Good morning, and welcome to Malibu Boats conference call to discuss First 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. And as a reminder, today's call is being recorded. On the call today from management are Mr. Jack Springer, Chief Executive Officer; Mr. David Black, Interim Chief Financial Officer; and Mr. Ritchie Anderson, Chief Operating Officer. I will now turn the call over to Mr. Black to get it 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 first quarter of fiscal year 2024 financials. We will then open up the call for questions. A press release covering the company's fiscal first 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 and other information that might be considered forward-looking, and that actual results could differ materially from those projected on today's call. You should not place undue reliance on these forward-looking statements, which speak only as of today, and the company undertakes no obligation to update them for any new information or future events. Factors that might affect future results are discussed in our filings with the SEC, and we encourage you to review our SEC filings for a more detailed description of these risk factors. Please also note that we will be referring to certain non-GAAP financial measures on today's call such as adjusted EBITDA, adjusted EBITDA margin, adjusted fully distributed net income and adjusted fully distributed net income per share. Reconciliations of these non-GAAP financial measures to GAAP financial measures are included in our earnings release. I will now turn the call over to Jack Springer.

Thank you, David, and thank you all for joining the call. Malibu Boats delivered solid first quarter fiscal results that surpassed our expectations despite a rapidly evolving operating environment. For the first fiscal quarter, net sales decreased 15% to $255.8 million compared to the prior year. Net income decreased 42% to $20.8 million, while adjusted EBITDA fell 31% to $39 million. Gross margins decreased 250 basis points to 22%, and adjusted EBITDA margin decreased by 370 basis points to 15%. In 12 short months, we went from unprecedented demand and navigating supply chain constraints while shipping every boat possible to an incredibly volatile environment flushed with rising interest rates and decreasing demand levels. Our team has taken this fluid environment in stride. However, over the last several months, the retail market notably deteriorated. And as that happened, we continued to showcase our durability as a business, improved our dominant position in every market we serve. Channel inventories across our brands are now back to or above pre-COVID levels, and we have worked diligently to match wholesale supply to retail demand by quickly aligning production levels throughout the quarter, which accounts for the decreases versus last year. While the softer retail demand levels are being driven by macro factors, they are being exacerbated by the return to a more normalized seasonality. In addition, the sense of urgency from customers to buy a boat has largely disappeared. The silver lining is that across all of our brands, those customers that are looking to buy are continuing to gravitate toward larger, more feature-rich boats, supporting higher ASPs. Importantly, these sales are often nearly all cash. Those customers utilizing significant financing when buying a boat are sitting on the sidelines in this more challenging interest rate environment. This is very evident in recent metrics.…

Thanks, Jack. In the first quarter, net sales decreased 15.3% to $255.8 million and unit volume decreased 24.1% to 1,698 units. The decrease in net sales was driven primarily by decreased unit volumes across all segments and increased flooring program costs across all segments resulting from higher interest rates and increased inventory levels, partially offset by a favorable model mix across all segments and inflation-driven year-over-year price increases. The Malibu and Axis brands represented 47.3% of unit sales or 804 boats. Saltwater Fishing represented 29% or 491 boats, and Cobalt made up the remaining 23.7% or 403 boats. Consolidated net sales per unit increased 11.5% to approximately $150,665 per unit, primarily driven by year-over-year price increases and favorable model mix within all segments. Gross profit decreased 23.9% or $17.8 million to $56.8 million, and gross margin was 22.2%. This compares to a gross margin of 24.7% in the prior year period. The decrease in gross margin was driven primarily by a decreased mix of our higher-margin Malibu segment and increased dealer flooring costs. Selling and marketing expense increased 10.9% in the first quarter. The increase was driven primarily by increased promotional events and an increase in compensation and personnel-related expenses. As a percentage of sales, selling and marketing expense increased 50 basis points to 2.2% compared to 1.7% in the prior year period. General and administrative expenses increased 7.7% or $1.5 million. The increase was driven primarily by an increase in compensation and personnel-related expenses. As a percentage of sales, G&A expenses increased 170 basis points to 8.1% compared to the prior year period. Net income for the quarter decreased 42.5% to $20.8 million. Adjusted EBITDA for the quarter decreased 31.7% to $39 million, and adjusted EBITDA margin decreased to 15.2% from 18.9%. Non-GAAP adjusted fully distributed net income per…

[Operator Instructions] And our first question will come from Mike Swartz with Truist Securities.

Maybe just to start off on the retail environment and some of your commentary around retail being softer and being one of the rationale for why you brought down your guidance. I mean, we've obviously -- and everyone has seen the retail over the past couple of months. And I think most people would say the numbers were actually decent. You're talking about Fort Lauderdale, some other have talked about how strong Fort Lauderdale was, yet you're kind of using that to take down guidance. Maybe just help us understand and clarify what exactly you're talking about. Is this more to do with the dealer psyche than the actual retail demand that we're seeing? Any color would be great.

Yes. I think it's the dealer psyche. It's also the consumer psyche. And I can't belabor enough that anyone that's going to be purchasing on interest rates, they're probably sitting on the sidelines. If you look back to 2021, 2022, the interest rates that they're paying are up to 4x more than what they were paying back then. So I think that's a big impediment to the retail consumer psyche. The dealers are certainly paying more, they want to carry less inventory. That factors into it. And ultimately, I think every single OEM company that is talking about this are looking at their order backlog versus previous years and what they think it will wind up being. What I hope, frankly, is that Fort Lauderdale proves to be a shift or a change in the environment that we have been in and think that we're going to continue to be in versus an aberration because it was so, so strong. And it was clearly evident that if you were an OEM that sold smaller boats or sold less premium boats, you did not do as well. And it was that premium, like the Pursuits of the world, the Cobias of the world that did very well, and that bodes extremely well for that saltwater environment. But ultimately, I think that what we have coming out of this, Mike, is you have year-end sales events that will take place in freshwater through the rest of the year. Then you hit that freshwater boat show cycle. Miami, of course, is always going to be very important. So by the time that we get to reporting on the second quarter, I believe we'll have a much better feel for what the year is going to turn out to be.

Okay. That's helpful. And then just with regards -- I know Malibu kicked off its annual year-end factory event, I think it was a week or 2 ago. Maybe just give us a sense of how that program compares to years past and maybe what you've seen thus far from a demand or an order perspective.

From what we've seen, it's really too early to tell. A lot of times, that starts happening in the November and leading all the way up to the December 15 time frame. What I would tell you on the program itself is -- and I think that everyone is experiencing this, is it is richer this year than in previous years. I think in the towboat and freshwater environment, we are in a more promotional mindset, and we're seeing that with our competition as well. And so to drive some of the volume, we're going to have to be more promotional, and we certainly took that attack path into the year-end sales event.

And our next question will come from Eric Wold with B. Riley Securities.

Just one point of clarification. On the updated net sales guidance for the year, what is the implied retail market change that you're using there?

Yes. So we're expecting high single digits to low double digits in our implied guide.

Okay. And then on the -- Jack, you talked about -- obviously, those credit buyers that are relying on credit are the ones staying on the sidelines. Are they -- in your opinion, are they purely sitting in the sidelines because of that interest rate cost? Or are you seeing any reluctance from lenders in this environment or any inability for those buyers to get credit even if they wanted to step up the sidelines and make that boat purchase?

Yes. In terms of order, certainly, they're just staying on the environment because they're not going to pay those interest rates. And it's so different than what it was. If we go back to 2021, the end of 2021, the interest rate was 0.25%, but the Fed announced 5.25%. And so that has a huge impact on them. Of course, in this environment, there is some level of people that are looking for credit, but it's more strenuous to get it or they cannot get it. But I would put that at the bottom of the category in terms of versus people who just are sitting on the sidelines.

And our next question will come from Craig Kennison with Baird.

I wanted to ask about your dealer network and the health of that network, given carrying excess inventory maybe and facing higher interest expense. Any concerns about your network or the broader marine dealer network?

Largely no, Craig. I mean, you always have some that you watch a little bit more closely. We're very in tune with Wells Fargo and what they're seeing, and the early warning systems that are in place that did not exist in 2008 and 2009. So we feel pretty confident. We're actually looking to expand our dealer networks, and we're working on that today. The one thing I would point to, though, that we're focused on is during COVID, when the Tier 1 builders, OEMs, could not build enough boats, dealers took on Tier 2 and Tier 3 brands. And so that needs to go away, frankly. I mean, there's floor plan that's being tied up with garbage brands, and so we need that floor plan. So that is a focus area of ours.

And then could you just comment on the age of inventory and whether you see any issues with noncurrent model year inventory?

For us, no. In fact, if we look at it across that freshwater environment when we had the promotion back in July that was so successful, a lot of that '23 inventory was moved. And there's very, very little, as you can imagine, '22 inventory. And so that's a little bit of a difference from the last decade, if you look at it that way. On saltwater, I think that we were highly successful in any remaining aged inventory moving through that at Fort Lauderdale. So if I look at it over, call it, a 5- to 7-year time frame, I would say that from our standpoint, the inventories are as fresh as they've been, with the exception of during those COVID years.

And our next question will come from Joe Altobello with Raymond James.

So it seems pretty clear there's some affordability issue among a large portion of your buyers, given the percentage of cash buyers you're seeing, particularly among your core Malibu access buyers. And a lot of that higher rates, as you mentioned, but some of it might be pricing as well. So as a manufacturer, what can Malibu do just to sort of address that beyond pricing?

Joe, I think -- beyond pricing, I think that we are going to see a more promotional environment in that regard. But one thing that I would point out on the Malibu Axis side is we have been -- because of our vertical integration, because of the way that we manage our business against our primary competitors, we're $20,000 and $30,000 less than what they are. So the value proposition that we offer the best boat on the market at a lower price because of the way that we manage our business, that's one of the reasons you see a 300 basis point gain in share. And I think that, in that equation, you have them with some higher levels of inventory that they're going to have to move through. So that's going to have an impact somewhat for a while. But I am supremely confident that with our model, with the way that we're able to build boats at the cost that we're able to build them, we're going to win over the long term. They just can't get there. They can't compete in a normalized environment. On the Cobalt side, Cobalt continues to show the incredible strength of the brand. And what I mean by that is the holding of price, and whatever we come out with from a Cobalt standpoint, continues to be a strength. And of the brands, at least up into Fort Lauderdale, Cobalt has remained the strongest throughout at least the first 3 months of this year. So the -- I think more for us, frankly, is a focus on next year. We have to have suppliers that are coming back to earth and coming out with costs that makes sense and have the increase is very minimal. It's time to get out of this inflationary mindset that many suppliers are in, and let's get the pricing back to where it needs to be.

Got it. Very helpful. And maybe just to follow up on that. You mentioned field inventories are at or above pre-COVID levels. And I think on your last call, you mentioned you wanted them to be a tad below that. Do you still think a tad below that is the right level given the current demand environment? And what's baked into your guidance?

Given the -- I'll let David answer the last part of the question. But given the current environment, I think it is a tad below COVID levels would -- pre-COVID levels would be the right amount of inventory.

Yes. And embedded in our guidance, we are using the pre-COVID levels on a sell-through perspective. So that's where we feel like the appropriate level is, and we baked it into our future forward-looking outlook.

And our next question will come from Jaime Katz with Morningstar.

I guess it would be helpful to hear how you guys are thinking about the split in profit pressure between gross margin and OpEx this year. And then maybe if there's a way to quantify what the flooring cost impact might be, that might help us frame that metric a little better.

Yes. So on the gross margin side, obviously, embedded in our guidance is more weakness on the tow boat side of the business. And so you saw, kind of in, Q1. A further shift out of Malibu. And that is creating a little bit of pressure on the gross margin and so you'll see that continue throughout the remainder of the year. And then on a flooring perspective, I'd say that's worth about 150 basis points of pressure.

Okay. And then I think you guys said 700 basis points of EBITDA deleverage in the second quarter. Is there anything idiosyncratic in that? Or is it just deleverage from lower volumes?

It's predominantly the deleverage from lower volumes and a shift in mix as well.

And our next question will come from Brandon Rollé with D.A. Davidson. Brandon Rollé: Just circling back to the pricing conversation. I know in previous calls, you had voiced some frustration that suppliers may not have given as much pricing concessions that you're looking for. Could you update us on your recent conversations and kind of how do you expect pricing to trend here over the next, I would say, 6 to 9 months?

Yes, Brandon, I mean, we've had some success. I think suppliers are -- it is a natural environment, right? When you have high volumes, you're going to raise prices. When the volumes start coming down, they're going to start getting competitive. And we've introduced competition into the mix in some cases because we're very, very focused. The consumer is speaking. We have to listen to it. The suppliers have to listen to it. So I would tell you that we expect marginal success going forward until we get to that next budget cycle, which is going to be in that March time frame of next year. And we're going to be extremely focused and putting a lot of pressure on the costing aspect. Because I do firmly believe that we need to have a price increase that's relatively minute next year versus the previous 4 years.

And our next question will come from Noah Zatzkin with KeyBanc.

Maybe just one for me on capital allocation priorities. I guess does the current environment change how you're thinking about priorities? I know you had mentioned looking to acquire a pontooned brand or greenfield ones. So just trying to get updated thoughts around that here.

Yes. Right now, what we've done is our capital allocation has been to product, it's been to the Roane County facility, which will be doing small boats for Cobalt. It's been -- for our tooling design center, that is a -- it's going to be a big important vertical integration for us going forward across all of the brands. And what I would tell you is that, that doesn't change our mindset. Product is critical. And back in 2009 time frame in a 2-year period of time, we took market share up 900 basis points because we're the only one bringing out product. So we're always going to be progressive and aggressive in bringing on new product, new innovations. We think that's a core lifeblood of the business, yes. And we put some in the -- in the PowerPoint this morning, you'll see some information on cash, and I talked about it as well. I think one of the blessings or benefits that we have is because we are such strong cash generators. We don't have to look at an environment and say, "Hey, we need to pull back. We don't need to make this acquisition." I will tell you that from an M&A standpoint, if the right asset comes to market at any point in time, be it midnight or noon, we will be in the market for that acquisition because we can be. We have that capability. We also have 3 or 4 initiatives, strategic initiatives that we're going to be embarking over the next 2, 3, 4 years that really have no relationship at all to what economic environment we're in. Because once we emerge from that, we will be stronger, and we'll have a higher market share.

I'm not showing any further questions at this time. I would now like to turn the call back over to Jack Springer for any further remarks.

Thank you, Joe. Appreciate it. In summary, Malibu's fiscal first quarter results surpassed our expectations, supported by our team's superior execution, combined with the inherent strength across our lineup of brands despite a rapidly evolving operating environment. As we move through the quarter, the retail environment markedly deteriorated, and the sense of urgency customers had over the last few years largely was gone, coupled with the challenged interest rate and macroeconomic landscape. However, those customers in the market are continuing to support elevated ASPs as they look for feature-rich boats. Our variable cost structure and ability to create significant free cash flow ensures a strong balance sheet, quicker recovery and ability to invest in important strategic opportunities. Our strategic planning, operational excellence and supply chain management continues to support our outperformance of the broader industry. And our vertical integration has enabled us to remain resilient. We are confident that this team will once again exercise its operational prowess to navigate the current environment while, at the same time, advancing our innovation, our manufacturing capabilities and our vertical integration footprint to ensure we once again emerge stronger as the market conditions improve. As always, I would like to thank you for your support and for joining us today. While we are in a challenging retail environment, especially compared to the COVID years, we will continue to thrive and grow with continued excellence in fiscal year 2024. Have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect your lines.