout the US, buoying the growth rate. Speaking regionally, each major region is influenced by its own set of variables. Malibu commands the leader position in every region, and we have increased our market share lead in every region according to the June SSI data.

Year to date, when looking at the more impactful states, California units have grown about 25% in the latest 12-month period ended September; and Malibu's unit growth has increased by 38% over the same period. Malibu has also captured 50% of the total growth in units as of the latest 12 months as of September in California.

Norcal has had a much better year due to El Nino and more available water. The California economy is continuing its recovery and is adding jobs almost every month.

Texas, another key state, has also had a healthy growth rate, and Malibu has expanded its commanding market share lead in that state. Malibu has captured almost 60% of the total unit growth in Texas year to date, resulting in a substantial share growth in Texas.

Other areas include the Northwest, and it's been a good growth area for Malibu. And we have shown strength in the East as well, with growth that we have not seen in the last couple of years.

The international markets continue to be weak due to a variety of factors, particularly the strong US dollar. Low oil prices and foreign currency valuations, along with the severe economic issues for countries in certain areas of the world, continue to weigh on the international markets. We do not see near-term relief, although we do believe that the markets have stabilized and will not decrease further.

Canada in particular is being impacted by both low oil prices and weak exchange rates, and this is the largest of our challenged international markets. Again, we believe Canada has stabilized. So any improvement will be a benefit that we have not counted on in our performance. Other international markets such as South America, Europe, and Eurasia continue to be impacted, primarily by low currency valuations in poorly performing economies.

Channel inventories are in very good shape, and weeks on hand of inventory at our dealers remains meaningfully lower than last year. We feel that Malibu is positioned quite well to benefit from the continued strong domestic retail growth.

On our last call I spoke of our new product introductions: the Wakesetter 22 MXZ, the Wakesetter 24 MXZ, and the Wakesetter 21 VLX. The reviews from our dealers and customers have been outstanding. We expect these boats to perform very well during the boat show season. The 23 LSV, the 25 LSV, and the M235 also continue to be very strong and generate demand.

Later this week, we will be introducing our fourth and last new boat for fiscal year 2017. This boat hits the sweet spot of skiing. It pulled its first competition two weeks ago, and athletes had better performances than they have had the entire year.

We are also offering this boat in four different flavors, so to speak, that should hit various customers where they are most interested. In the Axis brand, the A22 and P22 are stalwarts of the brand and continue to be in demand for their performance, simplicity, and edgy aesthetics. Our new dash for Axis is helping to drive demand for all models, and we believe -- and we are hearing it from the customers as well -- that it's being very well accepted.

We believe we are the operationally excellent marine manufacturer. Others are also good, but we believe no one can compare with our efficiencies, revenue per person, EBITDA per person, and direct labor hours per boat, based on our own internal research. Our commitment to and execution of operational excellence continues to be a driver of our improvement and ongoing consistent performance.

In summarizing my remarks this morning, Malibu had another great quarter meeting or exceeding our financial and internal metrics. During calendar year 2016, Malibu has seen significant growth in market share. We ended our fiscal year in June and expect to end the calendar year 2016 with the highest market share in Malibu's history. The domestic business continues to perform well, and we believe that retail registrations will grow greater than 10% for calendar year 2016, slightly better than we had anticipated.

International markets continue to be challenged, but we believe they have bottomed out. We are well positioned when international markets turn around. Our new product for model year 2017 has been well received and is already selling at retail.

Lastly, we believe that we are the best operators in business. We deliver four new boats every year and take on complex, effective vertical integration initiatives, such as tower and trailer manufacturing, that drive our efficiency and profitability.

I will now turn the call back over to Wayne to take you through the quarterly results in more detail.

Thanks, Jack. Net sales in the fourth quarter increased 8.4% to $62 million. Unit volume increased 1% to 833 boats, including 77 units from Australia. The Malibu brand represented approximately 69% of unit sales or 577 boats, and Axis represented approximately 31% or 256 boats, as both continued to perform well.

Consolidated net sales per unit increased 7.3% to approximately $74,450. The increase was primarily driven by a higher mix of Malibu models, lower international discounting, combined with year-over-year price increases across the line.

Gross profit in the quarter increased 7.6% to $15.8 million, and gross margin decreased 20 basis points to 25.5%. Selling and marketing expense increased 7.1% to $2.4 million in the first quarter.

As a percentage of sales, selling and marketing expense decreased about 4 basis points to 3.9%. General and administrative expenses, excluding amortization, increased 31.1% or $1.4 million.

As a percentage of sales, G&A expenses increased 170 basis points to 9.8%. The increase was primarily due to professional service fees, including legal expenses related to various litigation.

Adjusted EBITDA for the quarter increased 4.4% to $9.9 million, and adjusted EBITDA margin decreased 60 basis points to 15.9%. Both were in line with our expectations.

Non-GAAP adjusted fully distributed diluted earnings per share increased 4% to $0.26 per share. This is calculated using a normal IC corp tax rate of 35.5% and fully distributed weighted average share count of approximately 19.2 million shares. For a reconciliation of adjusted EBITDA and adjusted fully distributed net income to GAAP metrics, please see the tables in our earnings release.

Our first-quarter results were in line with our internal goals, and our outlook for fiscal 2017 is unchanged. As Jack mentioned, we believe our lower dealer inventory levels and strong retail share trends position us well for fiscal 2017.

We do not provide detailed earnings guidance, but our outlook for fiscal 2017 is based on the following factors: an increase in unit volume approaching mid-single digits; with respect to cadence, Q2 will likely be in the mid-single digits, with the remainder of the growth coming in the second half, weighted slightly more to Q3. From a volume/mix perspective, Axis is expected to represent a proportion of unit sales slightly lower than fiscal 2016. Consolidated net sales per unit is still expected to increase in the low single digits for the full year.

Gross margin is expected to be slightly up for the full year. As expected, margins were down modestly in Q1 year over year. Year-over-year margin expansion should begin happening slightly in Q2 and continuing each of the following quarters.

Legal expenses relating to the MasterCraft litigation are expected to be a little more than roughly double that of fiscal 2016. Adjusted EBITDA margin is expected to increase modestly. And finally, regarding capital expenditures, we are currently planning between $8 million and $9 million in capital expenditures.

In closing, let me just say that we are pleased with our first-quarter fiscal 2017 results. They were right in line with our plan. We believe the resilient growth in the US market and our strong market share trends have set us up very well for a strong fiscal 2017.

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

(Operator Instructions) Tim Conder, Wells Fargo Securities.

A couple of questions. A little color as far as your share gains, gentlemen. As you said, year to date here and then what you're anticipating for calendar 2016 here -- for yourselves in the industry, just a little bit more color. Is it Axis, Malibu brand? Which brands are behind that? And I guess for the industry also -- any commentary you can provide?

And then as it relates to Australia, Jack, you had mentioned that you are seeing the international markets, while not improving, stabilizing. Between Australia and Canada, which one would you say is maybe potentially a little bit more on the cusp of hitting that upturn?

To answer your market share question first, we've seen strength across the board in all the regions of the US. And Malibu premium -- so our Wakesetters, our M235 -- all of that from a market share standpoint has grown robustly, driven by the new product that we have introduced.

Axis has done quite well. As you might recall, we did not introduce a new model this year, and we only introduced one new Axis last year. But it continues to be at about approximately the same level, a clear number one. And so we've been very encouraged by that.

So we've seen the strength across both of our brands. Largely -- I'll divide it into two tiers. We have by far seen significant market share growth. The first tier, which would be our larger competitors, have either dropped in market share or stayed about the same.

And then that second tier of competitors -- we've had a couple that have picked up a little bit of market share. And one notably has dropped fairly significantly, because I think they lost some distribution.

Yes, and just to add a little bit of color there, Tim, in terms of the split of those market share gains, it really actually mimics volume. So I'd say 65% of those share gains are coming on the Malibu side, and 35% of them are coming on the Axis side.

Going back to your second question around Australia versus Canada, Australia -- because we do manufacture there, and we have such a significant market share advantage, that really has not been impacted other than from the currency side a little bit. So that has not seen the weakness that Canada has. It's been fairly consistent. So the upside remains on Canada should the currency and the oil and gas the situation turn around.

Okay, okay. That helps, gentlemen, thank you.

And then the litigation -- just any change in the timeline there that we should anticipate here as far as the trial? And then the doubling of expenses -- just a little bit more color there. And then also as it relates to CapEx, the $8 million to $9 million, Wayne, that you mentioned there. Just a little color, if you guys had another project filter in there, or maybe how you're going to be deploying that?

I'll take the first question, and Wayne can take the second two. On the timing, nothing really is changed. We continue to be in claims construction in some depositions. The first litigation is still scheduled for May of 2017, and then tentatively the second litigation is scheduled for the fall of 2017.

And with respect to the expenses, really, if you recall last year's guidance around expenditures there, we came in on the low side of that by about $0.5 million. So what you are really seeing there is the impact of little bit of expenses falling on the other side of that June 30 year-end date, and expense of a trial.

So that's really the function that's going on: a little bit of shifting, time variance, and the fact that you have a trial in the period. So that's specific to those expenses.

With respect to the capital expenditures, that is primarily driven -- that increase is primarily driven by our investment in a piece of property. We have the building that's under contract that is across from our facility here in Loudon, Tennessee, and are working through the last pieces to close on that property here in the next couple of weeks.

Okay, thank you, gentlemen.

Michael Swartz, SunTrust.

Just wanted to touch on -- more of a clarification. In terms of Canada, I know that's been kind of the big drag here for much of the marine industry the past year and a half -- could you just, again, clarify -- I guess, what's built into your expectations for fiscal year 2017? Are you looking for continued softness? Are you looking for a rebound? Are you looking for it to be down double digits again?

So at wholesale, we are looking for it to be essentially flat, which -- we were in de-inventorying position last year, which would lead you to the conclusion or expectation that we have embedded a little bit more softness in the retail environment for the coming year.

Mike, one way to think about that a little bit, too, is we think it's going to be flat, and that's what we planned for. But to the comment that I made on the call, if the currencies change or oil and gas changes, and there is upside, we have not built that into our planning.

Okay, that's perfect. And then just on the -- I think you made mention of it in the press release. Just if you could help flesh it out a little bit more, talking about the rebate promotional environment. It sounds like it's better year-over-year. So can you just give us any color around that, what you're seeing there?

Yes. I think what we have said pretty consistently since the beginning of the calendar year is around international discounting -- that we weren't getting our bang for the buck. So what you're seeing is a little bit of that impact on a year-over-year basis in the P&L of -- you know, where we are not putting as many dollars towards international discounting to try and help support those volumes.

And I would assume that's just in part due to the low inventory levels, since you have de-inventoried in that market?

Yes, and the -- on a year-over-year basis, more of a stabilization in the currency. Exchange rates, right?

Okay.

So bridging the gap between a 20% move in a currency for some period of time versus accepting that as a little bit of the new normal. So really that. And so from an environment perspective, I think it's -- you're not seeing as much of that type of discounting going on.

Got you. And just last question for me: you took your full-year expectations for the domestic market up to about 10% from 7% to 8%. Just in terms of how you think about the year, any -- maybe even baking this or including this labor commentary here. I think you mentioned in the press release labor costs were bit higher.

I guess, how do you think of that in terms of just your production plan for the year? Can you handle -- can you bring on board people in an efficient manner, where we wouldn't see cost efficiencies running through as you are ramping up the throughput rates?

I think that's very accurate. We've not to this point had any problem attracting talent and attracting people to our plant. We started 4 to 5 years ago, Mike, really putting together strategies and actions to become the employer of choice. And I believe that that is paying dividends for us well. So whether we need a few people because we're adding boat count, or whatever that situation may be, we feel very comfortable that we will have the labor for that.

And what I'd say is in Q1, the labor that we saw -- we brought three new models all at the same time. And so I think what we are seeing in the factory is a high degree of efficiency today. We've been very stable in our workforce for the past going on 15 months now, because our daily throughput has been pretty stable.

So I think we feel like that labor will -- obviously, the labor market globally and in the US has been a bit tight, but we feel like we have a nice, stable workforce. And we expect to get more efficiencies out of that labor force in the coming quarters.

Okay, great. Thanks, guys.

Joe Altobello, Raymond James.

I guess first question, I just wanted to clarify -- in Canada, you mentioned wholesale shipments you expect to be flat in fiscal 2017. That implies retail flat as well? Or do you think retail would be below that?

That would imply retail probably down modestly in our fiscal 2017.

Okay, but still better than what you saw in the trends in fiscal 2016, obviously, so --.

Yes, correct.

Okay. Moving on to gross margin, I'm a little bit surprised that it wasn't a little better this quarter. And I guess the outlook is for up modestly.

You've got improving mix, with larger boats, obviously, toward the Malibu brand. You talked about less discounting internationally this quarter, higher pricing, et cetera. So why aren't we seeing better margin trends?

And I guess part of that goes back to the labor cost comment you made earlier. Where in particular are you seeing higher labor costs? Is it healthcare or things like that?

It was a little bit on healthcare in the quarter, but really -- and when you look at it, it was driven by us bringing out three new models in the quarter. And just on a year-over-year basis, we didn't have any real volume. We were up 1% on a volume basis. So I think -- when you see -- like we said on our last call, we were expecting that, and it was right on top of our plan in terms of just some gross margin pressure in Q1.

Again, I think we feel very comfortable with our expectation that it will revert and get back to our plan in Q2, Q3, and Q4 of this year. But that's where the pressure was there. But we are seeing positive things on the material side.

Okay, so the gross margin should follow the -- beating the trends, basically, throughout this year?

Yes. And I think the other -- there's one other element. We have modified the way our dealer programs work this year, and that's had an impact as well. And it will adjust, and the back half will be impacted by those dealer programs.

So the programs will have more of an impact on Q1 and Q2. So we changed our backend money to our dealers and how that works. And our expectation is that that's going to be more of a drag in Q1 and Q2 versus Q3 and Q4.

So net for the year, it shouldn't be an impact on us. But there's some seasonality that will manifest itself in our program.

Okay, great. Thank you, guys.

Jimmy Baker, B. Riley & Company.

Thanks, good morning, guys. Nice quarter. Just hoping you could help us understand the 12% year-over-year unit decline in Axis units during the quarter? I believe that brand skews more towards the US versus the Malibu brand. And then, as you mentioned, Axis is gaining share against that stronger-than-expected domestic industry backdrop. So just wondering why -- in the destocking, why that was more pronounced in Axis versus Malibu, or if there was some sort of timing or comparison issue we should be aware of?

No, really, it's a function of new models. The fact of the matter is we brought out three brand new Malibu models. We didn't have a new Axis model. And there's an element of stocking that always goes on around new models.

And last year we had the impact of a new model on the Axis side. The Malibu 21 VLX is also on the shorter side in the Malibu family, and probably two-thirds of the way between the Malibu and Axis families. So it's really not an issue where -- like I said earlier, a third of the market share gains that we are seeing are still coming from Axis. So I think it's nothing outside of our expectation in the quarter.

Okay, understood. The rest of my questions have been answered. I just was hoping -- if you could provide a little commentary on where you're assuming channel inventories to end the fiscal year at? In other words, should we assume that this decline in weeks on hand domestically would continue, and that international units would be down for the full year? Or is there a change from full-year versus this quarter?

So you're asking from the point in time -- from where we are at today from inventories, where they're going to end the fiscal year 2017?

Where you're at to end the June quarter versus ending fiscal year 2017.

Got it. Yes, look, I think we felt very comfortable with where channel inventories were exiting fiscal 2016. I don't think -- I think if they went up a little bit, we would be fine. And I think if they dropped a little bit from where they ended fiscal 2016 on a weeks basis, we would be fine as well.

But I think we feel very comfortable that level. And I would say that we would be very happy to end next year at the same place that we were at -- we ended fiscal 2016.

And obviously, with calendar Q2 or our fiscal Q4 being the largest retail quarter, there's bit of variability in how that ends. So on a year-over-year basis, being flat is a good target. And depending on what happens at retail in calendar Q2 2017 will depend -- will drive whether it goes up or down or we hit right in the middle.

Okay, got it. That's helpful. Thanks a lot, Wayne.

Rommel Dionisio, Wunderlich Securities.

Just wanted to inquire a little bit on the granularity of the strength in California. Obviously, there were some weather-related factors, but you are dramatically sort of exceeding the market growth there. How much of that is the strength of distribution as opposed to just the general market share gains you're seeing everywhere else? I know you guys are kind of head and shoulders above everyone in terms of distribution in that market. And to the extent that your plans for maybe growing that dealer network in that market, given the strong growth that you're seeing there as well? Thanks.

We -- without a doubt, it's distribution. I would point back to besides the economic factors in the environmental factors in California, it comes back to the two things that I mentioned in my remarks, which would be the distribution as well as the product.

The product -- we think that -- you know, you have some large boat markets, so some of the product that we've introduced in the last year have really hit those markets. We also believe that our new MXZ series and the 21 VLX is going to be very strong in California. So product and distribution.

You do state correctly that we have the better distribution. Going back to the IPO, that was one of our key areas of potential growth, because we did have such strong market share and strong distribution. What I would point to is that we are always very careful in terms of adding additional distribution and minimizing or diluting our existing dealers. What we want to do is we want to have distribution that allows the customer to be able to take their boat for servicing, or for winterization, or for storage within a certain radius. We believe that when it gets beyond 3 to 5 hours, that it becomes a problem for that customer.

So as we are structured right now, we have the right distribution in the right areas. There may be a couple of areas in the Southwest that we can make some improvements, and we will look to do that.

Okay, thanks very much, Jack.

(Operator Instructions) Gerrick Johnson, BMO Capital Markets.

Can you discuss the modified dealer programs mentioned earlier? Thank you.

We don't want to say too much. I think the short of it is that we recalibrated our programs.

Our programs historically had not been as meaningful to the dealer who is below 40 units per year. And so the programs really were effective in terms of our relationship with our larger dealers, but they were less effective with some of the smaller guys. And the smaller guys are a majority of the total dealers. So what we did was we recalibrated our programs so that they would be meaningful to all our dealers.

Yes. I think one impact, Gerrick, that's probably important to note is that we have had our entire first-half book of orders in place for a couple of months now. And so that's an indication that from a unit wholesale point of view that the programs are working, the dealers are excited about it. And it will be successful.

Yes. So that was the primary reason for why we changed the program is to make it meaningful to all the dealers.

But what's the upshot here? Does that mean that your allowances are ticking a little bit higher, or how should we think about how this impacts the P&L?

I think that Wayne probably stated it pretty well. Just from a timing standpoint, it moves some up into that first half; but over the course of the year, we are not looking at anything greater than it's historically been, for the most part. The upshot on the positive side is that that unit volume will come in exactly as we would want it to be.

Okay, thank you.

Thank you, and I'm showing no further questions over the phone line.

All right. We at Malibu thank you for your interest in Malibu and also for joining this call today. We are very happy with our fiscal first-quarter performance, and we continue to have a positive outlook for Malibu in the second quarter and into the boat show season. Thank you for your support and have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone have a great day.