Malibu Boats Inc (MBUU) 2021 Q2 法說會逐字稿

Good morning, and welcome to the Malibu Boats Conference Call to discuss Second Quarter Fiscal Year 2021 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.

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 second quarter financials.

We will then open the call for questions.

A press release covering the company's fiscal second quarter 2021 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.

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

Our team posted incredible fiscal second quarter results, once again exceeding expectations.

Leveraging the strong retail environment and our previous planning in preparation for COVID-19, we significantly performed ahead of planned sales.

We delivered exceptional gross margins and realized historic adjusted EBITDA results.

Our results and view into the second half supports an increase in our full-year fiscal '21 guidance, and we will outline this on the call.

Customer interest in new boats and demand for larger boats with upgraded features and options remains very strong.

Our backlog of orders is historic for all of our brands.

ASPs are increasing, vertical integration strength is being realized with unparalleled execution, and we yielded a 320 basis-point year-over-year improvement in gross margins for the quarter.

This exemplary performance during the quarter further solidifies our position as a trailblazer and innovator in the marine space, as well as demonstrating our ability to adapt and grow in the current environment.

For the second fiscal quarter, we delivered net sales gross profit and adjusted EBITDA year-over-year growth.

Net sales increased nearly 9% to $196 million.

Gross margin increased to 25.3%.

Adjusted EBITDA increased approximately 28% to over $39 million, and adjusted EBITDA margin increased 300 basis points to 20%.

As you know, we have had a long-term target of 20% adjusted EBITDA margin annually.

And as you will see from our revised full-fiscal-year guidance, we are well ahead of schedule and will be there this year for the full fiscal year.

Our strong employee first culture continues to be a clear competitive advantage.

At Malibu, I'm very proud to say that in January, we hit over 5 million man-hours without a lost time accident, a nearly unheard-of level that illustrates our commitment to protecting and supporting the well-being of our workforce.

The last lost time accident we experienced was in June of 2016, which means we have experienced over 4.5 years without a lost time accident at Malibu.

This is a fantastic achievement for our entire Malibu team.

We also welcomed Maverick Boat Group as a new acquisition at the end of the fiscal second quarter.

Maverick brings a complementary lineup of premium brands, which are Cobia, Pathfinder, Maverick and Hewes to the Malibu family.

NBG has a distinguished their reputation and significantly enhances our breadth of saltwater outboard offerings, of which Cobia and Pathfinder are highly complementary to pursue.

The addition of Maverick allows us to better serve the full saltwater outboard segment with our brands.

We now have a full-length and price range of product in the center console and dual console segments and we immediately entered the bay boat segment with Pathfinder and the flat boat market with Maverick and Hewes.

We believe this provides a tremendous opportunity for increased growth and profitability.

Turning to the retail landscape, the thirst for boats remains very strong, even during what is historically a slower season in October through December periods.

Our dealers have remained agile in this more virtual environment.

And as a result, we are seeing an unprecedented increase in customer generated custom orders.

Actually for more than a decade -- annually now for more than a decade, we have conducted a year-end sales event in November and December.

The year-end sales event provides the best deals of the year to the customer even better than boat shows.

The strength of this program has steadily grown over the last decade, and it's a premier selling event for the Malibu and Axis brands.

It was very important to continue this event in 2020 for continuity and to offset lost boat shows.

Due to the low-aged inventory and lack of discounting, the program was modified this year and discounting was lower than in previous years.

This year, the year-end sales event was an astronomical success.

This is hard to believe, but orders for Malibu and Axis boats during the year-end sales event exceeded the number of orders received from last year's year-end sales event and boat shows combined.

This fact also applies for the -- to the 2018 combination of year-end sales event and boat shows.

This is a staggering statistic, seeing as boat shows have historically been viewed as a vital factor to the health of the boating industry.

To put this into perspective, over 1/3 of a full year's worth of unit sales and production was put under contract at retail in just over 30 days.

As we anticipated, both shows will predominantly not occur in winter 2021.

Most of the larger shows are canceled.

However, due to the strong retail environment and the extremely successful year-end sales event for Malibu and Axis, we see no impact to us in garnering orders for 2021.

As I mentioned last quarter, all of our brands were challenged to replace boat shows and we believe -- since we believe that most of them would be canceled.

Our brands have done a great job in working with dealers and planning on-site and other events.

More progressively, Malibu and Axis developed a state-of-the-art Virtual Boat Show in dealer solution.

Not only can a customer attend a local Virtual Boat Show, it also spotlights the specific boats at that dealer location and allows the customer to see all of the features and experience walking through the boat virtually.

This is not a generic boat model on our website.

This is the actual boat at the local dealership.

No one else has this or even close to it that we know of.

This should provide an unmatched customer experience.

During the second quarter, a large percentage of dealer commitments were filled with retail sold orders compared to the normal environment for this time of year, which is roughly a 50-50 split between retail sold and inventory recycling orders.

Further, as customers place custom orders, they are ordering larger boats commanding higher margins and invariably selecting additional features and options driving ASPs up and contributing to the margin profile up above.

This is a contributor to our fantastic gross and adjusted EBITDA margins for the quarter, and we expect this to continue.

Channel inventories are building, but at a slower pace than we had initially anticipated due to the strong retail demand.

As one would expect, given the time of year, we did see channel inventories increase in the second quarter.

Based on available data, we expect a longer runway to normalize channel inventory and believe it will be into calendar year 2022 before we see channel inventory equilibrium.

We view this as a great opportunity for our brands which sustains our growth and keeps A's inventory very low, allowing dealers to have only the newest and most advanced models.

Throughout this period of unprecedented demand, I am proud to say we have been able to fulfill every drop of demand with market-leading products, ensuring a long-lasting, sustainable and loyal consumer base.

We have not missed shipping one scheduled boat, a testament to our operational excellence and strategic vision.

Our unified cultures centered in operational excellence has allowed us to maximize our operations and ramp up production at a pace steadily ahead of our competition.

We have increased boat counts and instituted unplanned production Fridays at all of our brands.

We have built every boat we have planned to build and more.

In fact, since the beginning of the fiscal year in July, Malibu has increased daily production rates by 50%, Cobalt has increased daily production rates by almost 20% and for fiscal year 2021, Pursuit will produce 20% more boats than planned.

In the second half, Malibu, Cobalt and Pursuit will ship nearly 20% more both than in the first half of this year and about 35% more boats than last year.

For full year 2021, our unit shipments will be up mid- to upper-[teens] (corrected by company after the call) for the year.

Specifically by brand, Malibu has built and shipped 175 more units than planned this fiscal year, and it will be the most in Malibu's history.

Our dealers will be getting more boats than what any of our competitors will be able to deliver.

Capacity is sufficient to grow wholesale production.

And in fiscal year 2022, we will have the capability to build 5,000 boats or more for domestic demand.

Based on our current market share, that would project to a domestic market exceeding 15,500 units.

During our fiscal third quarter, Cobalt will see the final phase of our expansion and improvement project completed allowing further increases in production count.

This will enable capacity to increase more beginning in the latter portion of fiscal Q4.

This 3-phase expansion and improvement initiative will enable a 50% capacity improvement over time as we need it.

Pursuit is already seeing a substantial increase in additional boats being delivered on top of our current commitments.

For the year, we are projecting to deliver approximately 650 boats, drastically outperforming our initial commitments and a 30% increase in units built over any other year historically.

Further, we will be able to increase production even more in fiscal year 2022.

All of the recently introduced model year 2021 products are flying off the shows like hamburger patties for a cheeseburger picnic.

Our boats are resonating with experienced boaters while also attracting new customers into the lifestyle.

For Malibu, leading our model year 2021 new product or the recently introduced M220, 24 MXZ, 23 LSV and Axis A24, which are all larger boats that continue to drive new business and higher margins.

Additionally, our flagship M240, which is just entering its second year, is outpacing our expectations.

For Cobalt, momentum continues to build as we are seeing very strong performance in our brand-new model year 2021 boats, the R6 Standard, the R6 Surf, the R6 Outboard, the R8 Standard and the R8 Surf, all of which have a higher ASP than predecessor boats and better margin profiles.

We have delivered 5 new boats to the market this year and the R8 Outboard will debut in the third quarter, making 6 new boats for fiscal year 2021 or an average of one boat every other month.

These new boats drove record retail sales orders for our fiscal second quarter at Cobalt.

We continue to see higher-than-projected demand for the new Pursuit S 428, the largest Pursuit Boat that we have ever built.

As strong as we expected this boat to be, its acceptance has been surprising and orders are pacing about 50% higher than we thought they would be at this time.

The S 378 is another large boat that has done extremely well since its introduction in the fourth quarter of fiscal year 2020.

As we have previously said, the margin profile on both of these boats has doubled versus their predecessors, which were contract built in Michigan.

Oil production for the S 428 and the S 378 has been in Florida for the full fiscal year, and we are beginning to see the impact on Pursuit's financials.

We continue to also see a shift in larger boats in the premium outboard segment, and we have led this trend in our new Pursuit product.

We just completed the first month since we closed the acquisition of Maverick Boat Group.

We have spent significant time there in January and are even more excited about the opportunities.

There are operational improvements that we can make rapidly that will allow us to increase boat count.

The real production driver will be the Phase II addition to Plant 2 which will double that plant's square footage.

Very much like the Pursuit game plan once this expansion is completed, it will mean a significant increase to weekly production capability.

We expect to break ground on this expansion later this calendar year and have the plant up and running as soon as possible.

We are always focusing on creating sustainable improvements over the long term, and our plan for every brand includes building more boats in the second half of fiscal year '21 than in the first half and more boats in fiscal year '22 than in fiscal year 2021.

Moving to our operational excellence initiatives, we continue to see the gross margin benefit from our vertical integration strategy which remains a key competitive advantage across our brands.

Our vertical integration strategy allows our brands to control products or features from conception through customer delivery.

This helped drive strong fiscal second quarter adjusted EBITDA margins.

It also reinforces repeated statements that investments in our vertical integration initiatives drives profitability and unlocks maximum value from our product portfolio.

As you know, all of our Malibu and access models are powered by our best-in-class Malibu Monsoon engines.

Further, these new models are equipped with several of our patented technologies, including our integrated SURF platform featuring Surf Gate and our Stern Turn technology.

Our patented swim step feature that originated with Cobalt is being utilized in Malibu models as well, and Malibu's flooring vertical integration has expanded Cobalt and will eventually expand to Pursuit.

By developing our cross-brand vertical integration, we remain confident in our ability to generate new synergies across brands in fiscal year 2021 and beyond.

Looking ahead, we remain committed to our growth strategy and growing our marine platforms.

We will continue to drive innovation and be the first to market with compelling new products and features.

Additionally, our strategic acquisition strategy of acquiring premium companies with improvement opportunities remains a focus.

Fiscal year 2021 is positioned to be a master of year and well ahead of our initial expectations.

Despite the noise around supply chain constraints, as we have discussed today, we have increased production significantly since the beginning of the fiscal year.

I want to specifically recognize our suppliers who have done a magnificent job of getting us the product and parts we need to accommodate this growth.

In a tough environment, they have excelled.

Across our brands, we have continued to outperform our competitors and everyone's expectations.

The last 3-quarters have been consistent with our very strong historical operational performance.

Going forward, nothing changes.

In an environment where channel inventories are at historical lows and A's inventory is at a minimum, there is an overriding factor that determines who wins, who gains market share and who is most successful.

The companies that produce most boats will come out on top.

We are producing at least 1/3 more boats than our closest competitor in the Performance Sports Boat segment.

That is 1/3 more to ship to the retail customer and to build back channel inventories quicker.

As we have for over a decade, Malibu will win and that will carry to our other brands.

Further, the accomplishments we have seen amid a volatile market again illustrate the benefits of our vertical integration strategy which provide a level of insulation against supply chain constraints by building up to 25% more of our boats in-house.

We are incredibly optimistic for the second half of fiscal year 2021.

As a result, we have increased our full year fiscal 2021 guidance.

Wayne will take you through the specifics in a moment.

I remain incredibly proud of our team and their enduring commitment to lead the boating industry continues to shine.

We are achieving long-term sustainable success, and I am confident in our ability to deliver value to our shareholders while outperforming peers to remain a leader within the industry.

I will now turn the call over to Wayne to take you through our financial performance in more detail.

Thank you, Jack.

In the second quarter, net sales increased 8.6% to $195.6 million, and unit volume decreased 3.4% to 1,742 boats.

This decrease was primarily driven by lower production levels in our Cobalt segment.

But as Jack mentioned, we expect Cobalt's production to ramp up during the second half following the completion of its expansion and improvement project.

Malibu and Axis brands represented approximately 63% of unit sales or 1,101 boats.

Cobalt represented 28% or 489 boats and Pursuit made up the remaining 152 boats.

Consolidated net sales per unit increased 12.5% to approximately $112,000, primarily driven by a favorable mix across all of our brands.

And an increase in options and features in our Malibu segment.

Gross profit increased 24.1% to $49.5 million, and gross margin was 25.3%, an increase of 320 basis points from the prior year period.

Selling and marketing expense decreased $0.7 million or 14.3% to $4 million in the second quarter of 2021 compared to the 2020 period as a percentage of sales, selling and marketing expense decreased 60 basis points.

General and administrative expenses increased 49.2% or $5 million.

The increase was primarily driven by acquisition-related costs.

As a percentage of sales, G&A expenses excluding amortization, increased 210 basis points to 7.7%.

Net income for the quarter increased 25.8% to $22.1 million.

Adjusted EBITDA for the quarter increased 27.5% to $39.1 million, and adjusted EBITDA margin increased 300 basis points to 20%.

Non-GAAP adjusted fully distributed net income per share increased 31.2% to $1.22 per share.

This is calculated using a normalized C-Corp tax rate of 23.6% and a fully distributed weighted average share count of approximately 21.6 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.

Our healthy balance sheet supported our continued disciplined deployment of capital through the acquisition of Maverick Boat Group during the quarter.

An acquisition that we think fits our playbook of aggressive investment, operational enhancement and robust growth on the top and bottom lines.

At the same time, we continue to invest in our current brands where we are focused on setting up for substantial retail demand driven organic growth and continued margin expansion.

As Jack mentioned, we expect a robust second half of the year for fiscal 2021.

That said, we will remain attentive to the retail marketplace and nimble in the face of an ongoing global pandemic to quickly address any potential volatility that manifests as a result.

Nonetheless, we expect strong demand to continue for our premium brands and now expect full year revenue growth of greater than 35% year-over-year, and adjusted EBITDA margins of approximately 20.5%.

In terms of cadence, for the remainder of the year, we believe revenue will be generally consistent throughout the second half.

And margins will slightly increase as the second half progresses.

These estimates include the impact of our acquisition of Maverick Boat Group for the second half of the fiscal year and continue to include a modest amount of cushion given pandemic-related uncertainty.

In closing, our team continues to post incredible results and surpass expectations.

We believe in our ability to continue to deliver strong returns on our investments, both organic and inorganic.

Our prior investments, industry positioning and record momentum provide an attractive setup to drive significant revenue and profitability gains through fiscal 2022 further solidifying Malibu as the industry leader.

With that, I'd like to open the call up for questions.

(Operator Instructions) Your first question comes from Mike Swartz from Truist.

Maybe just want to touch on your new guidance here.

Obviously, this is the first time you've formally incorporated Maverick in that guidance.

And I guess we are under the assumption that Maverick's margins were in the mid-teens that you're taking your consolidated EBITDA margin guidance.

So maybe help us think about the puts, the takes there?

And maybe if you can back out the contribution from Maverick specifically?

Yes.

I think you're thinking about it correctly that, ultimately, the implied guide, excluding Maverick, is meaningfully up from a margin perspective.

And so we continue to see really strong margins.

We talked about it in fiscal Q1, that is the strength of the margin's business.

We continue to see that.

We see that continuing through the year in terms of what we're seeing both from a volume perspective and margin performance and the cost profile in the business.

That embeds some headwinds that you see in terms of some inflationary cost pressures, all of those things.

But we're not going to give specific guidance that excludes Maverick.

But I think your math and the way you're looking at it is correct.

So it's an underlying margin performance, and it's really driven by Pursuit in the Malibu business.

I would tell you, all 3 of the pre-existing businesses are outperforming margin expectations, most meaningfully it would be on the Pursuit side with the addition of the new factory and Malibu where you're seeing the benefit of the engine business.

Okay.

That's helpful.

And then just given the strength of retail demand and what you're seeing in your order book, can you talk about maybe how much flexibility you have in the year to take on new orders in your businesses?

And also talk about competitors and other players in the industry moving their model years forward and doing some different things with the timing therein?

Have you given any thought to that or how you're going to proceed going into model year '22?

No.

I mean, we will.

We'll keep the model year as it historically has been.

Last year, as you recall, we did move the model year up one month, and that was based on a scenario where we thought that we were going to need to increase demand and get newer product out there quicker.

It flipped on us here and that did not materialize, but it certainly did not hurt.

But going back to a more recognizable cadence, I think it's the right thing to do.

And we'll sell throughout the end of the year.

In terms of ratcheting up, we have done that all year long whereas you know, we take commitments from our dealers before the beginning of the fiscal year.

And we are going to surpass, by a large margin for all of the brands, the commitments that we took in at the beginning of the fiscal year.

And as I've talked about in the call, we have taken production counts up substantially, and we'll continue to do that on an as-needed basis as of end.

Your next question comes from Joe Altobello from Raymond James.

Just want to stick on the guidance -- on the EBITDA margin guidance for a second.

Obviously, if you look at fiscal '21, you're benefiting from a lack of discounting, very strong features uptake and a number of other items.

But is this the new base of 20.5% that you think you could potentially grow off of next year?

Or are there some headwinds that come back into play in fiscal '22?

Yes.

I mean, arithmetically, you obviously, in fiscal '22, have the inclusion of Maverick for an additional 6 months.

And so that creates a natural headwind.

I would still -- I think it's a little early to go out there and give '22 guidance, but I think -- and Jack can affirm this, which is -- I see it is the new base.

Now growing off of it, I think everybody needs to keep in mind that you're going to have the 6 months of Maverick added to fiscal '22, and that's going to be a headwind that's going to be measured in probably 50 basis points or so.

So is that exactly the baseline, I mean, 20%, 20.5% would be kind of my baseline prospectively, Jack?

I agree.

I think it's sustainable.

I think that everything that we've modeled says that it is even with Maverick coming into play.

That's helpful.

And just a second question, if you look at your production capacity, you guys have increased significantly across the portfolio.

If we were to index what your capacity will be in '22, let's call it, ex Maverick versus '19.

How much of an increase have we seen over the last 3 years?

Over the last 3 years?

Yes.

From fiscal '19 as a base.

There is a quick math here, Joe.

15%, 20%, somewhere in that neighborhood?

It's higher than that.

It's going to be 30%, 40% over a 3-year period.

We put in a lot of improvements in place, expansions in place.

And so the result, if you look at accumulatively for all the brands, it will easily be in that 30% to 40% range.

Your next question comes from Jamie Katz from Morningstar.

I want to dissect some of the Cobalt information a little bit more.

And I think what was in the print was that units would be increasing in the second half of the fiscal year.

But I think what I heard in the commentary was that, that might not happen until the end of the fourth quarter and so we may not see actual positive unit volume growth until fiscal 2022 on that.

Am I thinking about that the right way?

No.

We'll have unit growth increase in Q3 and in Q4.

My point, Jaime, was that with this expansion and improvement coming into place, that's going to allow that process to increase our production even more up to 50% over time.

Okay.

And then given there were so many positive commentary factors coming out of the quarter.

Can you guys sort of give us the inverse perspective, what do you see is the biggest risk that would really derail the company's ability to outpace the market at this point?

We will outpace the market.

No question.

Okay.

So nothing keeps you up at night?

No.

I mean, other than politics.

Okay.

And there is one last thing.

In the slide deck, there was a point on custom boats becoming a bigger percentage of sales.

And I'm curious whether that's something sort of secular that you've seen over the last few years, what was that maybe in 2018?

And what do you expect that to be in 2021?

Because it seems like that could be a potential shift to maintain higher gross margin performance over time?

Yes.

I think the big driver has been over the last year, and it's been the COVID pandemic and seeing the inventories drop to the low channel inventory levels we are, if you think about it normally and just to break it up a little bit, in the course of a normal year from July to June, the first half of the year is typically 60%, 65%.

And I'm speaking of retail now.

Our dealer sales, 60% to 65% stock boats and then 30% to 35% customer order boats.

With the lack of inventory and with the COVID pandemic and people just buying both that we've not seen in a number of years or they're new to the market, that channel inventory has caused it to swing the other way.

And I'll give you an example.

I spoke to our year-end sales event, last year in our year-end sales event, 44% of the boats that were sold were channel inventory both are stocked, both at the dealer.

This year it's 18%.

And so you have these customers that are coming in and they are buying boats because they don't see what they want on the floor at the dealer.

Or there -- they want more features, more options, larger boats.

So I think ultimately, that's driving it.

I do think it sticks even after we get past the pandemic a little bit, but I think it will revert more to a normal 50-50 split over the course of the year.

Your next question comes from Alex Maroccia from Berenberg.

It looks like one of the biggest drivers of margin expansion, at least this year and probably into next year a little bit is a reduction in the sales and marketing expenses, primarily driven by this lack of boat shows.

Are you thinking about '22?

And are there any cost reductions you can think can repeat when boat shows do return?

I know you gave some good information about that year-end event you held.

So is that more in your plans going forward?

Alex, I would say that of all of the factors that are generating the margins that are -- the discounting is probably one of the smallest, if not the smallest.

And if you look at the larger boats and the features and the options, the new product at Cobalt and Pursuit and Malibu being a higher-margin profile, all of those, I think, are bigger drivers.

I do think that once we get back to a more normalized basis next year, we'll see it pick back up a little bit.

But if this demand continues, and right now, there's no reason to expect that it won't, I think discounting will continue to be low going forward.

Yes.

I would also envision that there is an element of that rate.

So you're talking about less than 20% of the margin pickup.

And I would tell you that probably half of that's a fundamental shift and a permanent variance in lower travel and going about business a different way.

Okay.

Great.

And the second question is just a bit more forward looking.

But how are you thinking about the next capital initiative once the Maverick project is complete?

Is Malibu on deck for another expansion?

Is there another vertical integration opportunity?

Or is there something else out there that we're not thinking about?

No, that's a very good question.

I think afterwards, we're looking at Malibu, and if the pace continues and we go to 14,000, 15,000, 16,000 over the next couple of years in the Performance Sports Boat segment, we already have plans in place, and we'll start a process of a small expansion project that will effectively get us about 20% more boats.

Your next question comes from Brett Andress from KeyBanc Capital Markets.

Do you have any channel inventory stats for us, just maybe weeks on hand or year-over-year inventory declines?

Yes.

So what I would tell you, I'd frame it the same way we framed it in the past, which is the size of the hole.

And so obviously, with the addition of Maverick, they have a hole as well.

So that number that we quoted that was north of 1,000 in August is up.

Ultimately, we've grown channel inventories in the last 3 months since we last communicated with folks, but that's generally a seasonal increase.

And so the good news -- the bad news is that there's still a really big hole relative to the seasonally adjusted appropriate level.

The good news is that's being driven by a white hot retail environment.

So the short takeaway is that for the full year, if it continues to go like it is at retail, I don't think we're making up any of that hole.

And -- but that means retail is just absolutely on fire.

Got it.

Okay.

And then so when you think about when retail starts to seasonally ramp up here, right, into the spring and the summer and given where inventories are at.

I mean, are you and your dealers going to have to operate differently?

I guess, how are you preparing for that?

It is like everything just going to be deposit based in presales as we get into the selling season here?

I think, certainly, by the time we get to the end of this fiscal year in that post Memorial Day time frame, it will be deposit base.

I share what Wayne said, it's going to be very difficult to make up channel inventory this year as hot as it is, but with the volume that we're putting out and we'll be putting out in model year '22, I think that we'll grow those channel inventories over the course of that model year.

Your next question comes from Eric Wold from B. Riley Securities.

A couple of questions, I guess.

One, on the Cobalt improvement program, you talked about getting to a 50% capacity improvement over time should you need it.

Is that solely through process improvements and higher staffing?

Or would there be kind of another kind of capital spending need to get there?

And then if you look at kind of where Cobalt will be post this expansion program and prior to it, the efficiency improvements, what could you see in terms of margin expansion between the 2?

Okay.

On the 3 phases of the improvement that we've done, and we're concluding the third one this quarter, Eric.

That's what allows a 50%.

So there's no further expansion projects that are needed.

At that point, it simply becomes a matter of getting the people in place as we go up and count, we will add people.

And so it's just a function of people at that point in time.

The second question, I'm sorry, say that again?

Just what could be the margin benefit or expansion kind of prior to this and post this at Cobalt?

Let me -- I guess, I'm struggling with the prior.

I mean, the post, look, there's a lot of the capital that's been spent there relates to optimizing the flow and reducing rework and improving quality.

And so the prior portion of the question, I don't necessarily understand, but the -- on a prospective basis, what I would tell you is within that business itself, there's hundreds of basis points of margin expansion opportunity related to efficiency improvements as that volume goes up.

No, that's perfect.

This is what I was looking for, I guess.

And then second question, obviously, tons of demand still coming in 4 new boats, backlog, historic highs.

How do you think about kind of the puts and takes of trying to do kind of all you can to ramp production, push out order boats as fast as possible, including production price, all that, versus potentially straining the manufacturing system or the labor force and the process of doing so?

We think that we're better suited to engage that than almost anybody else out there.

And I think one of the things you have to be very careful about and we always are and we've done this in a very measured basis this year is to do it in at the pace that you can accommodate it, that you can hire the people, that you can train the people.

Because I can tell you what's going on out there right now is there are a lot of people that are rushing to get boats out there and their quality is horrible.

And so we work very hard to bring production up in a measured basis with people that are very well trained, and we can keep our quality while also accelerating the increase in the number of boats.

(Operator Instructions).

Your next question comes from Gerrick Johnson from BMO Capital Markets.

Now that you have some time to analyze the Cobia dealer network.

Have you identified any expansion opportunities?

I'm not sure if that's your primary focus at this point, but further down the road, how much larger can that network be?

And looking at the overlap between it and Pursuit, maybe there are opportunities for consolidation as well.

So if you can just talk about Cobia?

And then also, I'm just wondering you're thinking on the bay and flat boats and how they fit in your portfolio?

So I'll answer the last question first.

From the flat boats, it's a new segment.

We're not in that segment.

So it puts us into an immediate category that's a smaller outboard boat.

It's small, and I think it will continue to be small somewhat.

You're dealing with a different competitive set there that our smaller builders are building one at a time.

So I think it fits.

But it's not anything that we would see as a big growth item.

As it relates to Cobia, Gerrick, the answer to both of those questions are yes.

There are absolute opportunities with Pursuit, and that's one of the attractors for us.

When you look at the Pursuit, that out index is about 3 or 4 feet, it is a premium, higher price model.

Now we have a Cobia that index is below Pursuit.

At a price point, it's a little bit different.

And to the point that we've been making, it gives us a full gamut of product.

We have the entire product range from a length and from a price point of view now in both the center console and the dual console segments.

On the distribution side, there are opportunities, but our biggest challenge right now is to start building more and more and more boats.

Very similar to what we entered when we acquired Pursuit.

We have a shortfall and we need to get our current dealers as much inventory as we possibly can.

That's why we're going to add a plant and our expanded plan on Phase II and increase substantially the number of boats that we're getting out.

Until we do that, I don't think it's prudent for us, and it's not fair, frankly, to the other dealers for us to go out and sign other distribution.

I don't see necessarily consolidation.

And I go back to when we acquired Cobalt.

We will always have the best dealer in the market.

We want the best dealer for every individual market.

And if they happen to be an existing dealer, they're going to continue to be our dealer.

And if there's an opportunity to improve at some point because the market share is low and the service of the consumer is not as good as we would want it to be, that's when we would look to make a change.

Okay.

And on the band flat boats, wondering if there's an opportunity there to maybe, I don't know, exit that business and move that production capacity to bigger, more feature-rich boats like your Pursuits or your Cobia or something like that?

No plans to do that now.

I mean, when we look at Maverick, we saw all 4 segments as an opportunity for us.

And on the bay boats, frankly, we have been thinking about getting into bay boats from a build scenario.

So what that does for us is that puts us into that segment right now, right away.

There is no further question at this time.

I'll turn the call over back to Jack Springer.

Thank you very much.

In summary of our quarter, leveraging our premium product lineup and our industry-leading operational excellence, we capitalize on the strong retail demand to deliver revenue ahead of plan, exceptional gross margins, and historic adjusted EBITDA results in the second quarter, and we do believe that this will be sustainable.

We expanded our brand family with the acquisition of Maverick Boat Group and its complementary lineup of brands, further adding to our diversification strategy and brand variability.

Our strategic planning, operational excellence and supply chain management continues to support our outperformance of the broader market.

We have the capability and capacity to deliver more boats than competitors, selling more to retail customers and increasing the inventory at our dealers more quickly.

Vertical integration continues to drive higher margins and overcome many of the issues our competitors face who did not vertically integrate.

And given our extraordinary first half of the year, we remain confident in our ability to deliver value to our shareholders while outperforming our peers to solidify our dominant industry position.

As always, we want to thank you for your continued support.

We want to thank you for joining our call today and our journey towards growth and continued excellence.

I hope you on those around you are all safe and healthy and hope you have a fantastic day.

Thank you.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.