Malibu Boats, Inc. (MBUU) Q2 2014 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to Malibu Boats conference call to discuss second fiscal quarter 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. For management on the call today are Mr. Jack Springer, Chief Executive Officer; and Mr. Wayne Wilson, Chief Financial Officer. I will now turn the call over to Mr. Wilson. Please go ahead, sir.

Thank you, and good morning, everyone. Welcome to Malibu's first earnings call covering the fiscal second quarter ended December 31, 2013. Also here with us this morning is Ritchie Anderson, the company's Chief Operating Officer. Jack will provide commentary on the business and I will discuss the fiscal second quarter results in greater detail. We will then open the call to questions. Before we get started, I want to remind everyone that press release covering the company's fiscal second quarter financial 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 at www.malibuboats.com. 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 SEC, and we encourage you to review our SEC filings for a more detailed description of these risk factors. Please also note that we will be referring to certain non-GAAP financial measures on today's call such as adjusted EBITDA, adjusted EBITDA margin and adjusted fully distributed net income. Reconciliations of these non-GAAP financial measures to GAAP financial measures are included in our earnings release. Now let me turn the call over to Jack Springer.

Thank you, Wayne. Welcome to everyone on our first earnings call as a public company. I'm excited to be speaking to you today representing Malibu Boats. As most of you know, we completed our initial public offering on February 5, and we used the proceeds to pay our long-term debt and purchase stock from existing owners. Retail sales in the boating industry generally peaked in the February-June time period and trough from October through December. However, our October through December is an important period for Malibu. This is the period where dealers are evaluating our new model year products, assessing their inventory levels and planning their businesses for the upcoming boating shows and retail selling season. This is also when we hold our annual dealer meeting educating our dealers on our new products and building excitement in the marketplace. By October, we have taken initial orders and are fulfilling demand on new models on boat show products. We worked with our dealers in building our inventory levels and planning their business for the upcoming retail selling season. It is an important quarter for Malibu and it really positions us well for the boating year. On every front, we had a phenomenal fiscal second quarter. Net sales were up over 16%, driven by strong increases in both unit volume and average selling price. Our margins approved across-the-board and we generated the highest second quarter adjusted EBITDA margin in the company's history. Our new product introductions, which include the 23 LSV, the Axis A24, the Axis T22 and the addition of Surf Gate as an optional feature on all Axis boats have been very well received by our dealers and created a lot of excitement in the market. The demand for these new products has been greater than we even expected. The 23 LSV is a Malibu Wakesetter and has sold more retail than any other model in the performance sports boat segment. The 23 LSV for model year 2014 was completely changed from the hull up. In addition to a versatile wake and surf hull, which performs both boards equally well, the freeboard and the entire deck was improved. Strong demand for this boat has caused us to add another set of tooling in our operations about 5 weeks ago. The A24 is our first 24-foot Axis boat and it targets the consumer who wants a large-size boat with top performance capabilities, but doesn't need all the features offered in our Malibu line. The performance, quality and versatility are there, but at a much lower price point. We launched the A24 to the world in August, and our dealers really began seeing this new model in our fiscal second quarter. The T22 was launched at our National Dealer Meeting in November to rave reviews. It was the most well-done, exciting products introduction since I had been with Malibu and Axis. The T22 is a 22-foot traditional bow boat and is the first traditional barrel design in the Axis line. With the introduction of these 2 models in Axis, we have doubled the Axis lineup for the current model year. The addition of Surf Gate as an optional feature to the Axis line of boats for 2014 is something our dealers are extremely thrilled about. We were the first to market with a completely automated electronic surf wake system. With the addition of new features every year, we continue to hear that Surf Gate remains the best system on the market. While Surf Gate is an optional feature, the historical take rate on Malibu Boats has been close to 100%, and we are seeing a very similar trend for Axis. I will discuss the market trends for a moment for our fiscal Q2 in January. Based on the market data that we have from Statistical Surveys, Incorporated, I will note the following, which continues to support our excitement for the performance sports boat segment in Malibu. For fiscal Q2, which is I covered[ph] through December of 2013, we have 38 states reporting. Performance sports boat units were up 15% over the previous year. Malibu and Axis units combined were up 30% over the previous year. We had just received January numbers as well. And for January 2014, based on 20 states reporting, performance sports boat units were up over January of 2013 by 25%. The combined Malibu and Axis units were up 58% over January of 2013 at retail. The fiscal Q2 in January preliminary results continue to point to a performance sports boat segment that is significantly outperforming the marine industry in general. Malibu continues to strengthen this #1 position and lead the way with performance that more than doubled the rest of the performance sports boat segment. New product launches and the excitement around our brands led the continued strong demand in the fiscal second quarter, as we have seen, and positioned us well for the boat show season. Starting with New York, the major boat shows begin in early January and run through April. The boat shows of our local dealer showcase Malibu and Axis products and interact with retail consumers. In support of our dealers, we have representatives at many of the boat shows, including factory personnel. But we are really there to support our dealers. This is our dealers' time to work with new and existing customers interested in shopping the market and potentially buying a new boat. Now with that said, the major boat shows are obviously important events for Malibu, and we've been very pleased with the feedback, the retail sales contracts and the customer leads coming out of the shows this year. Except for shows with bad weather, almost all of the boat show venues have seen increased traffic and customers ready to buy versus past years. Malibu has experienced very good results in Minneapolis, Nashville, Dallas, Atlanta, Calgary, Denver, Portland and Seattle among others. The certaining popularity of wake surfing is continuing to broaden the customer base, shopping the performance sports boat market. And when they see our Malibu and Axis boats offer the best wake innovation, performance, styling and versatility of any boat on the market, they are often sold on one of our boats. If they are not sold on the boat show floor, we only need to get them on the water at one of our post-show lake events. Once they are on the water and they experienced the performance and handling of one of our boats, it's typically game over. As one customer told me at one of these events, "Why would I buy a station wagon when I can have a Porsche at a better value?" Our boat is everything a typical person or family would want to do on a boat today, and they do them very well simultaneously. By controlling and even customizing the size and shape of the wake, our boats can accommodate everyone from the beginner to the professional behind the boat. A family can switch between tubing, surfing, wakeboarding and skiing all day long and then end the day with a meal on their boat or just by cruising around their lake. When it comes to on-the-boat activity, the interiors of our boats are specifically designed to accommodate larger groups with more usable space in the key areas of the boat such as the bow and the stern areas. Our larger boats can comfortably accommodate up to 18 people on the boat, and they offer customizable interiors that can be modified instantly. Whether you are looking to tow the kids, engage in water sports or just kick back for a day of leisure on the water, our boats are the most versatile boats on the market. In summary, we had a very strong fiscal second quarter and are very positive about our momentum and positioning, heading into the peak retail selling season. We believe we have the most dynamic and innovative lineup on the market today and we know how to drive demand through a well-defined, new product introduction strategy. Before I turn the call back over to Wayne, I would like to thank our dealer partners. Their passion and their partnership is integral to Malibu's success and we appreciate them very much. I also want to thank the more than 400 dedicated and passionate people who work at Malibu and live the Malibu lifestyle. They are committed to making the best boats on the market every single day. Thank you. Our boats in the Malibu lifestyle are all about bringing people together. Life without limits and freedom are some of the mantras that we have. I am blessed and I am proud to be a part of a company that values and embraces this lifestyle and has such a passionate group of dealers and employees. I will now turn the call over to Wayne for a more detailed review of our fiscal second quarter results.

Good morning, everyone. It's nice to be talking to you on our first earnings call. As Jack mentioned, we completed our initial public offering, which closed on February 5, selling 8.2 million shares to the public and raising total net proceeds of $170 million. Of this amount, we retained approximately $70 million, which was used primarily to repay the company's term loans and we returned approximately $37 million to a combination of our selling stockholders and member owners. In conjunction with our IPO, we created an Up-C structure to capture certain tax benefits that would have otherwise been lost. The financial implications of the offering are reflected under pro forma balance sheet and income statement in our press release. I won't walk-through all the details because it's fully explained in our IPO prospectus, which is available through our website. But in essence, the IPO's operating transactions created a holding company that sits above the operating company. The holding company is the publicly traded C corporation with a partial ownership interest in our operating company, which is a limited liability company. For financial reporting purposes, we will be reporting on a consolidated basis. Our GAAP, tax expense will appear quite low based on the fact that our C corporation only pay its income taxes on its portion of ownership in the LLC. The portion of the LLC owned by our C corporation will vary over time as the LLC member, owner’s exchange their LLC units into Class A common shares of the C corporation as described in our prospectus. This will cause both outstanding Class A common share count to increase as well as our tax liability. In an effort to provide clear, consistent and comparable communication around our financials, we will supplement our GAAP financials with the presentation of earnings using a non-GAAP metric, adjusted fully distributed net income. Adjusted fully distributed net income is calculated, assuming the C corporation owns 100% of the LLC operating company and therefore reflects a normalized tax structure and tax rates. We believe adjusted fully distributed net income will assist our Board of Directors, management and investors in comparing our net income on a consistent basis from period to period because it removes noncash and nonrecurring items. It eliminates the variability in tax rates and non-controlling interests as a result of the Up-C structure. In addition, we will be providing fully diluted share count that assumes all LLC units are exchanged for Class A common shares to be used in conjunction with the adjusted fully distributed net income. For example, in today's release for 22.4 million share count was calculated by adding the 11,054,830 Class A common shares of Malibu Boats, Inc. that are currently outstanding, and the 11,373,737 LLC units that are currently owned by LLC members and are subject to exchange in the Class A common shares. We believe dividing adjusted fully distributed net income by the share count is the most comparable metric to other company's earnings per share. With that out of the way, let me review our strong second quarter fiscal 2014 results. Net sales in the quarter increased 16.2% to $43.9 million. The increase was driven by strong increases in both unit volume and net sales per unit. Unit volume increased 10.1% in the quarter and we sold 662 boats compared to 601 boats in the same quarter last fiscal year. The increase in unit volume was the result of strong continued consumer demand for our boats, which in turn was bolstered by an introduction of our new models and features that Jack discussed. Breaking down the unit volume between Malibu and Axis, Malibu units were 493 or 74.5% of total units in the quarter while the Axis units were 169 or 25.5% of total units. This compares to unit mix of 80% Malibu and 20% Axis in the second fiscal quarter last year. The shift in mix for Axis was in line with our expectations and primarily is a result of strong demand for 2 new Axis models and the introduction of Surf Gate as an optional feature to that supply. Net sales per unit increased 5.5% to over $66,000 and was primarily a result of a high mix of larger boats and increased sales of our proprietary Surf Gate system. Gross profit in the quarter increased 25.8% to $11.7 million and gross profit margin increased over 200 basis points to 26.6%. The increase resulted primarily from production efficiency on the increase volumes, fix cost leverage on a higher and average selling prices and per product cost reductions from our ongoing initiatives. Adjusted EBITDA was $8.7 million in the quarter compared to $6.8 million in the fiscal second quarter last year, an increase of 28% driven by both higher volumes and improved gross margins. Non-GAAP pro forma adjusted fully distributed net income totaled $4.4 million or $0.20 per share. This is calculated using a normalized C-corp tax rate of 37.3% and a fully distributed diluted share count of 22.4 million shares. Comparisons to a year ago results are not meaningful since we had no comparable shares outstanding, nor are we a corporate tax payer under the historical business model. For a reconciliation of adjusted EBITDA and adjusted fully distributed net income to GAAP metrics, please see the tables in our earnings release. Turning to the balance sheet. Pro forma for the IPO, cash and equivalents were $7.1 million at the end of the second quarter. I would also note that prior to the IPO, we paid a $3.2 million tax distribution to our members, owners for income allocated to them during calendar 2013 that is not included in the pro forma second quarter cash balance. The other significant adjustments to the pro forma balance sheet includes the elimination of our long-term debt and a long-term asset payable related to the tax benefits derived from the Up-C structure. Looking forward, we believe the current medium estimates for revenue and adjusted EBITDA for fiscal 2014 represents reasonable targets of our performance for the full fiscal year. Our second quarter results and trends were in line with our expectations and our outlook for the remainder of the fiscal years is unchanged. In our outlook, however, there are some differences between the second -- the first and second half of the fiscal year that are worth noting for modeling purposes. The first of these is unit volume mix between Malibu and Axis with the strong reception of our 2 new Axis models and the addition of Surf Gate as an optional feature to all Axis boats, we expect strong Axis sales to shift the unit mix in the 20% to 30% range in the second half of the year. This compares to 16% in the second half fiscal 2013, as we purposely limited shipment volumes to reduce channel inventories, prior to the introduction of Surf Gate on Axis. The second difference between the 2 halves of the year has to do with production and productivity rates. As you know, we do not produce any speculative inventory and all of our boats are built pursuant to a purchase order from a dealer. These purchase orders ebb and flow throughout the year based on demand trends and the normal seasonality of the business. We obviously cannot be changing the production size of the business based on the daily order flow and we generally set our production schedule 6 to 12 months in advance. This allows us to better plan our cost and drive higher production efficiencies over time. Beginning with the third quarter of fiscal 2013, we stepped up production levels by approximately 15%. On a year-over-year standpoint, this means the first half of fiscal 2014 benefited from higher production rates relative to the first half of fiscal 2013. In the back half of fiscal 2014, the year-over-year production comparison is relatively flat. Therefore, we have planned business around a greater benefit to gross margin in the first half versus the second half of 2014. As I've said, all of these factors were fully built into our expectations starting the fiscal year and the way we are protecting the business has not changed. We simply wanted to give you some additional color around these trends to help you better understand some of the planned differences in the first and second half business. As Jack said, we feel very good about the momentum of our business and the recovery in the power sport boat segment both from the second fiscal quarter and coming out of boat shows. We're continuing to drive demand for new product introductions and believe we are well positioned to continue gaining market share. With that, we would like to open the call to your questions.

[Operator Instructions] Our first question will come from the line of Joe Hovorka from Raymond James.

A couple of quick questions. First, you mentioned you've got asymmetric[ph] production volumes 6 to 12 months in advance, but if retail continues to be strongest that we're seeing in January and in the back half of the fiscal second quarter, how quickly can you take advantage of that and kind of match your production levels with demand. And then I have a follow-up after that.

We can adjust very, very quickly. As soon as those orders come in, we have -- currently, we're operating at about 14 boats per day and we can take our count up. And in addition to that, we work at 4x10 workweek so therefore we can add additional products. We feel like that we can take advantage of that very quickly.

And the Surf Gate has been pushed down to the Axis brand. Are the take rates the same on Axis as it was in Malibu or similar?

Yes, they are, nearly 100%.

Our next question will come from the line of Tim Conder from Wells Fargo Securities.

Jack, you gave us color on what was going on at retail through January, but just from in conversations with your dealers, what's the feedback on February to -- obviously, January was not too impacted by weather. Just any color on February that you would have there, sir. And then, Wayne, thank you for the color on the mix of Axis going forward here in the balance of the year. Longer term, do you see at some point the mix of Axis versus Malibu plateauing. And then I'll have one other question after that, gentlemen.

Okay, in speaking to the February versus January, with this still a very positive scenario for our dealers. As an example of that, the Dallas show, the Calgary show, the Seattle show were all a part of those February numbers and they had extremely good boat show seasons. We're still seeing others that are not in our boat shows that are having retail sales. There seems to be a tremendous amount of demand for the new products, for Axis, for the 23 LSV and as I mentioned, we had to add another set of tooling for that 23 about 5 weeks ago. So does weather really impacted only 2 to 3 shows with New York being the primary one at the very beginning of the season.

And Tim, with respect to the mix of Axis, we have historically seen a mix of Axis in the high teens or 20% range. And as we brought out 2 new models, it meets where they're targeted in terms of the position of the market. We could see that our goal for market share there is to increase it, and it's not to increase at 1 percentage points. So we could definitely see Axis in the top end of the 20% range and kind of 25% to 30% is a ballpark right now. The strong acceptance of those new models right now is something that we are pleasantly surprised by and we'll monitor.

Okay. Okay. And then, gentlemen, zooming out a little bit here on the fiscal year, any color that you could give us from the perspective of where you're looking at for adjusted EBITDA range on that or margins or any color on that or just total revenues for the fiscal year?

Yes, I think what we said was, there's clearly a bunch estimates out there. We're comfortable with the median of the analyst estimates on revenue and adjusted EBITDA as a reasonable target for the year.

[Operator Instructions] Our next question will come from the line of Mike Swartz from SunTrust.

I just wanted to touch on maybe the capacity of production question earlier just maybe in a different way. I mean, given some of the strength you've seen in early 2014 here and the other commentary around some extra tooling for the Malibu product that you mentioned. I mean, is there a scenario where maybe some of that demand is still left on the table as we move through '14?

This is Ritchie. No, we've got that covered and that piece of tooling that took those extra orders we have off the side. So we will not be leaving any of those on the table.

And I think -- this is Wayne. One thing that I think is important to note is we manage our business and plan our business to an annual number so in the July time frame when we're starting our fiscal year, we're putting a volume target out there with model mixes and we're making sure over the course of the year, right, because the boats that we're building from July through June are really fulfilling a lot of orders that are in retail demand call October through September. And so we feel like we've reacted to the market demand and the needs so far and we're well positioned to be able to take advantage of opportunities if they present themselves.

Great. And shifting over maybe and touching on, I know there's a pretty big regional or geography aspect to the wake in power sport boat market, anything you're seeing in that core kind of Southwest U.S. region thus far that gives you more kind of excitement about the year ahead?

I think it continues to be very strong. That is a very strong region for us. It's about 39% market share. We are hearing from our dealers that the boat shows on the West Coast, Denver, for example, have all been very strong. The Texas boat shows were also very strong. So we believe that we're continuing to see an uplift in that Southwest region. It really is well as all the regions.

Our next question will come from the line of Gerrick Johnson from BMO Capital Markets.

I was just wondering if you could talk about channel inventory, what it looks like out there to dealers right now. Are we lower than last year, higher, sideways? And then I have a few follow-ups.

So channel inventory, we track both on a micro basis, quarterly bottoms up, build up; and on a macro basis top-down monthly. And we are from a dollar perspective up year-over-year. When you adjust that for both market growth and what we expect our market share to be in ASP. So on a unit basis, we're in line with the 2012 and 2013 in terms of the amount of inventory that's in the channel.

Okay. That's great. And on ongoing planned expansions, is there any incremental expense in the quarter from that activity? And what should we expect going forward on that?

Not a huge expense flowing through in the quarter. There's a little bit of labor that is uncapitalized. It's going to flow through in the quarter, but it's not a meaningful number and on a go-forward basis we'll be -- we'll probably experience a little bit of labor flowing through the P&L, but with respect to that, but any material will be capitalized at the beginning.

Okay, great. And lastly, with the big shift to Axis, yet you saw a 5.5% increase in sales per boat. I guess, we could probably do the math on our own, but just in general, what would the sales per boat has been? What would that growth have been in each of your brands if you kind of isolate them and isolate the mix shift?

Great question. I'd like to follow-up with you. I just want the specifics of it. You mean, in general, there's also an impact of Surf Gate on Axis, right, and so that's another element of that. But I'd love to follow up and just give you the actual precise numbers.

[Operator Instructions] Our next question will come from the line of Joe Hovorka from Raymond James.

Just couple of quick follow-ups. Particularly on the dealer inventories. So your retail is up 30% in the fiscal second quarter and wholesale shipments were up 10%. So clearly, retail growing much quicker than wholesale. So 2 things, one is that would suggest that retailer or dealer inventories are coming down. And I know there's seasonal difference here between wholesale shipment and retail sell-through, but then I guess, second question would be, we would expect that on a full year basis that retail and wholesale should match relatively close. Is that correct?

Our goal would be for retail and wholesale to match. It matched over the course of the year. With me, there's going to -- there will be -- add some tiny puts and takes between the wholesale, but yes, absolutely, the goal over time is, for that retail to match that wholesale. I think with respect specifically to the fiscal second quarter registration statistics in January. What you see there is really that the loss small numbers, right? I mean, they are just relatively small. Those 4 months that we talked about are relatively small months from a registration perspective, a small amount of boats can do a big move, but I think the reason why we included that is part of our conversation is that we think it's indicative, I think those growth rates are really out there a bit. And I think over the course of when you start to get into the months with larger registration, you'll see it more accurately reflect kind of what we're seeing in our volumes.

Sure, yes, I'm not implying. I guess, that should be the flat line throughout all '14. But just wanted to kind of get -- and we did start the year, last year, for a call, the break[ph] for weather. And even the ski business, if I remember correctly, had a difficult start of the year because of weather. So the first 6 months of fiscal or rather calendar '14 would be relatively easy comps?

From a registration?

Yes.

Yes, perspective. Yes, from a registration perspective, there were -- there was a modest delay in deliveries. And so if you looked at the quarter, the calendar 2013, quarterly registration growth rates, they accelerated throughout the year, right. And call it Q1 low, a Q2 was a bit faster than Q3 and Q4 were better. So yes, there's probably a little bit of a low comp in Q1 '14 versus '13.

Okay. And I think you mentioned that you bumped production about 15%. I think it was almost 4 quarters ago. Was that the last time you've bumped production?

Yes.

Our next question will be coming from the line of Tim Conder from Wells Fargo Securities.

Seeing that production thing, gentlemen. Ritchie, you mentioned that you've added the tooling here on Axis in the last 5 weeks. And Jack, you'd said also that you do have some flexibility here with the work schedule. So 14 boats per day now, just remind us, I guess, where your plan is for the year and then how quickly you can take that to 15, 16, 17 boats per day here as the current configuration of the plan stands?

Yes, let me, Tim, let me correct something very quickly. The additional tooling was added for the 23 LSV. So that's on the Malibu Wakesetter side. And that those are good events for us certainly. In terms of responding to the demand, we can very rapidly take it up to 15 or 16. We don't believe that we have to add a number of people to do that. But what we do is we utilize Friday's as an example to have those peak build times and then if it's going to be a longer-term scenario when we add people. But ultimately, going back to the first of the year, we have largely predicted and planned our business around the uplifts and so we're managing it on that full year basis. So we don't believe will be surprised.

And Tim, this is Wayne. In terms of that planning cycle, we are -- we build various plans off of the baseline. So that we don't have to change -- chase that retail demand too much, right? So to Jack's point, if we need stop at 15 or need to stop at 16 we can do that and at Friday's, we can do all of those things. But it's all based off of beginning in July, what is that number at the end of the year, so that those step functions that we have to perform to meet any fluctuations in demand are lessened in magnitude.

Okay. And then I guess, one other modeling question here, gentlemen, how should we think about growth in your diluted share base from an option, as options would flow in over time. Just any color that you could give us there, Wayne.

As of now we have 7.5% of the total diluted number outstanding for grants. But they're ungranted at this point in time. So it should be relatively modest, from here on out anything that was granted prior to the IPO is calculated in that 22.4 million share base.

And at this time, I'm not showing any further questions. I would like to turn the call back over to management.

This is Jack. Thank you for your participation. We look forward to speaking with you again on our next earnings call.

Have a good day.

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