Malibu Boats Inc (MBUU) 2019 Q3 法說會逐字稿

Good morning, and welcome to Malibu Boats conference call to discuss third quarter fiscal year 2019 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; Mr. Wayne Wilson, Chief Financial Officer; and Mr. Ritchie Anderson, Chief Operating Officer.

I will turn the call over to Mr. Wilson to get started.

Please go ahead, sir.

Thank you, and good morning, everyone.

On the call, Jack will provide commentary on the business, and I will discuss our third quarter financials and outlook for fiscal 2019.

I will then hand the call back over to Jack for some closing remarks.

We will then open the call for questions.

A press release covering the company's third quarter fiscal year 2019 results was issued today, and a copy of that press release can be found in the Investor Relations section of the company's website.

I also want to remind everyone that management's remarks on this call may contain certain forward-looking statements including predictions, expectations, estimates or other information that might be considered forward-looking and that actual results could differ materially from those projected on today's call.

You should not place undue reliance on these forward-looking statements, which speak only as of today, and the company undertakes no obligation to update them for any new information or future events.

Factors that might affect future results are discussed in our filings with the SEC, and we encourage you to review our SEC filings for a more detailed description of these risk factors.

Please also note that we will be referring to certain non-GAAP financial measures on today's call such as adjusted EBITDA, adjusted EBITDA margin, adjusted fully distributed net income and adjusted fully distributed net income per share.

Reconciliations of these non-GAAP financial measures to GAAP financial measures are included in our earnings release.

I will now turn the call over to Jack Springer.

Thank you, Wayne, and thank you for joining the call.

The third quarter for Malibu was another outstanding quarter, as we continue to deliver strong results quarter-over-quarter and year-over-year.

Each quarter is a new record, and it drives our continued optimism.

For the quarter, net sales increased 42% to $199.9 million; adjusted EBITDA increased 32% to $37.8 million; and adjusted fully distributed earnings increased 29% to $1.15 per share.

Our robust product lineup, value proposition through vertical integration and strong commitment to operational excellence throughout the organization are clear differentiators and continue to drive our superior performance.

In addition, the success of our disciplined M&A strategy to acquire and integrate premium brands is underscored by the successful integration of Cobalt and Pursuit today.

Both brands are exceeding our expectations.

As you recall, our model is to acquire great brands with quality teams in place at a reasonable acquisition price.

Then, based on our unmatched strategic and operational expertise, we identify and develop the improvements in [financial] value over time.

The result is high-functioning, well-performing brands that seamlessly integrate with the broader Malibu organization.

Our acquisitions are helping to drive additional value every single quarter, not diminish our performance.

Our model is excellent, and we are very good at executing on it.

There seems to be a renewed and heightened concern on the retail environment, so I will speak to retail as I address the individual brand performances.

We continue to advance the integration of Pursuit.

We are expanding production capacity at Pursuit, and we have (inaudible) how we can build more product in model year 2020.

But the real value enhancer will be bringing the new plant online over the course of the next 12 to 15 months.

This will allow us to approximately double volume over time.

Currently, we are in the final stages of permitting, and our expectation is that we will break ground in the next 2 to 3 months.

We are very confident in our ability to complete this initiative on time and on budget, as Ritchie Anderson, who is our COO, myself and others have accomplished this multiple times in our careers, and on a much larger scale than what we have at Pursuit.

In the meantime, we are focused on enhancing the operations of Pursuit to further deliver attractive results.

From a retail perspective, Pursuit continues to grow and capture market share in the 22-foot to 44-foot saltwater outboard segment.

The boat show season was very successful for Pursuit and its dealers, significantly up over 2018 with double-digit growth.

Cobalt continues to perform very well as new product and the operational enhancements we've made in the brand are supporting its strong financial performance.

While the overall sterndrive market contracted again in 2018 based on the latest data, Cobalt has continued to grow and outperform as the entire decline in sterndrive registrations was in boats under 20 feet and over 30 feet in length.

Cobalt continues to gain market share in its core segments of 21 to 23 feet and 24 to 30 feet and remains the market share leader in the 20- to 40-foot sterndrive segment.

Additionally, the larger 30- to 40-foot sterndrive segment continues to grow for Cobalt while regressing for other brands, and our outboard product has maintained this rapid growth in the growing outboard segment as well.

This tells us we are not wasting our time and investment dollars in underperforming segments.

We are in the right segments, and we are either growing or we own the segments that matter.

As Cobalt's position in the outboard market continues to mature, we are seeing significant growth in market penetration.

In fiscal year 2018, there was only one model that existed the entire year.

In fiscal year '19, there were only 3 models in existence the entire year.

We will introduce another outboard model in the first half of fiscal year 2020 and another in the second half of fiscal year 2020.

These models will add to unit volume for fiscal year 2020 but the real impact will be for model year 2021, and it'll be greater given that it will be the first full year of each model.

However, we are not stopping there.

As we have stated previously, Cobalt's presence in the outboard market should continue to grow as we add new models over the next few years.

We believe this will be enhanced further by the addition of Pursuit and their expertise in the larger outboard design and innovation.

The Malibu and Axis brands continued to perform strongly as well, maintaining a dominant position in the markets they serve.

As you know, performance sports boats are leading the growth for marine at about 10% over the trailing 12-month period as of March.

This is a great dynamic for almost all manufacturers and dealers in Performance Sports Boat.

Malibu owns nearly 1/3 of the domestic market share.

We consistently have an 800 to 1,000 basis point share lead over the nearest competitor, making any comments to the contrary flat out false.

Our sales model is heavily reliant on our year-end sales event and boat show season translating into significant growth at retail in March -- in the March to July period every year, and this year is no different.

In March alone, we saw a 600 basis point share gain, and we believe this will only sustain or improve based on the states reporting as the data matures.

The fact that March total PSB segment count grew 13.8% versus March 2018 makes this Malibu growth even more substantial.

Calendar year-to-date performance of retail is even more compelling.

Of the unit growth in calendar Q1 2019 over 2018, Malibu has captured 52% of that growth.

While the market has grown at about 8.7%, Malibu and Axis growth is almost double that.

This converts to our share being up by almost 200 basis points over the year-to-date 2018 calendar year.

For the first calendar quarter, Malibu and the #4 player in this segment were the overwhelming retail winners, leaving all other competitors behind.

Another data point we look at are warranty registrations.

Through March, our warranty registrations were up a whopping 20%, which support this strong spring we're seeing in retail.

At the same time, our channel inventories remain at very healthy levels, and the low level of Asia inventory is another example of the strong demand for our product.

Malibu is primed for a strong wholesale and a strong retail.

Order books for all of our brands remain at record levels.

Malibu, Axis, Cobalt and Pursuit have been sold out for model year '19 for several months.

While we could easily build and ship more product, that is not the prudent and advised action.

We are committed to matching wholesale and retail demand to the best of our ability.

The result is consistent quarter-over-quarter growth, performance and profitability.

We simply do not have the whipsaw quarters that others have, in which one quarter is good and then the next sees large margin swings and degradation.

Investors can be confident in consistent MBUU quarterly performance.

Supporting our record order books at the most recent boat shows, we saw double-digit order growth on an absolute basis year-over-year; particularly the model year 2019 product line continues to perform strongly and has been very well-received by our dealers and our customers.

We remain bullish on the outlook for our new Wakesetter 25 LSV at Malibu as well as A29 at Cobalt, which won an innovation award at the Miami Boat Show.

The new DC 266 at Pursuit has been very well received and is also in high demand.

Another good omen from our order books and the boat shows is there continues to be a migration towards larger, more expensive boats.

That bodes well for the confidence of our customer, dealer profitability and our own margins and profitability.

Innovation with boats and features is one of the primary lifebloods of our organization.

We are continually adding new features to each of our brands and are leveraging these disruptive technologies across the platform.

Furthering this momentum, we have some exciting new products for model year 2020, and we look forward to sharing those in our next quarterly call.

As we have said many times, our vertical integration strategy is a competitor-busting differentiator as well.

The progress we have made advancing our vertical integration initiatives and generating synergies within our brands continues to drive growth and profitability in each of the markets we serve.

We remain on schedule to bring our Malibu Monsoon engines, which were awarded the 5-star award for best emissions rating in February, to all of our Malibu and Axis models by the beginning of fiscal year 2020.

We have been slowly ramping that throughout fiscal year 2019.

There is nothing that dissuades us that the Malibu Monsoon engine will be the power plant for 100% of all Malibu and Axis boats in fiscal year 2020.

In addition, we began incorporating the patented swim-step technology from Cobalt into our Malibu boats at the beginning of model year '19.

This started with our new 25 LSV and has expanded into a couple of additional models.

We are now excited to announce that this highly accepted feature will be incorporated throughout most of the Malibu lineup.

This is just another example of our vertical integration strategy combined with our operational expertise, which provides powerful (inaudible) for unlocking synergies within each of our leading brands.

Even more exciting, there's more vertical integration coming across all brands.

We're committed to managing our channel inventories optimally so that our dealers are able to successfully sell our product at acceptable margins without local inter-brand competition.

Managing channel inventories ensures the brand integrity of our business remains strong.

I am pleased to say that our inventory levels are very close to where we want them to be for each of our brands.

That said, we are aware of higher-than-normal competitor inventory in the channel that has materialized over the last several months, which will likely impact the promotional environment in the coming months.

We faced this 24 to 30 months ago with minimal impact to both our share and financial performance.

Then and now, we are proactively taking actions to mitigate any potential impact on our performance.

We cannot control the carelessness others choose to practice.

We can only control our proven and rational approach, which pays dividends in the long term.

Speaking to the larger marine and economic markets, we remain incredibly optimistic about both.

While the winter season was longer than expected, dealer sentiment remains very strong.

I have canvassed our sales teams and dealer networks.

We have not experienced the delayed spring that other companies have said they experienced.

There might have been about 2 weeks worth of softness related to some product, but that has quickly reversed and gained positive traction for all brands.

And I will state that we did not see any slowness at all on the Malibu front, Axis front.

More telling, dealers are still wanting more inventory, and as I stated earlier, we could build even more boats than we have planned if we were solely listening to dealers.

Our record backlogs underscore this view, and we believe we are well positioned as we enter the prime retail selling season.

We continue to be optimistic on the economy.

It is a highly debated subject, as developments within global trade and U.S. monetary policy have led to mixed interpretations over the state of the economy.

Despite this noise, we have not seen anything within our business that would indicate a slowdown or a decline in consumer and dealer sentiment.

Really, it's just the opposite.

As we've stated previously, we believe the 2020 election cycle plus one year is the next potential cycle change.

Additionally, recently published economic data supports our viewpoint as follows: the U.S. economy added 263,000 new jobs last month, approaching 100,000 more jobs than the economists projected; unemployment dropped to 3.6%, and it is now at the lowest rate than in the last 49 years; we have now seen 9 straight months of year-over-year wage gains at 3% or higher; consumer confidence surged to 129.2 in April, which is in line with the continued strength and demand for our product; and the advanced estimate for GDP for the first quarter came in at 3.2%, a solid increase over the 2.2% in Q4 of 2018.

All of this points to our belief in continued economic and marine strength, with MBUU leading the way.

Last Friday, it was announced that the Canadian tariffs on boats have been lifted.

This is a fantastic outcome for MBUU and for the marine industry because Canada is a top-3 market in the world for many marine segments.

This is a great outcome at a good time.

Related to Europe and China, where tariffs remain in place, we have been able to navigate around the export tariffs for [Malibu and] Axis due to our strategic and operational capabilities, as we shifted some manufacturing from -- to our Australia facility and avoided the impact of the 25% European and China tariffs.

This has allowed us to salvage sales that we know that we would've lost for Malibu and Axis.

I will now turn the call over to Wayne to discuss the financial performance in more detail.

Thanks, Jack.

In the third quarter, net sales increased 42.4% to $199.9 million and unit volume increased 17.2% to 2,094 boats.

The Malibu brand represented approximately 41.5% of unit sales or 869 units; Axis represented approximately 20.9% or 437 units; Cobalt represented 30.8% or 645 boats; and Pursuit made up the remaining 143 boats.

Consolidated net sales per unit increased 21.4% to approximately $95,500.

The increase was largely driven by the inclusion of Pursuit models, which carry a significantly higher average selling price than our other brands, and for our other brands, year-over-year price increases and higher mix of larger boats.

Gross profit increased 36.7% to $49.7 million and gross margin was 24.9%.

This compares to a gross margin of 25.9% in the prior year period.

The decrease in gross margin is attributable to the inclusion of Pursuit and consistent with our annual guidance and expectations.

Our comparable gross margin performance in the combined Malibu and Cobalt business increased 50 basis points year-over-year in Q3.

Selling and marketing expense increased 61.6% or $2 million in the third quarter.

This is primarily driven by the seasonal spend at Pursuit for larger boat shows.

As a percentage of sales, selling and marketing expense increased by 30 basis points.

General and administrative expenses increased 56.8% or $4.5 million.

The increase was primarily driven by the addition of Pursuit boats in the quarter, including acquisition-related expenses.

As a percentage of sales, G&A expenses excluding amortization increased about 60 basis points to 6.2%.

Net income for the quarter increased 32.2% to $22.2 million.

Adjusted EBITDA for the quarter increased 32.4% to $37.8 million and adjusted EBITDA margin decreased about 140 basis points to 18.9%, attributable to the addition of Pursuit.

Non-GAAP adjusted fully distributed net income per share increased 29.2% to $1.15 per share.

This is calculated using a normalized C corp tax rate of 24.1% and a fully distributed weighted average share count of approximately 21.9 million shares.

For a reconciliation of adjusted EBITDA and adjusted fully distributed net income per share to GAAP metrics, please see the tables in our earnings release.

The following consolidated outlook for fiscal 2019 includes the 8.5 months of contribution from Pursuit since it closed on October 15.

For Malibu and Cobalt, an increase in unit volume over last year approaching double digits.

For Pursuit, a total unit volume for the fiscal year of just over 400 units.

Net sales growth for Malibu and Cobalt approaching midteens.

Consolidated net sales growth between 35% and 36% for the full year.

Consolidated gross margin is expected to be flat -- about flat year-over-year.

Acquisition and engine expenses are expected to be approximately $7 million to $8 million, not including purchase accounting adjustments for asset step ups.

Consolidated adjusted EBITDA margin is expected to be down slightly year-over-year, again as a result of including the currently lower Pursuit EBITDA margin.

For consolidated capital expenditures, we are currently planning about $17 million to $18 million.

And finally, our forward-looking normalized annual C corp tax rate should remain steady at our current rate of 24.1%.

In closing, we delivered another quarter of outstanding financial results.

Our brands continue to perform well as we progress into the peak selling season.

We are executing well on our vertical integration initiatives and operational and capacity enhancements where we are focused on investing in the future.

Next year, we will see -- will see us spend additional capital to expand our production capabilities at both Cobalt and Pursuit as we continue to plan for meaningful future growth.

We believe these capital investments, combined with our vertical integration initiatives, set us up well for continued strong growth in revenue and earnings.

With that, I'd like to hand the call back over to Jack for some closing remarks.

Thank you, Wayne.

In summary of our quarter, our third quarter was another strong, record-setting quarter for our business.

EBITDA margin was exactly on target with Street expectations at 18.9%.

Despite an underlying tone of global economic uncertainty, the important metrics we view and U.S. consumer confidence remains strong, as does our confidence in marine and our continued performance.

Our competitive advantages and operational excellence continue to allow us to outperform and gain market share within the growing U.S. marine market.

The demand for our products remains very strong and our channel inventories are right where want them to be.

We're seeing outperformance in Cobalt and our Pursuit brands, and we benefited from the first full quarter results from Pursuit.

We're very excited about the future of Pursuit, as the best is yet to come for this powerful premium brand.

Our vertical integration strategy continues to move forward, separating us from the competition and proving to be a tremendous growth opportunity for our business.

And most importantly, Malibu remains very strongly positioned going forward.

We are in an excellent position to drive long-term value for our stakeholders.

Operator, we will now take questions.

(Operator Instructions) Our first question's coming from the line of Tim Conder with Wells Fargo Securities.

First of all, gentlemen, congrats.

And by no way, Jack, can you tell you that you're confident, I mean that definitely did not come through, so -- but no, seriously, very strongly came through.

Channel inventory comments, just wanted to clarify and make sure I heard it correctly, were the -- you're very comfortable where you are with Malibu, Axis, with Cobalt, with Pursuit.

The channel inventory, a little bit heavy among competitors.

Where -- is that in the towboat category, or is it that in some of the other categories?

Just a little clarity on that, sir.

I think you see it across all categories, but certainly within the towboat or the Performance Sports Boat category.

I termed it that we try very, very hard to do a wholesale/retail matching every single quarter.

And so if we look at our wholesale, it's very close to where retail is.

If retail is up 10%, we're normally in the 8% to 12% wholesale range.

If you're out there and you're putting 32% into the channel but your retail's growing 8%, then clearly you're putting inventory into the channel.

We do, however, see it in certain outboard segments, we see it in certain parts of the sterndrive segments as well.

And I think that -- I think largely it's a pretty heady environment, and so people are taking advantage in these other segments of putting inventory into the channel.

Okay.

Okay.

Canada specifically, with the tariffs now being repealed, obviously good for everyone.

But can you talk about how your channel inventories are there?

And then the ability to respond as dealers maybe potentially add some more on there?

Yes.

Our channel inventories are good in Canada, and I think really for -- probably the segments that we're in, we've been somewhat surprised that shipments into Canada and retail into Canada has remained more consistent than we thought it would have been even with the tariffs.

I think, more than anything, what we will see is now you have a psychological factor with these tariffs being eliminated that will create additional demand.

And that's what we're looking forward to.

Okay.

And any quantification, Wayne or Jack, there, or any degree of assistance that you provided, so we can -- as far as modeling going forward -- maybe that won't be there when we look to fiscal '20, to the Canadian dealers?

Yes.

It would be just a low double-digit basis point number that it impacted on a year-to-date basis.

Our next question is coming from the line of Joe Altobello with Raymond James.

So first question is sort of a broad question, and you guys have seen the same SSI data that we have, which indicates a slowdown in the broader power boat industry in recent months.

Obviously, towboats seem to be the exception to that.

But I'm just curious, Jack, you talked this morning about the strong macro background and things like that, but why do you think we're seeing a slowdown in the broader space?

I am going to go back to some of the comments from companies that reported earlier in the month, and I think that what they were pointing to is the longer winter season, maybe some of the flooding had had an impact on their segments, and I can certainly see that.

I can really only speak to our segments -- performance sports boats, sterndrives, outboards -- and we have not seen that.

The boat shows are very strong, as I pointed out.

And we've continued to see a very strong season.

And one thing that I didn't even mention in the remarks is we are -- from a standpoint of the West Coast, California, there is more water than there has been in years.

So any even thought of a drought has gone away in for -- what for us is the second largest state.

That was my next question, which is California.

Obviously, a lot of rain over the winter.

Has that translated into better retail so far?

I think it will translate into better retail.

Still very early in the season.

Boat shows were commensurate with other boat shows, but I think that as we get into that later May, June, July time frame, we will see stronger retail.

Okay.

Great.

And just one last one in terms of the promotional environment.

You did allude to the heavy inventories that are out there in the channel by others and the potential for an uptick in promotional activity.

Just to be clear, you've not seen that yet, but you are anticipating that to happen?

Yes.

We have not really seen it to that extent yet.

We -- it will happen and it will play out similar to what it did 24 to 30 months ago, and it's the law of diminishing returns.

The people most impacted are the smaller players, the Tier 2, Tier 3 players.

And then the second most impacted are going to be the people that are having to take the markdowns to move the inventory.

Our next question comes from the line of Gerrick Johnson with BMO Capital Markets.

First question is on distribution.

Have you been able to realize distribution dealer synergies between brands?

And how has that impacted unit shipments?

There has been a minimal amount at this point, Gerrick, between Pursuit and Cobalt.

There's been some over the recent, call it, 12- to 18-month period between Malibu and Cobalt.

But I would say that the impact on retail, the impact on our wholesale has not been that great thus far, but we'll continue to look for additional opportunities.

Okay.

And then on inventory, at those dealers, you call it at appropriate levels, well positioned.

But well positioned for what?

For what kind of retail?

Well positioned for us.

Now let me go and take a step back.

If you recall, we have discussed pretty extensively that last year, especially at the Malibu, Axis front and the Cobalt front, we were under inventory.

So as retail was growing 10%, we were putting about 7% or so into the channel.

So we've been making that up.

We look at it at a weeks on hand.

And if you look at our weeks on hand of inventory versus previous years, we are right on target with where we want to be.

So we're projecting in that 7% to 10% growth rate.

Okay.

Great.

And then lastly, I just want to quantify or circle back to what Tim was asking about Canada.

What percent of boat shipments do go to Canada?

And just remind us how you are handling that tariff impact before.

Before, we were, both on the Cobalt and the Malibu side, we were participating with the dealers somewhat on that tariff and trying to make sure that the consumer did not see that.

So if you look at it from a prospective view, any markdowns that we were taking and others were taking will go away.

For us, at Cobalt, it's a little bit less than 5% of the total business, and it's is less than 7% or so from a Malibu point of view.

And we look at it again prospectively that it removes a dynamic for the consumer that we think will be a positive in selling boats in Canada.

(Operator Instructions) And the next question coming from the line of Brett Andress with KeyBanc Capital Markets.

This is Dan on for Brett.

Congrats on the quarter.

That 20% warranty registration growth you spoke to in the prepared remarks, I mean that's a great number from the admittedly variable SSI data.

Looks like that's been pretty broad-based across all of your brands, with very strong Malibu growth.

Is that the right way to think about that number?

It is the right way to think about it, yes.

Okay.

Perfect.

And then on Monsoon, I mean with the schedule on track, can you talk about the dealer and customer feedback so far, and remind us the margin expansion target from the full integration there for next year?

Okay.

I'll cover the first part of the question.

It's truly out of this world.

The dealers are ecstatic.

The characteristics that we strive to deliver with this engine have been embraced on every front.

It is a very quiet engine.

The torque is fantastic.

The serviceability is fantastic.

So the dealers are very much -- can't wait to get this into 100% of the boats.

There are quite a few -- since we started this earlier than we initially thought we would in putting it out in the field, there are a lot of engines that are already out into the field, and it's been dynamic.

The consumers are absolutely seeing what we have seen and the dealers have seen, and we think that it will only drive additional uptake.

Yes.

And on the margin target front, we had originally, before the Cobalt and Pursuit acquisitions, targeted a couple of hundred basis points in EBITDA margin expansion.

When you dilute that number because the increase in the revenue base, it gets stepped out 100 basis points of margin expansion in terms of the target.

We have realized a little bit of that this year, as you guys can tell, through some positive expansion of gross margin in the Malibu and Cobalt business on a combined basis over the last 2 quarters, but that's generally pretty minimal.

So the majority of that expansion should be coming in the form of -- or in fiscal 2020.

There might be a little bit that leaks into '21 as well.

But when we give formal guidance, we will give a little bit more clarity on that.

But I would tell you most of it's going to be in '20.

We've realized a little bit of it in '19 so far.

Okay.

Great.

And one more, if I can.

On the Pursuit front, the ASP there continues to really impress.

Is this roughly 260,000 ASP kind of a reasonable go-forward assumption?

And can you give any updated thoughts on the capacity expansion there, the -- maybe a best-case/worst-case scenario and some of the variables behind that we should consider?

Yes.

I think that that ASP is going to be pretty consistent.

And what we're seeing -- and we're seeing it in all brands, frankly -- is the uptake of features, the uptake on options is just incredibly strong.

And that points back to what I think the economy is and how our consumers view where we're at in the economy.

So we would expect that to be consistent.

As it relates to our growth from an operational point of view and ability to generate demand, we have unlocked, I would say, some -- like we typically do -- some strategies that will allow us to perhaps build more product in fiscal year '20 than we had initially anticipated.

I would put that into the tune of 8% to 10% or so versus our capacity today.

But I can't hammer enough that the real benefit is going to come in model year 2021, when we have that new plant online and we can start that progression of doubling the amount of production that we can generate.

And at this time, I'm showing no further questions.

I would like to turn the call back over to Mr. Jack Springer for closing remarks.

Thank you very much.

Malibu had a great quarter.

Our dealers and our consumers remain positive as we progress through the peak retail sales season.

All 4 of our brands continue to perform well and will drive us to a strong finish in model year '19, fiscal year '19.

I want to thank you for continued support of Malibu, and thank you for being on the call today.

I hope everyone on the call has a great day.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes today's program.

You may all disconnect.

Everyone, have a great day.