Malibu Boats, Inc. (NASDAQ:MBUU) Q2 2024 Earnings Call Transcript
Malibu Boats, Inc. (NASDAQ:MBUU) Q2 2024 Earnings Call Transcript January 30, 2024
Malibu Boats, Inc. beats earnings expectations. Reported EPS is $0.57, expectations were $0.47. Malibu Boats, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, everyone. And welcome to Malibu Boats Conference Call to Discuss Second Quarter Fiscal Year 2024 Results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. 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, today's call is being recorded. On the call today from management are Mr. Jack Springer, Chief Executive Officer; Mr. Bruce Beckman, Chief Financial Officer; and Mr. Ritchie Anderson, Chief Operating Officer. I will now turn the call over to Mr. Beckman to get started. Please go ahead, sir.
Bruce Beckman: Thank you. And good morning, everyone. On the call, Jack will provide commentary on the business and I will discuss our second quarter of fiscal year 2024 financials. We will then open the call for questions. A press release covering the company's fiscal second quarter 2024 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.
Jack Springer: Thank you, Bruce. And thank you all for joining the call. MBI navigated a challenging quarter, driven by continued economic uncertainty as retail remained suppressed and channel inventories were reverting to historical norms. For the second fiscal quarter, net sales decreased 38% to $211.1 million compared to the prior year. Net income decreased 62% to $13.8 million, while adjusted EBITDA fell 60% to $22.9 million. Gross margins decreased 460 basis points to approximately 18% and adjusted EBITDA margin decreased by 610 basis points to approximately 11%. We continue to experience soft retail demand as we entered our slowest time of the year. The confluence of events and coming off a pandemic retail high, channel inventories have built much quicker than anyone imagined, a return to seasonal norms and economic uncertainty due to a prolonged elevated interest rate environment that resulted in channel inventories higher than we or our dealers would like to see.
It is a tough market to say the least. But it is important to keep things in perspective and level set versus historical norms. While the retail environment is compressed, the biggest factor contributing to a tough year-over-year comparison is the normalization of channel inventory. Over the last two fiscal years, we've been focused on rebuilding our channels from historically low level brought on by lingering supply chain challenges and unprecedented demand during the pandemic. Today, these dynamics have shifted and a level-setting is going on as the inventory channels have fully recovered. We're back to natural market dynamics and MBI be highly focused on recalibrating to match wholesale production to retail demand. We are very, very committed to reducing channel inventories to lower levels that set up the dealer and MBI brands to recover more quickly once retail begins growing again.
We expect channel inventories to move downward as the selling season kicks in and reduce to the normal levels by the end of calendar Q2. MBI will continue to monitor the channel and take an aggressive approach with production levels as we head into the selling season. We do not shy from a downturn or a recession. We welcome the opportunities that are presented with it. Our variable cost structure and world class operational capabilities set us up extremely well to execute in driving the most profitability possible and continue to invest in the business. The investment in the business, whether it be new product and features, vertical integration or capacity, will drive market share increases and the realization of higher revenues and margins quickly once retail comes back.
The investment in the Roane County, Tennessee expansion for Cobalt is a great example of this commitment. Demand for our 30-foot-and-over cruisers has consistently outpaced our production capability. And with the addition of new models over the past couple of years and more coming, this expansion positions Cobalt to be able to build to demand as we exit the downturn and see demand growth. Had we waited until after the downturn, we would be sacrificing one to two years of revenue growth as we added capacity. MBI will be well positioned to exit this downturn more quickly and be even stronger than we were when entering it for all of our brands. From the retail lens, the sense of urgency from customers to buy a boat has largely disappeared. The consumer has been very patient.
They know inventory is available and they are looking for the best deal. To address this lighter retail environment, we introduced a program earlier this month, which we've been working on since early 2023 to introduce a Malibu and an Axis at entry level pricing. The Malibu LX-r is offered at $99,995, the first time that a 21 foot or larger Malibu can be purchased for under $100,000 in many years. The Axis T220-R is a 22 foot boat with a nationally advertised price of $89,995. We expect pricing on these two boats will draw customers who've been waiting for the lower prices to dealer. The goal is to have this customer exit the sidelines, go to the boat shows or dealerships and purchase. With these boats, we are also targeting smaller and less profitable jet boats for the cost conscious weight sports enthusiast.
Finally, we believe this is a great opportunity for a consumer to get a Malibu or Axis at a price less than a tier two or a tier three lake brand. We also believe that we will not only sell these boats, but they will lead to further opportunities to upsell by our dealers into other models, driven by the consumers' desires for more features and options. We have already seen this occurring in the January boat shows that have taken place thus far. A customer segment that has remained strong is the premium segment – cash buyers who are looking forward to larger, feature rich premium boats. We have several new offerings targeting these consumers that we are excited about. Our brand, through boat shows, are focusing on the new M242 Malibu, the most premium boat in the Malibu line.
Cobalt has introduced a new R33 surf cruiser and Pursuit will leverage the new OS 405 and DC 306, both premium boasts over 30 feet. As you see by their names, these models are targeting the important offshore and dual console segments in the saltwater outboard category for Pursuit. As always, the boat show season is very important and will be the measuring stick for the rest of fiscal year 2024. While the general consensus is that we are at or near the bottom for retail demand as sentiment shifts and as interest rate pressures are forecasted to subside, data from the selling season will be the first side of the trajectory. We were already seeing positive signs following our year-end sales event for Malibu. This event, which we've been doing for the last decade and a half, saw Malibu and Axis performing better than we had expected.
This further demonstrates the strength and resiliency of our premium suite of brands. As we reported on our last call, Fort Lauderdale was a fantastic show for Pursuit, setting all-time records, and was also a very good show for Cobalt, exceeding last year. That positioned the focus of the calendar year 2024 shows that began the first week of January. The Atlanta Boat Show was the first weekend of January and it is always an important guidepost. That show, which is run by our partner OneWater, through their Singleton Marine Group, was a bright spot for Malibu and was well ahead of last year for Cobalt. Minneapolis was another good show, especially for Malibu and Axis. Last weekend, the New York boat show took place. This is both a freshwater and saltwater show.
Looking back at the results of the previous five years, this was a very good show for MBI brands. All brands were at the higher end of sales compared to the previous five years, and Cobalt had an excellent show. Not only was the volume of sales for Cobalt very good, but the composition included a preponderance of the 30 foot and over cruisers that are new to the market. In summary, boat shows have been decent. They have not been record breaking shows, but they have also not been bad shows. After the first three weeks, we were on a par with unit sales for all of our brands for 2023. Miami, of course, will be the bellwether show for our saltwater brands and we are placing a lot of focus on making Miami the best show possible. Looking ahead, we are optimistic about the outlook for the marine industry.
Cost increases are stabilizing, creating a more favorable pricing environment as we look at this through year 2025. Overall, this coupled with a lower interest rate environment, which is predicted to occur, will relieve pressure on the entry level buyer and help drive a recovery in margin. Despite the macroconditions we are faced with today, we remain in an optimal position to deliver results. As we have said many times and proved in the fourth quarter of 2020, we are confident that even in a 25% to 30% down revenue environment, we can maintain 15% or above EBITDA margins. While we are projecting revenue will finish down more than 30% for the year, the relationship remains intact. This is due to our highly variable cost structure that flexes in line with market conditions.
In addition, we have spent the past couple of months ensuring cost efficiencies throughout our organization. Based on our forecast, despite lower-than-anticipated revenue, we maintain our conviction that we will continue to deliver operationally with our strong margin profile. Our winning strategy and durable business model are what truly differentiates us. We will continue to stay nimble, advance our innovation and product development, leverage our vertical integration footprint, capitalize on market opportunities and enhance operational excellence initiatives to ensure we remain on top as market conditions improve. I will now turn the call over to Bruce for further remarks on the quarter.
Bruce Beckman : Thanks, Jack. In the second quarter, net sales decreased 37.7% to $211.1 million and the unit volume decreased 43.7% to 1,373 units. Decrease in net sales was driven primarily by decreased unit volumes across all segments, resulting from soft retail demand and lower wholesale shipments. The volume impact was partially offset by a favorable model mix across all segments, and inflation driven year-over-year price increases. The Malibu and Axis brands represented 44.1% of unit sales or 606 boats. Saltwater fishing represented 29.5% or 405 boats, and Cobalt made up the remaining 26.4% or 362 boats. Consolidated net sales per unit increased 10.7% to $153,732 per unit, primarily driven by inflation driven year-over-year price increases and favorable model mix within our Malibu, saltwater, fishing and Cobalt segments.
Gross profit decreased 50.5% to $37.5 million and gross margin decreased 460 basis points to 17.8%, driven primarily by lower volume and an increase mix of the saltwater fishing segment and increased dealer flooring program costs. Cost of sales decreased by 34% in a period where revenue decreased by 37.7%, demonstrating our operational excellence and highly variable cost structure. Selling and marketing expense decreased by 9.5% to $5.6 million. Decrease was driven primarily by lower marketing spending. As a percentage of sales, selling and marketing expense increased 90 basis points to 2.7% of sales due to lower volume. General and administrative expenses decreased 19.0% to $15.4 million. The decrease was driven primarily by lower personnel related expenses.
As a percentage of sales, G&A expenses increased 170 basis points to 7.3% of sales due to lower volume. In total, Q2 operating expenses declined by $4.2 million as we made necessary adjustments to our cost structure while preserving our capacity to innovate. Net income for the quarter increased 72.1% to $10.1 million. Adjusted EBITDA for the quarter decreased 60.2% to $22.9 million. Adjusted EBITDA margin decreased to 10.9% from 17.0%. Non-GAAP adjusted fully distributed net income per share increased 69.4% to $0.57 per share. This is calculated using a normalized C Corp tax rate of 27.8% and a fully distributed weighted average share count of approximately 21.1 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.
Turning our attention to the balance sheet. We invested $12.6 million in CapEx in the quarter, driven by investment in our new Roane County, Tennessee manufacturing facility. We paid down $30.0 million of debt, bringing our outstanding debt balance down to $35.0 million at quarter's end. And we repurchased 226,000 shares or $9.9 million of stock in the quarter. Even with these actions, and in a challenging operating environment, we increased our cash balance by $10.3 million in the quarter, demonstrating the strong cash generation potential of our business. As Jack mentioned earlier, the retail environment continues to be challenged by broader economic uncertainty and the prolonged interest rate environment. As a consequence, dealers are looking to bring their inventories down to pre-COVID levels or lower.
While inventory started to recede in the quarter, we expect more time will be needed for channel inventories to fully normalize. We now expect the lower sales levels of wholesale shipments to persist through the end of the fiscal year. With this in mind, we are revising our fiscal 2024 outlook. We anticipate a year-over-year decline in annual net sales ranging from a mid to high 30s percentage point decrease. We expect Q3 revenues to be down mid 40s percentage points. Consolidated adjusted EBITDA margin is expected to decline 800 to 900 basis points for the year, with Q3 slightly below Q2 on a margin percentage basis. Before opening up the call for questions, I want to say how excited I am to be joining Malibu. Despite our near term challenges, I'm excited about the potential for growth of our company.
We have market leading brands, the best operations team in the industry, a strong balance sheet and many avenues for growth. I look forward to partnering with Jack and the rest of the Malibu team to drive the company forward and create long term value. With that, I'd like to open up the call for questions.
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