Call Start: 08:30
Call End: 09:01
Malibu Boats, Inc. (NASDAQ:MBUU)
Q2 2016 Earnings Conference Call
February 3, 2016 08:30 AM ET
Jack Springer - CEO
Wayne Wilson - CFO
Ritchie Anderson - COO
Michael Swartz - SunTrust Robinson Humphrey
Timothy Conder - Wells Fargo Securities
Gerrick Johnson - BMO Capital Markets Corp.
Rommel Dionisio - Wunderlich Securities
Good morning and welcome to the Malibu Boats Conference Call to discuss Second Quarter Fiscal 2016 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 and as a reminder, this conference call is being recorded.
On the call today from Management are Mr. Jack Springer, Chief Executive Officer and Mr. Wayne Wilson, Chief Financial Officer.
I’ll now turn the call over to Mr. Wilson to get started. Please go ahead, sir.
Thank you and good morning, everyone. Ritchie Anderson, the Company’s Chief Operating Officer is also on the call today. Jack will provide commentary on the business, and I will discuss our second quarter financials and outlook for fiscal 2016. We will then open the call for questions.
A press release covering the Company’s second quarter results was issued this morning and a copy of that press release can be found in the Investor Relations section of the Company’s Web site.
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’ll now turn the call over to Jack Springer.
Thank you, Wayne, and welcome everyone to our call. We had another good quarter of inline our better results. Our net sales increased 9%, adjusted EBITDA margin remain very strong at 18.5%, and fully distributed net income per share increased 15%. This is the 8th consecutive quarter where we’ve delivered such results and done exactly what we said we were going to do.
We’ve been steadfast in the execution of our business plan and achievement of our growth targets. This plan has served us well. We want to own the technology in innovation side of the industry.
Malibu wants to offer the best integrated wake and surfing package on the market. We want to drive demand through consistent new product and feature launches. We want to vertically integrate production to maximize quality and lower cost. We want to drive and control distribution through partnering with the best dealers around the globe and we want to drive higher returns across the organization through a disciplined planning and production process.
We are doing all these things very well and continue to perform at a very high level. However, there are also some things that are outside of our control that we’re managing around. The decline in the foreign currency markets, the decline in oil prices, and the volatility in the U.S macro environment are the primary headwinds we continue to face.
We’ve managed all of these outside factors to this point and have delivered against our growth targets. The U.S market has been in a recovery trend and it continues to be strong. Thus far the strength in the U.S market has more than offset the weaknesses in the foreign markets, but the foreign markets, especially Canada have been weaker than we anticipated.
We hope that the U.S strength will continue to more than offset international weakness, but the latest movements in the stock market, foreign currencies, and oil prices create some added uncertainty over the global picture. Now we’ve not changed our tune and we remain cautiously optimistic, but we’re watching the global macro trends very closely.
The boat shows are always a good leading indicator for the trends across the industry. And we’re right now about 35% through the boat show season. The reports and the data from the boat shows to date would suggest that the marine recovery and strength in the U.S market continues. Overall, the traffic levels at the shows has been up slightly and the industry appears to be attracting a healthy number of new and existing buyers.
What I can tell you is that Malibu’s boat show orders are tracking higher on a year-over-year basis than last year and we’re very pleased with the results. The bigger shows for us have been Minneapolis, Houston, Denver, Atlanta, Birmingham, and Chicago. The Minneapolis, Denver, Birmingham, and Atlanta shows were all very strong for Malibu in access and we were very pleased with the amount of orders coming out of these show.
As expected, Canada will continue to be a strong headwind this year and that has been reflected in the shows. Our Vancouver show was relatively flat and traffic out of the Toronto show was down fairly significantly.
On the other hand, at the New York show, it’s not a big show for us in our segment, but we sold our first M235 at that show and we took more orders than in previous years. Even in the Houston show which saw the attendance [indiscernible] when oil dropped below $30 a barrel the last weekend of the show, we saw an increase in orders over last year.
Each major market or region has its own unique set of variables and trends impacting the business. And some of these trends are pretty disconnected. Texas and California are two very good examples. These are the two largest markets for performance sports boats. The decline in oil prices is likely to have some negative impact on market such as Houston, and West Texas. However, this Austin, San Antonio, Corridor and the Dallas markets are the largest markets in Texas and they both remain very strong. Both markets are benefiting from growing populations and very diversified economies.
Houston is the third largest market in Texas, but smaller than the first two markets and the West Texas is a very small market for performance sports boats and for Malibu. The majority of our Texas business comes out of the Austin, San Antonio, and Dallas markets. In addition, there is now sufficient water in Texas from border to border. As a result, we feel good about the way that we’re positioned in Texas.
In California, the biggest issue subsequent to the recession has not been in oil prices or the macro economy, but the drought in very low lake levels. However, we’re hopeful that the heavy rains over the past couple of months and a good snow pack in the mountains could bring the water availability back up to more normalized levels. There are always a number of different external factors impacting individual regions, both on the positive and the negative side in each of the market we continue to follow and manage.
Our [indiscernible] boat models are outperforming very well. The Malibu M235 is doing exactly what we hoped it would do. It is driving traffic into the boat show, but its turning heads without a doubt. It’s generating a buzz, but most of all, it’s selling.
As we discussed, the M235 is a very special boat for that most discerning customer who wants the absolute best in performance luxury and lifestyle. Early orders for the M235 are ahead of our initial projections. The demand for the new 25 LSV remains very strong.
Even we were a little bit surprised by the strong order trends right out of the gate, given the size of this model. These trends have continued through the fall and into the boat show season. The huge surf wave and massive wake combined with seating for up to 19 people makes this the most versatile, best performing 25-foot boat on the market and that’s what many of our customers are looking for these days. Performance, versatility, size, and value, which thus the boat [ph] delivers.
The new Axis A20 is receiving rave reviews for the new surf wave. The new A20 combines a brand new hull design and running surfaces with our integrated surf system and generates an incredible surf wave for an entry level 20-foot boat. Yet it still retains a wakeboard characteristics that it has been known for.
The Malibu Wakesetter 20 VTX is another boat that appeals to the special customer. It’s what we call a crossover ski, wake and surf boat, that allows the customer to achieve tournament quality skiing and also allows the family to wakeboard and surf like they can on any other Wakesetter.
As always, demand for the 23 LSV for Malibu continues to be very strong and this model remains the industry’s top selling boat. Similarly, sales of the Wakesetter 22 VLX and the Axis A22 are always strong and they both continued to perform well. On the new feature side, our new rear camera, new steering wheel controls, powered driver seat and docking motor, all customer favorites at the boat shows.
We are the only Company that offers such features. Combined these optional cutting edge features along with the performance for our proprietary integrated surf system and the fact that we’re the only Company that offers hydraulics on our surf system as well as our power wedge and we think we’ve the most compelling value offering on the market.
On the vertical integration side, we’re just finishing up the expansion of our trailer operations, which will increase our capacity per day to over 20 trailers. We are very pleased with the way that we’ve transitioned the trailer business in-house and the quality and the value that we’re now able to produce for our customers.
Vertical integration remain the key strategy and the differentiator for Malibu. Malibu builds far more of our boats in-house than any of our competitors and this allows us to deliver unprecedented quality and value to both our dealers and our retail customers.
Finally on the market share side, we like the way that we’re positioned. The fourth quarter is a very small quarter, there can be a lot of volatility in the quarterly numbers, but it looks like Malibu had a very nice quarter. We continue to believe that we’re positioned to gain global market share over the long-term, but there will be volatility in the numbers year-to-year.
For calendar 2016, we expect our market share to be flat to down slightly. However, the launch of the three new Malibu boats this year and some very targeted product in areas where we’ve significant opportunities to grow, along with what we saw in the fourth quarter, we believe we should begin to see some modest share gains in calendar 2016 and beyond.
As a quick update to the litigation front, the court has issued a scheduling order for Malibu versus MasterCraft. That order culminates with the trial days scheduled for May 2017.
I’ll now turn the call over to Wayne, who will take you through the quarterly results in more detail.
Thanks, Jack. Our second quarter results were inline with our expectations. It’s important to point out that the second quarter results are the first quarter to contain Australian business and the consolidated financials in both the current and year-ago periods, albeit the year-ago period was three weeks short of a full quarter. That means we’re now essentially apples-to-apples for the first time when we look at the quarterly financials on a year-over-year basis. As you recall, this was not the case last quarter and the inclusion of the Australian business impacted various comparisons.
The other factors to keep in mind is the increase in our daily average production rate in October last year. As we’ve discussed before we match our production rate with our annual demand forecast and increased production rates at the appropriate time. This impacted the comparisons in the first quarter of the fiscal year, but we’ve now fully anniversaried the last rate increase and the second quarter is also on apples-to-apples comparison.
With that said, net sales in the second quarter increased 9.1% to $60.5 million; unit volume increased 2.4% to 867 boats, including 81 units from Australia. The volume number was right in line with our expectation and the total revenue growth was slightly ahead of our expectation, given the strength in our new larger more expensive models. Both Malibu and Axis performed well in the quarter with Malibu representing approximately 68% of unit sales at 591 units and Axis representing approximately 32% of unit sales at 276 boats.
Consolidated net sales per unit increased 6.5% to approximately $69,787. The increase was primarily driven by year-over-year price increases and higher mix of larger Malibu models.
Gross profit in the quarter increased 12.1% to $15.9 million and gross margin increased approximately 70 basis points to 26.2%. The increase in gross margin was primarily driven by strong performance in our U.S business that was supported by a higher mix of larger model sales and optional features, as well as the in-house production of trailers. Gross margin was slightly lower than we anticipated as a result of currency impacts and discounting in certain international markets.
Selling and marketing expense increased 6.5% to $2.2 million in the second quarter. As a percentage of sales, selling and marketing expense decreased about 10 basis points to 3.6%. General and administrative expenses excluding amortization decreased 7.6% to $4.2 million.
As a percentage of sales, G&A expenses decreased approximately 130 basis points to 6.9%. The decrease was primarily due to the decline in legal and acquisition related costs related to the Nautique litigation and Australian acquisition in the second quarter of last year. This was partially offset by higher stock compensation expense associated with share based equity awards that were granted to investor in the second quarter of this year.
Adjusted EBITDA for the quarter increased 7% to $11.2 million and adjusted EBITDA margin decreased 30 basis points to 18.5%. Adjusted EBITDA was in line with our expectation, but the adjusted EBITDA margin was slightly below our expectation. Non-GAAP adjusted fully distributed net income was flat versus the second quarter last year of $5.8 million, and adjusted fully distributed diluted earnings per share increased 15% to $0.30 per share.
The increase in adjusted fully distributed earnings per share was driven by a 14% decrease in the number of fully distributed diluted shares to $19.4 million and assumes a normalized C-corp tax rate of 35.5%.
For reconciliation of adjusted EBITDA and adjusted fully distributed net income to the GAAP metrics, please see the tables in our earnings release.
Our second quarter results were in line with our expectations and we’ve not changed our outlook for fiscal 2016. As Jack mentioned, we continue to be cautiously optimistic about our favorable secular trends in the U.S. market offsetting continued headwinds in several international markets, such as Canada, Europe, South America and South Africa.
We do not provide detail earnings guidance, but our outlook for fiscal 2016 is based on the following factors. An increase in unit volume in the mid-to-high single digit with Q1 unit growth being the highest and the remainder of the growth coming in the back half of the fiscal year specifically Q4.
From a volume mix perspective Axis is expected to represent a proportion of unit sales slightly higher than fiscal 2015. Consolidated net sales per unit is expected to increase in the low-to-mid single digits for the full-year driven by our mix of larger boats and a model year 2016 price increase in Australia that went into effect January 1.
Gross margin is expected to increase slightly for the full-year with Q1 being the low point for the year. Legal expenses relating to the MasterCraft litigation are expected to be $1 million to $1.5 million for the year. Adjusted EBITDA margin is expected to grow modestly with the majority of the growth coming in the back half of the fiscal year. Finally, regarding capital expenditures, we are budgeting just under $6 million.
In closing, let me say that we are pleased with our second quarter results. The strong response to our 2016 product portfolio and the strong financial performance in our U.S. business helped us as we manage the business through the various international and currency related headwinds.
With that, we’d like to open the call to your questions, operator.
Thank you. [Operator Instructions] And our first question comes from Mike Swartz of SunTrust. Your line is now open. Please go ahead.
Hi, good morning guys.
Jack, you spent some time talking about California and the West Coast, and the potential for improvement there with obviously the rain and some of the snow pack that we’re seeing and hearing about. Could you maybe give us just quantification in terms of how big those markets used to be and maybe where they stand today?
Yes. If we go back to prior to the recession the 2006, 2007 timeframe, California was our largest market by a considerable margin; Texas was second at that point in time. When the recession occurred, what I’ll call the South West which is primarily going to be driven by California; it dropped effectively 89%, whereas I think the rest of the marine industry in the country saw around a 65% to 70% drop. So it dropped much further. It had a lot further to come back. So over time what we would hopefully expect to see is that California comes back and its on a par with Texas or maybe even it surpasses Texas at some point again, and it will pick up several 100 units, if that were to do that. But I think that we’re looking at the entire South West region when we speak to that.
And to add to that, Mike, the -- if you look our 10K, you can see that in the fiscal year 2006, the South West region as we define it was almost 3,800 units, and in calendar 2014, it was under 800. So in terms of the degree of magnitude, it still has a lot of potential and the weather there, that impact is still TBD [ph].
Okay, great. And then just on the -- on the commentary around some of the new models that you’ve introduced for model year ’16, and talking about how the orders coming out of boat shows have been, I guess greater year-over-year. Is there any way to provide some kind of quantification on what exactly that means? I mean, some of these boats are obviously going to be replacing some prior models. So, I guess, what is the incremental with some of these new products coming out?
Well, as we know the M235 is a brand new boat. So it was what we consider and call a wide space for us. It is an area where we did not have a previous model. So all of that is going to be gain whatever that turns out to be, and that is a relatively new model just brought out for the boat show season. The 25 LSV is a boat that replaced completely our 247, which we call that boat. And that boat in the first six months generated considerably more orders than the 247 had done all of last year. So this has been a very, very strong model for us. That 20 VTX crossover boat is a boat that we already own the number one market share, and we expect that that’s going to continue to drive market share, because that’s -- as I touched on, that is a very unique customer. Generally that customer is someone that grew up skiing, they want that ski wake, but they now have that family or they now have those friends that want to wakeboard and wakesurf. And so this boat gives them that ability to have tournament [ph] wakes yet also get out behind the boat a little bit later in the day to wakeboard or to wakesurf. And then the other boats that are not necessarily new, but just continue to be stewards [ph] is that 23 LSV, the best selling boat of all time. Every single year, it sells more boats than any other boat in our segment. That A22 for Axis has been the leading selling boat since 2010 in that entry level or that value segment. So -- and that’s what we’re seeing in the boat shows, so we continue to see our product drive Malibu along and generate the results that we’re seeing.
Okay. Thanks guys.
Thank you. And our next question comes from Tim Conder of Wells Fargo Securities. Your line is now open. Please go ahead.
Thank you. Wayne, in the summary of your updated guidance, maybe just sort of go with the puts and takes from last quarter. If we’re hearing you right, is the gross margin maybe the adjusted EBITDA was just a [indiscernible] lower, and it sounds like that could be emanating from what you’ve seen in Canada, just to clarify that. And other than that it didn’t sound like you had changed much at all, so one question there. And then, is there anything else on the litigation front other than what you mentioned Jack as far as the timeline for the trial in May. Is there anything else about ruling on summary judgment or anything else that may be there on the calendar? Thank you.
I’ll answer your litigation question first, and then Wayne can follow-up. Outside of the scheduling order which lays out the discovery and all of the parameters for getting to the trial date, there’s really not an update. It just ends with that schedule trial. There has not been any movement on the summary judgment motion to this point.
Yes, and further on that, I’m aware we’re just in the middle of the discovery, and that will go on for a bit of time here in depositions et cetera, it will be ongoing I assume, but that’s in its very early stages. On your first question Tim, I think your takeaway is generally accurate in that. There’s a little bit, we moved a couple of things around primarily ASP, our expectations for ASP being up a little bit relative to what we had previously said. We previously said low single digits, and now we’re saying low to mid single digits. That’s on the back of both the strength in our larger boats and just in general, optional feature take rates. So what you’re also seeing is, we moved the gross profit margin indication there from modestly to slightly increasing, and that’s really a function of both, we have higher ASPs coming in, but then we’ve also had some margin impacts from both, Australia and in Canada or international discounting. So, the international discounting is going to be, combined with the impact of both translation in Australia, but really the impact of some of the foreign currency moves there were. We’ve just been really chasing that currency down as we sell parts into there and we set our pricing, that’s been a headwind on the margin in the Australian business so far. And when you quantify both of those in this specific quarter, you’re going to be looking at approaching 100 basis points. So it was a meaningful headwind to us for the quarter. We were able to increase prices in Australia for model year 2016 as of January 1, so that should abate that. I think we also expect that volume mix in Canada is likely to be a little bit lower in the second half. So, I think we’re -- that maybe helped margin a little bit. But those have been the negative headwinds that have impacted our kind of projection, and what we’re saying in terms of guidance. I think when you get that all down to the bottom line that we didn’t move our expectation on EBITDA, and so I think we feel comfortable that we’re in the same ballpark there.
Okay. And then, Jack just to clarify. You said for calendar ’15, you do expect some combined of the two brands, a little bit of market share loss, but it sounded like the calendar Q4 trends at retail were definitely that the new products are improving and do you expect some modest gains here in calendar ’16 and just, if I understood those right?
Okay. And then lastly, back to the California question. When are you starting to see any movement yet in retail there just -- and maybe dealers commenting on, we’re getting some increased flow, just given that a few lakes have reopened, any -- anything, any color from that perspective.
Yes, it’s really too early for that yet, Tim, because the majority of the shows have not taken place. So there we’re not seeing it at this point. When we can expect to begin seeing that is probably in that March, April timeframe, once the shows take place and Northern California starts to warm.
Okay, great. Thank you, gentlemen.
Thank you. [Operator Instructions] And our next question comes from Gerrick Johnson of BMO Capital Markets. Your line is now open. Please go ahead.
Hi, good morning. Quickies -- one here for me. If you could just quantify what your retail sales were in the U.S. and international on a percent change basis? Thank you.
Sorry, Gerrick, are you talking about for the Q4?
Sorry, whatever quarter we’re in.
Well, so calendar Q4, I mean, the registration data is up significantly for us, I recall 40 plus percent on a year-over-year basis versus the market that was up 10%, but it’s a small quarter. So I think that’s where we’re sitting there seeing the impact of the 2016 product line and seeing a substantial boost. But it is a very, very small quarter.
Okay. Thank you.
Thank you. And our next question comes from Rommel Dionisio of Wunderlich Securities. Your line is now open. Please go ahead.
Thanks very much. Good morning. So a question, not to beat a dead horse, on your current check on California and Texas markets, we know they’ve had a tough call with here these last couple of years. Could you just talk to the inventories of used boats as well as the general overall dealer health in those markets? That’s what I’m trying to get at is, if conditions improve, can you really benefit that quickly just given what might be on the loss for used inventory as well as the overall dealer health? Thanks.
Yes, the overall dealer health is very good. We have some of our best dealers certainly in Texas, and California being a stronger space as they have been in the past and are today. Texas has been less impacted and has come back faster certainly than the West Coast. And now that the Empire State really has water, we think that, that will continue to give us that supply from a customer standpoint. We are in a very nice position as it relates to used boats. And the way that I describe this, is if you think about it, we went for four years or so where the market was down 70%, 60%. So the number of new boats coming into the market in previous years was very small, creating a scenario today where that used boat inventory is very tight. And so, one of the advantages that we have is we’re able to offer our Axis product at about the same price as some of that what we call, that three year old nearly new product. And so we’re able to capitalize on that because that market is so tight, and we can generate, we believe further demand from that, because there’s just not a lot of newer used boats.
Great. That’s very helpful. Thanks, Jack.
Thank you. [Operator Instructions] And I’m showing no further questions at this time. I would now like to turn the call over to Mr. Jack Springer for closing remarks.
Thank you. Again we are very pleased with our quarter, and we also thank you for joining Malibu on our call. Have a very good 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.
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