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.

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.

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…

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…

[Operator Instructions]. And our first question this morning comes from Craig Kennison from Baird.

I wanted to ask about dealer inventory. Is there a way to frame, I guess, the number of excess boats you see in the channel that you'd like to see come out?

Craig, we always talk about it and think about it in terms of weeks on hand of inventory, not necessarily units. Sorry to get down to that level. But from a weeks on hand basis, I think the overall industry, and we're seeing the same thing, is around five weeks too much on hand of inventory. And it's a little bit dependent upon the segment, but [indiscernible].

You had mentioned ASPs, you've got some product coming out at some sharper prices. I'm wondering if you could help us think through your ASP by segment going forward, given that lower price product and some of the promotions that you also have in place.

There's a little bit of a balancing act. What is missing is a typical market that we've seen in the past, which is going to be the lower link size, less feature appointed segment. They're sitting on the sidelines. And so, that's been missing. And it's had a positive impact on our ASPs. What I will tell you is that, on that Malibu and Axis side, with the addition of that R series, the objective is to bring that consumer back in the market. I don't see a downward push from that on ASPs. What we are seeing is that premium buyer being out there and largely our ASP maintaining at about the same level, perhaps a little bit higher.

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

Jack, you mentioned the weeks on hand about five weeks on hand too much. Is that specific to Malibu? And what are you seeing with other peers in the space that may be pressuring demand? Are you seeing other competitors kind of leaning into price a little bit further, given where their inventories are? And how is that playing into kind of your dealer actions?

Yeah, we have seen that especially during the fall. I think we look across the entire landscape in marine, OEMs and their dealers have too much channel inventory on hand. So it's been a promotional environment for the dealers. They're locked into a promotional environment. And I think that's going to continue. Obviously, when you have competitors that are also trying to lower inventories, it's a hand to hand combat type of environment at the dealer level. And we have seen that and we would expect to continue to see that.

Just one last question. I know it's probably a little early, but with the expectation that we could see rates come down in 2024, what are your dealers hearing from potential buyers? Are they likely willing to get ahead of the rate declines by buying for this boating season now, adjusting their loans later, or you think they're more likely to wait until actually the low rates become reality before pulling the trigger.

No. I think that's what we're seeing in the boat shows, frankly. You think about the entire retail environment. It has been soft, more promotionally. I think we alluded to that. What were we're seeing today is the dealers, at least in the boat shows, are coming back, willing to buy. Our dealers I believe are doing a great job from an economic point of view of trying to get the lowest interest rate they possibly can. Numerous resources that they may have. As we look at the environment [indiscernible], depending on the banks and the various entities that you talk to, I think generally speaking, the expectation for 2024 is two to three rate decreases, 100 to 125 basis points over the course of the entire year, primarily following the second half of the calendar year. And the consumer is not waiting for rates to go back 2%. I think there's a realization they're not going to be there any time in the near future. But there's a psychological advantage to that first rate decrease. And then you have a couple more on top of that. I think that helps the market come back and it will be – come back quickly.

Our next question comes from Joseph Altobello from Raymond James.

Couple of questions on the guidance. I guess, first, if I look at your EBITDA and revenue guidance, it implies an EBITDA margin this year of around 12%, give or take, which is below the margin that you delivered in the June 2020 quarter on a similar unit decline when production was shut down for several weeks. Why has your cost structure shifted a little bit more fixed versus variable?

It really hasn't, John. If we did a comparison against Q4 of 2020, there was a difference there from a cost perspective and then we shut our plants down for six weeks. And so, we are going to continue to invest, we're going to continue to run the company and prepare for everything downturn. And so, we're not shutting down completely. And that's what I will tell you had a significant impact on it being different than that.

Okay. Because I'm looking at your slide and it looks like the percentage of costs that are variable went from 82% last year to call it 77% this year, so it's about a 500 basis point decline.

I think that's fair. But I think that's just continuing operations reality.

Maybe in the second half, the margin decline you're looking at, how much of that is coming from higher promotions and discounting?

Yeah, the promotional activity is largely at that bigger level. What we said, we don't expect it to change in the second half. The impact from an MBI perspective is under 100 basis points. So we will supplement and we'll help our dealers from a promotional aspect, but largely it falls on them. And they're coming off of a two to three year environment where the margins are extremely high, and so their pencils have sharpened.

Our next question comes from Jamie Katz from Morningstar.

I actually want to carry on with that line of questioning on the flexible cost structure because not only does the EBITDA margin look bad maybe relative to 2020, but I don't think the implied EBITDA margin has been this low in maybe over a decade. So, can you just reconcile maybe, was it the magnitude of the change? Is it the conditions declined too fast to react? Or are there other sort of one-time items, like investing in the factory, that are really leading to that adjusted EBITDA margin compression because saying that there is a flexible cost structure and then generating EBITDA margins where they're going to be is sort of in conflict a little bit.

I think a couple of things you pointed to, Jamie, are accurate. You did see a change very, very rapidly of moving from a high wholesale production environment to the low channel inventories, left very quickly, the softness of retail occurred. But one thing – and I'll let Bruce chime in here – is that we are hyper focused. If you look at what our goals are for the rest of this year, channel inventories have to come in line. And so, we have taken production down more significantly than where probably anybody could have ascertained or predicted and we are going to get inventory levels where they need to be to support our dealers. And honestly, I think dealers appetite right now is they don't want it to be historic channel inventory. They would like to be, at least for a little while, little bit lower than channel inventory [indiscernible].

Yeah. And from an EBITDA margin perspective, it's not really a complicated story. It really is fixed cost, the leverage coming down. We are still seeing, year-to-date, and expecting to see for the remainder of the year, our variable cost structure above the gross margin line to be in that 85% to 90% range that we talked about previously. So, it really is about the magnitude of the revenue guidance change that's driving up the EBITDA margin decline.

One of the things that I'll point at to, Jamie, [indiscernible] is really important to understand. We have a long, long history of driving the margins with Malibu, and the differential between the Malibu entity, Malibu and Axis margins and Cobalt, Pursuit, MBG, there are hundreds of basis points of difference. And now you've seen a flip that Malibu is more impacted. I think we're down well under 50% now as a part of the total. And so, that impact from a margin aspect is going to be greater than if it were even across the board, if that makes sense to you.

As you think about cleaning up the inventory channel, assuming that the other OEMs are behaving rationally, does that imply – and I know this is early that, like, fiscal 2025 would go back to some sort of normal growth algorithm and it would be much easier to recapture some of that operating leverage. Or is there some transitory sort of float back to normal to get back to where we were?

I think you nailed it. That's exactly right. And that's what we're positioning for. What I'm seeing is people were being very responsible with general inventories. And that's what we're hearing from our dealer. I think that will continue. But even absent that, we are positioning ourselves so that we come out of this and we can recapture that growth much quicker than anyone else if they're not being as responsible as we are. But [indiscernible] we have to get the channel inventories down.

Our next question comes from Brandon Rollé from D.A. Davidson. Brandon Rollé: Just on your updated guidance, what gives you confidence you fully kind of reset the bar for the remainder of the year? And is there any upside being baked in for the last two quarters of the year? Or would you say this is a conservative guide?

I would say it's a conservative guide. As you can imagine, we've had a lot of discussion on it. There is not any upside baked into the second half of the year for us. So that would be welcome certainly, but there's nothing to say [indiscernible]. We believe that this, as we say, is conservative, and that if we see some positive tailwind, that it'll be beneficial.

And our next question comes from Noah Zatzkin from KeyBanc Capital Markets.

Most of mine have been asked and answered, but just wondering just in terms of capital deployment, particularly in terms of maybe green fielding or acquiring a Pontoon brand. Has anything kind of changed there and just maybe any updates around that process?

Well, I'll maybe let Jack comment on the pontoon, but from a capital allocation priority standpoint, our capital allocation priorities have changed. First, we looked upon the organic growth initiatives, such as the Roane County, Tennessee facility. We have an active share buyback program. And we're always on the lookout for M&A opportunities. And as you can understand, we are not able to dictate the timing of when those opportunities present themselves, but our strong balance sheet gives us the opportunity to move quickly when they do.

Commenting on Pontoons, and I guess M&A in general, Pontoons has been something we've talked about. I've been consistent. We've been consistent on this. We would much rather make an acquisition than greenfield, but that greenfield is absolutely an option for us. Expanding it a little bit. The market, with what we're dealing with, I think that prompts potential sellers to come to the market. And I didn't want to go through this. And so, we're seeing more activity. And it's across the board. So I will tell you that, from an M&A point of view, we are paying a lot of attention not only to Pontoons, but we're paying a lot of attention to the outboards, all our outboard market, and categories like that that we're not in today that we can get into.

And our next question comes from Fred Wightman from Wolfe Research.

I just wanted to come back to the mix question. As it was pointed out, the Malibu/Axis as a percentage of mix was down almost 10 points. How do you sort of see that trending in the back half of the fiscal year, just given some of the capacity that you guys have coming online for the other brands? That'd be helpful.

We see it probably pruning down a little bit more, more toward that 40-ish range for the second half of the year. I think you pointed out the things that are really going to influence that. But what I would tell you is that Cobalt has been surprisingly strong for us. And I think it will continue to be. We saw it, as I mentioned, in the New York boat show, again. And so, I think from a freshwater perspective, they're going to capture more of the brand share and then we expect saltwater to be a little bit stronger than the Malibu/Axis.

Just a clarification. There was a comment about EBITDA margins for 3Q being slightly below 2Q. Was that an absolute comment? So the actual reported EBITDA margin will be slightly lower than 2Q or was it a year-over-year comment?

It was versus Q2, so slightly lower than Q2.

And, ladies and gentlemen, at this time, we'll be ending today's question-and-answer session. I'd like to turn the floor back over to Jack Springer for any closing remarks.

Thank you very much. Despite the softened retail demand and being in our slow season, we continue to see success at our year-end sales event and the boat shows, a testament to our durability of the business and a dominant position in every market we serve. While channel inventory levels are higher than we want to see, we expect to see downward movement as we get into the selling season and normalize over the course of the next six months. We are focused on driving channel inventories to historic norms and we'll continue to adjust production up or down accordingly to make that occur. Our strategic planning, operational excellence and supply chain management continued to support our margin stability and our vertical integration has enabled us to remain resilient. Despite the challenges, we remain optimistic as we look to the back half of this year. We're positioned to grow and recover as retail demand recovers. We relish this environment. This is when we fine tune our model and we position for a strong recovery. We did it back in 2009 through 2011. Not only driving recovery, but capturing market share and exiting the downturn even stronger than before. As I always do, I want to thank you for your support and for joining us today. Have a great day.

Ladies and gentlemen, this concludes today's conference call. We thank you for participating. You may now disconnect your lines.