Wayne Wilson - CFO Jack Springer - CEO.

Mike Swartz - SunTrust Marc Torrente - Wells Fargo Joe Altobello - Raymond James Gerrick Johnson - BMO Capital Rommel Dionisio – Wunderlich Securities Jimmy Baker - B. Riley & Company.

Good morning and welcome to Malibu Boats Conference Call to discuss Fourth Quarter Fiscal Year 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 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 business, and I will discuss our fourth quarter financials and initial outlook for fiscal 2017. We will then open the call for questions.

A press release covering the company's fourth quarter and fiscal year 2016 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, and adjusted fully distributed net income. 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. Good morning and welcome to our call. Malibu had another strong quarter, as both the Malibu and the Axis brands performed well. Malibu also had the best fiscal year in our 34 year history when compared to all previous years, including fiscal 2015.

Against fiscal 2015, net sales increased 10.6% to $253 million, adjusted EBITDA increased 10.5% to $48.2 million, and adjusted fully distributed net earnings per share increased 18.9% to $1.32 per share. In an uncertain economic environment, especially internationally, we continue to perform well.

Our performance is due to our disciplined strategies for growth, revenue generation, and operational excellence. Our management strategy is focused on delivering year-over-year results and improvement for our shareholders. We have and we will continue to refuse to make short term decisions to drive a short term benefit or a quarter's results.

Our strategy and corresponding decisions are to build value for Malibu over a long period of time. The U.S. market as a whole remains healthy, after four years of double digit growth in U.S. unit registrations. Growth rates are now normalizing, as we stated that they would in our last call.

You may remember that many people were euphoric over outstanding first quarter retail registration data, especially March, which showed greater than 20% gains at retail for our market over 2015, and even higher for Malibu.

We at Malibu, provided specific reasons, why they would not continue and within one month, the market had moderated from that abnormal spot, and the industry seems to now be in agreement with us, that we will see mid to upper single digit gains for this calendar year.

The more fully developed registration data for calendar Q2 has confirmed what we communicated during our last call, which is that growth rates would be about 7% for the calendar year.

This also supports our assertion that warm weather accelerated both registrations substantially into the first quarter, versus the two previous years, which experienced later spring warming. Regionally, we continue to see positive trends and good growth from our dealers.

In the western region, especially Northern California, the El Niño effect and substantial snowpack has revitalized the area. Malibu remains dominant in the western region. Texas growth moderated in Q2 as expected, but saw a strong July, and still has over 10% growth year-to-date through July, and Malibu has gained share in Texas.

Texas was probably more impacted by early unit registrations than possibly any other state. The combination of having water throughout the state and a mild winter contributed to the early registrations. Over the past year, we have seen a rebound in the east region, both in total unit sales and in Malibu's share of those sales.

We believe this is due to the new product we introduced in fiscal year 2016, and changes we made to our sales management for the eastern region a year ago. Most international markets were weaker than we anticipated throughout the model year. The uncertainty in international economies was exacerbated by the strong U.S. dollar and low oil prices.

Canada, our third largest market was impacted by both weak currency valuations and low oil prices, and saw significant weakening of demand during the year. This is continuing today. Although we believe that the inventory channel is in much better condition for Malibu than it was a year ago.

International dealer inventories improved throughout fiscal year 2016, as dealers weren't sure of the economic environment and they were hesitant to add wholesale units. We do not see much relief coming from international markets in the near term, although the impact of Brexit on the world economy has been minimal.

The international market continues to be challenged, but we are closely monitoring it, so that we can make adjustments in our strategy quickly, if needed.

In the United States, dealer inventory has improved, due to continued growing consumer demand in the first half of 2016, our strong dealer network and our commitment to making sure that channel inventories are healthy.

Inventories are at or near optimal levels, coming off the peak sales season, and our dealers are pleased with our discipline in maintaining reasonable inventories, while providing them with products, which they can sell and take share. We believe that our strategy is the most responsible and efficient way to manage the channel.

While we are positioned today with clean channel inventories and robust new product pipeline for our 2017 model year, it leaves us in a position where wholesale shipment should closely match retail demand.

Another factor that helps differentiate us from other manufacturers in the performance sports boat space, is our commitment to release four all new models each year. I will remind everyone that Malibu is the only company that delivers four completely new boats to the market every year. We do not reuse hulls or decks.

Every one of our four new boats are new from the ground up. Now this is important, because we are constantly discovering ways to enhance performance, aesthetics, and make the experience better for our customers.

While we could save CapEx through redesign and repurposing, using the same tooling, we believe that we give our dealers and our customers a much better product every time, instead of every second or third time.

After focusing in previous years on delivering a complete line of boats for our Axis brand, in model year 2016, we pivoted to the premium Malibu brand. The 25 LSV was the most successful large boat product launch we have ever had and it is the best selling large boat in our segment, by far.

The ultra premium M235 is the most premium boat in the space, and has exceeded our expectations. Not only do we believe it is the most prolific and talked about boat ever introduced, it has brought a customer to Malibu that we have previously not seen.

It is that boat for the person that wants the most spectacular, most premium, and highest performing boat in its subsegment, knowing that it will be one of a special few on an individual lake or river. It made a splash with consumers and dealers alike, and continues to drive traffic to our showroom floors.

Our two new 20 foot boats, the Malibu 20 VTX and the Axis A20 performed very well, and helped us to achieve our goals in an area where we had the opportunity to gain share. It also demonstrates our focused strategy on delivering product that addresses white spaces or weaknesses that will move the needle for Malibu in terms of sales and share.

Model year 2016 saw Malibu introduce many new and exciting features that continue to set Malibu apart from the competition. The Malibu Wakesetter models received a sleek and stylish new windshield, with model badges backed by LED lighting that set a new standard in the industry.

Our integrated Surf platform once again evolved, as we had a Surf Band technology, which allows routers to control their wave and wake from a touch of a wrist. In addition, Surf Gate added hydraulic actuators to increase the quality and the reliability of the system.

The final feature that I will discuss here, that was added in model year 2016, was a panoramic rearview camera option. This feature allows drivers to see everything behind the boat for the ultimate in convenience. All of this new features were well received by dealers and customers alike, and we were very pleased with the results.

Model year 2016 saw Malibu began to manufacture our trailers in-house. This continuation of our vertical integration strategy, allowed us to provide exceptional value to our dealers and customers, while delivering a higher quality product with better margins.

Through vertical integration, we manufacture one-third more boats than our nearest competitors, and build significantly more of each boat in-house, and we do it with less employees per unit. We were able to do this because of our focus on being the best operator in the industry, without compromising the quality of our boats.

We believe our product development and engineering teams are the best, as is our disciplined Phase Gate process for new product introduction.

We are the only manufacturer in the space, who is able to produce four completely new models a year, and implement significant vertical integration projects, that are accretive to margins, while also providing unmatched value for our customers.

A recent development was the announcement of our agreement to license our Surf Gate technology to Chaparral to produce our own version of Surf Gate. I want to clarify, this is just our Surf Gate related IP. It does not include all of the other features, some of which have their own intellectual property backing.

All of the features that comprise the Malibu integrated Surf package, or ISP. Our ISP is a competitive advantage, that Malibu will continue to singularly own. There are several reasons that the Chaparral licensing made sense for Malibu. First, our desire is to see more people to be exposed to the pleasures of lake surfing.

As we have consistently stated, this boat is in its very early stages, and many people either do not know about it, or they don't realize how easy it is. This allows us to expose a broader segment of the population for lake surfing into Surf Gate.

Secondly, we know that Chaparral will produce a better experience than what their competitors will with their version of our surfing innovation. But we also know that the experience offered by any stern drive company cannot come close to the solution offered by Malibu in an in-board boat, along with our ISP.

As a result, customers will continue their migration to Malibu. Thirdly, it was important for us to reward the integrity of Chaparral, who stated they knew that it was unlikely they could design around our IP, and rather than infringe, approached us for licensing.

As a preface to discussing our litigation with MasterCraft, I will say as we always do, that we are limited in our comments due to the ongoing nature of the litigation. Both cases continue to be on separate litigation tracks, with the first case scheduled to begin trial in May of 2017.

In that case, discovery, claims construction and depositions are well down the road. I want to clear up a recent report on the IPR petition, that has been filed by MasterCraft. The inference was that if the IPR was successful in removing even one claim, the patent would be invalidated for the MasterCraft litigation. This is incorrect.

The IPR petition addresses several claims of the patent. If an examiner rules against one of our claims, that claim is no longer applicable to this case, but any other asserted claims of the patent continue to be viable in the litigation. The case will not go away. Regardless of the IPR petition, we expect both litigations to go to trial.

Also, there was a recent judgment in a case, in which Marine Power, a Louisiana engine manufacturer sued Malibu. While we disagree with the jury's decision to award Marine Power an award, it is our process in the United States. As of this date, the court has not entered the judgment, so only the jury verdict is in place.

Currently, we are awaiting the court's rendering of a judgment, and will then look at our plans for appealing certain aspects of the court process. Looking forward, we believe our decision to be responsible with channel inventories, both internationally and domestically.

To focus our new product offerings on opportunities to increase market share; to focus on vertical integration, and our commitment to operational excellence. All of these put us in a strong position to continue growing the business and earnings in fiscal year 2017. I will speak about the retail data for a moment.

Retail data is very solid for Malibu and Axis. In the most recent data available through July, both Malibu and Axis have gained share over all, when compared to the prior year, and in total we expect to increase market share from 70 to 100 basis points for the calendar year.

Our next closest competitor is well over 1000 basis points behind us in share. Here are a couple of important facts about market share; through July, Malibu and Axis have captured 55% of every new unit of growth in our segment.

Secondly, Malibu is the leader in market share for the premium segment, for the entry segment, and for the total performance for its boat segment. Malibu is a clear leader in every measurement of market share.

Our strategy of building Axis into a complete product line has paid off and it continues to pay off, as the entry segment has outpaced growth in the premium market. We built the Axis brand from the ground-up beginning in 2009, and it is a clear leader in the entry level segment.

The strong position of the Axis brand has now allowed us to pivot our focus on to new product introductions in the Malibu brand, focusing on the higher volume premium market.

Despite that pivot, and even as the new entry level product has come to market from other competitors, Axis is a testament to the success of that strategy, because Axis continues to gain share alongside Malibu. As we have said in the past, our commitment is to deliver four new boats each year, and we will do it again for model year 2017.

In fact, we have already introduced three of the four new boats. Each of these new boats is in the Malibu brand and target markets that we believe will allow to grow more in our segment.

The Malibu brand serves as a premium market, which still represents about two-thirds of all performance sports boats sold, despite higher unit growth in the entry level segment.

This means, while Axis continues to be number one in the entry level brand segment, Malibu will have new boats that drive demand and continued number one share in the larger premium segment. Our first new boat introduced this model year was the Malibu Wakesetter 21 VLX.

With this boat, we have created a bold and sleek design that is a 100% pure Malibu. The 21 VLX comes well equipped with Surf Gate, our new G3.5 tower, our Malibu trailer and a long list of other features for a nationally advertised price of $79,995.

Thanks to an incredible effort by our engineering team, we were able to include an amazing package of features at a price point that will appeal to that first time towboat buyer. This boat was also designed for another demographic. The Malibu owner from 2004 through 2012, that has seen prices rise year after year.

Many of them have said on the sidelines, holding on to their boat. Our objective was to activate that customer who we believe is a white space for the Malibu brand. That customer loves Malibu, and they love the brand. They may own one of our older Sunsetter or Ride series models, or even an older 21 VLX or 23 LSV.

They are ready to upgrade, but want an affordable Malibu branded boat, and didn't know how affordable true Malibu style, performance and luxury could be.

The 21 VLX, inflation adjusted, is a boat equivalent to the price from several years ago, only has better quality and many more features which set Malibu apart, including Surf Gate, our integrated surf platform, Power Wedge II, and other features that were not available on boats of the past.

The next two boats introduced for model year 2017 are the Malibu Wakesetter 22 MXZ and the Wakesetter 24 MXZ. Pertinent to our discussion earlier, both boats are brand new boats in every respect.

These boats debut completely new holes that are deeper than ever to produce monster-like board wakes, and when combined with our integrated Surf platform, featuring Surf Gate and the Power Wedge II, they also create an amazing surf [indiscernible].

Both of those feature Malibu's own Quad Hard-Tank Ballast System, with the all new, this year, Max Ballast L-Shaped Rear Tanks. This is exclusive to Malibu's MXZ line. Both of the MXZ models feature grey anodized details seen throughout the boat, that exemplify Malibu's renowned craftsmanship.

The new MXZ models, along with the Malibu M235, give us three new models in the last eight months, that address the premium pickle fork market, where we have a substantial opportunity to increase share and drive demand.

Our final boat, to be released this fall, will appeal to a niche of the industry, which has dedicated enthusiasts that desire versatility and performance above everything else.

Both this boat and the 21 VLX, are boats that can impact both domestic and international markets, where they have the potential to stimulate demand in several regions, including Australia. In addition to these new boats, we believe that the Malibu 23 LSV will remain the best selling boat in our market once again.

The other component in our industry leading innovation, is the addition of new features and options. Our strategy is to set the market for technology and convenience in performance sports boats, and model year 2017 is no different. The first feature is the Malibu exclusive stereo system.

This system was designed by Malibu engineering, who partnered with Wet Sounds for the highest performing battery system. Every detail on the Malibu system was carefully designed, all the way down to the Malibu emblem on the amps, speaker grills, and subwoofer cone.

The proprietary Malibu stereo systems now ensures better reliability, easier installation at the manufacturing level, and an optimum output of sound, all while ensuring the best sound in quality and performance. A key feature of our sound system this year is to give the customer the ability to control sound by zone.

I will tell you, that this has been asked for by dealers and retail customers alike, and in our regional meetings two weeks ago, as our dealers were static. Next is our new G3.5 tower, which is standard on all Malibu Wakesetter models. This model offers outstanding value, without sacrificing renowned Malibu quality.

The GE3.5 tower introduces a new [indiscernible] design, a new LED tower in anchor lights, and optional side pooling points for surfing. The tower is built with aerospace grade aluminum, has stainless steel hooves, and anodized power coated components.

For Axis in model year 2017, we have designed a new driver experience with a beautiful new dash, and easy to use push button commands to control all aspects of the boat. This allows for an easy and reliable way to customize huge lakes and lakes for any skill level. A recent announcement that we made will have impact for Malibu in 2017.

We announced our appointment of Eric Bondy, as our Vice President of Sales and Marketing. Eric is a veteran of the power sports industry, who brings along a proven track record of sales and marketing growth and improvement.

His experience in product and brand management, provides Malibu with an exciting opportunity to further set ourselves apart from the competition, and to improve Malibu for the future. We are excited about our position and the direction that we are headed into fiscal year 2017.

We continue to lead, continue to grow, and continue to meet the expectations we communicated 2.5 years ago during our IPO. Our new product is winning and driving market share, profitability, and growth. Market share trends support our strategy of having a complete access line and pivoting to the larger premium market that Malibu serves.

Our dealer inventories are healthy. Our production output appropriately supports the industry growth rate, with room to grow. Malibu strategy of vertical integration continues to pay dividends and advance our company well beyond our peers.

We believe the international market will continue to be weak, but we have planned for that accordingly, and we are prepared for any unexpected upside.

As I have said before, we believe we are the best operator in the performance sports boats, and that is the reason we are able to handle the shifts in the landscape, and still perform at a very high level.

No manufacturer in our segment comes within 1,000 boats of our annual production, and we do all this, while leading the industry in innovation, and with less employees per unit. We are pleased with our fiscal 2016 results and are looking forward to a promising fiscal year in 2017.

I will now turn the call back over to Wayne, to take you through the financial results in more detail..

Thanks Jack. Net sales in the fourth quarter increased 9.8% to $66.7 million. Unit volume increased 2% to 922 boats, including 76 units from Australia. Both Malibu and Axis performed well in the quarter, and the mix between the two was in line with expectations, at 309 Axis boats and 613 Malibu boats.

This puts the full year Malibu mix at about 67%, in line with our expectations. Consolidated net sales per unit increased 7.7% to approximately $72,321. The increase was primarily driven by a higher mix of larger model sales, with more optional features.

Specifically, the success of the M235 and the Wakesetter 25 LSV, combined with year-over-year price increases across our product line. Gross profit in the quarter increased 9.5% to $17.8 million and gross margin decreased eight basis points to 26.7%.

Selling and marketing expense decreased 12.1% to $1.5 million in the fourth quarter, as a percentage of sales, selling and marketing expense decreased to about 55 basis points, to 2.2%. This was driven by the timing of seasonal expenses that are event driven. General and administrative expenses, excluding amortization, increased 193% or $5.3 million.

As a percentage of sales, G&A expenses increased 748 basis points to 12%. The increase was primarily due to legal expenses related to Marine Power litigation. On a normalized basis, G&A, excluding amortization grew 10.9% to $3.7 million.

Adjusted EBITDA for the quarter increased 13.8% to $13.5 million and adjusted EBITDA margin increased 71 basis points to 20.3%. Both were in line with our expectations. Non-GAAP adjusted fully distributed diluted earnings per share increased 18.8% to $0.38 per share.

This is calculated using a normalized C-Corp tax rate of 35.5% and a fully distributed weighted average share count, of approximately 19.3 million shares. Just touching on the full year numbers quickly; unit volumes increased 4.8% and net sales increased 10.6%. Net sales per unit increased 5.5% on a consolidated basis.

Gross profit increased 10.6% to $66.8 million, and adjusted EBITDA increased 10.5% to $48.2 million for the year. For reconciliation of adjusted EBITDA and adjusted fully distributed net income to GAAP metrics, please see the tables in our earnings release.

Our fourth quarter results exceeded internal goals and full year results were in line with our modified expectations. Our outlook for fiscal 2017 is optimistic. As Jack mentioned, we believe our lower inventory levels and strong share trends can offset non-U.S. volumes that may continue to be challenged due to currency trends and macroeconomic factors.

We do not provide detailed earnings guidance, but our outlook for fiscal 2017 is based on the following factors; an increase in unit volume approaching mid-single digits. With respect to cadence, we expect Q1 to be close to flat and Q2 in the mid-single digits, with the remainder of the growth coming in the second half, weighted slightly more to Q3.

From a volume mix perspective, Axis is expected to represent a proportion of unit sales slightly lower than fiscal 2016. Consolidated net sales per unit is expected to increase in the low single digits for the full year.

Gross margin is expected to be slightly up for the full year, driven by lower international discounting, offset slightly by negative mix impacts, as we roll off the introduction of the 25 LSV and M235. We expect margins will be down modestly in Q1 year-over-year, and with year-over-year margin expansion happening in each of the following quarters.

Legal expenses relating to the MasterCraft litigation are expected to be roughly double that of fiscal 2016. Adjusted EBITDA margin is expected to increase modestly.

Finally, regarding capital expenditures, we are currently planning between $8 million and $9 million in capital expenditures, as we are looking to purchase a building close to our existing plan, to potentially consolidate some current leases or provide space for further vertical integration.

In closing, let me just say that we are pleased with our fourth quarter and fiscal 2016 results, in spite of the tough international markets. We are very pleased with the 2016 model year new products, and the impact we believe it has had on market share. We believe the U.S. market continues to grow, and we like our competitive position.

International markets continue to show some stabilization, and we do not plan at this time, to offer material discounting to support these markets going forward.

Our prudent actions in the last half of fiscal 2016 to maintain healthy inventory levels and a strong 2017 model year product pipeline, set us up for a strong financial performance in fiscal 2017. With that, we'd like to open the call to your questions.

Operator?.

[Operator Instructions]. Our first question comes from Mike Swartz with SunTrust. Your line is open..

Hey, good morning guys..

Good morning Mike..

Hey, just wanted to dig into your international outlook embedded in your fiscal year 2017 guidance or rough outline. Remind me for fiscal year 2016, I think at one point you had said wholesale volume to Canada, specifically was down around 20%.

I guess, is that the right number, because if so, that would imply something like a 2% to 3% drag on your volume in the prior year alone.

So I guess, how do we think about that going forward? Are we now at a point, where maybe Canada is just flat year-over-year, and it's not that drag that we saw in 2016?.

Yeah. We have seen a significant amount of de-inventorying. So just given the -- at retail in Canada, it has come down the past two years, in a material way, and as you all are aware, we were a little bit surprised by the magnitude this year.

Given what we have seen from both the de-inventorying, meaning retail outpacing our wholesales shipments over the past two years, and what we are seeing at retail there we think from a wholesale perspective that there is not going to be that same material drag next year..

Okay. That's helpful. And then just, in terms of the licensing agreement with Chaparral, I think you gave some of the rationale behind the deal.

I mean, can you maybe give us a little more color on just what the package they are offering is, and how that differs versus what you are offering on your boats? And then secondly behind that, just any indication or any economics that you can provide us, regarding that relationship?.

Mike, what they are licensing from us, is our IP and their version of Surf Gate. So they have created their version of Surf Gate. The rest of that ISP, what we call our platform for surfing, they do not have access to.

So for example, the Power Wedge II, which is critical to creating the length and the hype on the Surf Wave that we are able to get, that's not a part of the package. So it's one, it's really that element of Surf Gate and their version of it.

As far as the economics and I am sure you will understand this, because every situation is different, we really don't disclose those..

Okay. That's fair enough. Thanks guys..

Our next question is from Tim Conder with Wells Fargo. Your line is open..

Hey good morning guys. This is actually Marc on for Tim.

Just wanted to get your thoughts on the July retail that was out there, and across the broader marine industry? I know Ski Lake held up a little better, but was there anything out there that indicates a turnover in the broader industry? It doesn't sound like it, it sounds like July could have just been an anomaly, but did you guys see any pickup from July and August and September?.

No, we really haven't. And you know Marc, I will say kind of what we always do, that the July number is not fully developed yet. And we at Malibu are very hesitant to focus on any one month, especially if it’s a current month; but we did not see anything that indicates anything coming at us, at a broader marine industry level.

We think that it's just an aberration, similar to the aberrations that we have seen all year long..

And even, I would say last year, this monthly registration data is very-very lumpy. I mean, we saw it in Q1, and that impacted April, and then you saw May being more flattish and June up substantially.

So we just think there is a lot of bumpiness in this data, and noise that when you look at it over longer periods of time, really gives you better trends..

Okay, great. And then on market share expectations, I think you said between 70 and 100 basis points for the calendar year.

Just given the new product introductions and positioning, how do you see that playing between the Malibu and Axis brands? And then, is the share that you are gaining, is that primarily consolidation from the smaller players in the industry towards the top?.

Okay. So there are several questions in that. I think that we are pretty comfortable, especially given where we are at through July. With that 70 to 100 basis point gain in market share for the calendar year, and that's more than what we thought it would be. We have performed very-very strongly.

I think, one of the statistics that I read is pretty surprising and incredible to me, and that is the unit growth this year, Malibu and Axis has captured 55 out of every 100 units, and that's extremely strong.

So then, as it relates to the new product, we think, in terms of new product, as it comes out, it's going to take around six to nine months, and we saw it again this year, for that product to get out into the marketplace, to be at the boat shows, and to start generating that acceptance.

And so the new products that we have come out with this year, we would expect to start seeing the impact of that new product beginning in January to some extent, and then increasing throughout the rest of that six month period, so the latter half of the year. Fiscal year rather.

Did I miss a question?.

Just the share gains, is that coming from the smaller players in the industry, is that more broad based?.

That's broad based. We are taking from our nearest competitors, and we are taking from the smaller competitors..

Okay, great. Thank you..

Our next question is from Joe Altobello with Raymond James. Your line is open..

Hey guys, good morning.

Just wanted to touch on the discounting environment you guys are seeing, particularly in the domestic market? You mentioned international discounting obviously, but what are you guys seeing from a pricing standpoint in the U.S.? Obviously your ASPs were up nicely this quarter, so it seemed like it was a big deal for you guys so far.

But is it getting worse?.

No. our perception is, that it’s getting slightly better. We have seen the market tighten up in terms of pricing. I will tell you that last year, there were a couple of our competitors in key markets that were being irrational with the pricing, that they were giving dealers and that their dealers were putting out into the market.

But we have seen that stabilize, so we think that the pricing is more stable today than it was a year ago, or even six to nine months ago..

Got you.

And that kind of leads into my next question on gross margin for 2017, I think Wayne, you mentioned you expect to be up slightly for next year, and I am just trying to look at what the drivers of that are? Obviously, the pivot to Malibu next year, from a product standpoint, increased licensing revenue, the promotional environment seems pretty rational, so why wouldn't that number be higher?.

So I think there is an element of mix in play. This year, with the 25 LSV being so strong, out of the gate, and the M235 and its initial introduction, that's going to be the natural drag that brings that down a little bit higher than where we would like it, probably.

And so, in terms of licensing revenue, frankly, we aren't modeling a major number coming from the stern drive.

If you look at that, Jack touched on it in terms of -- we don't talk about economics, but if you talk just generally about forward -- the Volvo new stern drive solution, with source systems, those volumes we monitor them; they aren't big right now. And so we don't think that that product is going to work that great and compete that well with us.

So we are not modeling a lot of incremental 100% margin dollars there..

Okay. Great. Thank you guys..

Our next question is from Gerrick Johnson with BMO Capital Markets. Your line is open..

Hey, good morning. I had three questions. Hey, when you talk about market share, just to clarify; you are including those new stern drive entrants, or is it just in-boards? That's question number one..

The answer to question number one, it would be, whatever the retail data is putting out in that category. Right now, that's sort of minimal, I don't think it moves the needle..

So if you're saying, are we including in the market share analysis, forward facing stern drives, the answer is no, because the data doesn't discriminate between forward facing and stern drives, and traditional stern drives, but we monitor the data. And those numbers are very small, triple digit numbers from a registration perspective.

So it's not going to meaningfully move the needle. Those people would likely drop purchasing stern drives anyways. They aren't moving out of our product into theirs..

Okay. Got it.

And then, when you're talking about average selling prices, how about your like-for-like price increases for the year? So same boat last year to this year, what's the price increase on those?.

Yeah, it's going to be low single digits on a like-for-like basis..

Okay.

And lastly, you are increasing your warrant reserve, going from three to five year warrant use, but what are you seeing in actual claims? Is it better, worse, the same, compared to last year?.

Claims are better. We look at several different metrics. One, that I think that everyone will look at is your percent of revenue and percent of units that you are building. And we are seeing -- and its based upon a lot of the changes we have made over the last few years.

But we are seeing that warranty curve go down, even though we have increased it to five years..

Great. Thank you guys..

Thank you. And our next question is from Rommel Dionisio with Wunderlich Securities. Your line is open..

Yeah thanks. Good morning. You just talked about some of the sluggishness in international markets.

Obviously currency related, it's perfectly understandable, but I wondered if you could just chat about the growth of the sports in that market? Wakesurfing, is the popularity still growing or has this sort of repeated that -- I realize currencies are going about strong [ph].

But are you still seeing the interest, the consumer interest, the growth in the sport in some of those overseas markets? Thanks..

We are seeing the growth of the sport, most definitely, in the U.S., and we still believe it's in the early stages. The way that I will color the international markets, is think about the international markets being a little bit behind the United States.

And so largely, there is still very much a key orientation, more so than in the United States, and a wakeboard orientation.

And our belief is that, surfing is just now beginning to start taking root in the international markets, and that the growth curve is going to be large over a longer period of time, because people are still predominantly getting behind the boat, ski and wakeboard..

Okay. Thanks very much Jack. That's helpful..

And our next question is from Jimmy Baker with B. Riley and Company. Your line is open..

Hey, good morning. Thanks for taking my questions..

Good morning..

First, just hoping you could talk about the impact of dealer turnover, particularly in Canada, on fiscal 2016 results or 2017 guidance. And then I guess if you think back to when you lowered your full year guidance last quarter, it seemed like the driver there was really international weakness and international promotional activity.

Some of the commentary today makes it sound like, there was also a component of rationalizing channel inventory. I guess, not to say that those are mutually exclusive, but I am just hoping you could clarify, what triggered you to reduce second half production, despite, as you pointed out in a pre-robust U.S.

ski lake boat backdrop in your market share gains?.

International was bad last year, and I think that on our last call, we had said that it turned out to be worse than we thought it would be. So it would be graded throughout the year. So international certainly was not as good as we had hoped that it would be.

Also on our last call Jimmy, we talked about the fact that controlling the inventory levels and taking our production down in Q4, was something that we were going to do. So this is not a new phenomenon, we announced that we were going to do it. But we took some hits on it.

But we turned out to be the only ones that were right in what was happening at retail. So we think that we were pretty proficient at gauging where we were at, and then adjusting, so that we were preparing for 2017 to be a pretty good year. Our distribution in Canada is really not unlike what it is in the U.S.

We look at every single dealer situation every year, and then we make the determinations that are going to be best for Malibu over the short term and the long term. And I think a great example of how we employ them, how we can move with whatever might be going on is Alabama.

A year ago, changes were made in Alabama, and we are substantially better off today than we were a year ago.

And so, the decisions that we make on dealers, and naturally we would always rather retain a dealer; but when we have to make those change-outs of dealers regardless of where it's at in the world, the view is that over the short term and the long term, it's going to be better for Malibu, and I will say that, at least since 2009, probably we are at a near 100% success rate..

And I think the other point, Jimmy, in terms of -- I think the reasoning behind bringing down second half, was absolutely driven by that international weakness.

The performance from the market share perspective to the magnitude of what we have seen, has even surprised us, and that's what has driven down channel inventories more than we actually anticipated, and when we use the word like optimal around those inventories, it's because of the fact that, that market share gain has been quite robust, and that's driven those numbers down lower than we even expected them to go.

So now, they are optimal in terms of -- they still have enough inventory to maintain appropriate market share, but they are, in no way shape or form, feeling like they are heavy on inventory..

Understood.

And then just, as you highlighted your model introductions this year and last year as skewed towards both the Malibu brand, I was just hoping you could elaborate a bit, on kind of how you think about product planning, relative to, let's say, the retail reception of Axis versus Malibu, and also kind of how this demand environment played into your decision to run the VLX 21 at a nationally advertised price?.

There are several things that come into play, as we start looking at the product planning, and the way that we do it, is we go out for 36 months. And the way that I have described it in the past and will today, is the first 18 months that we are looking at today, is pretty locked in. We have taken all the data. We have taken all the surveys.

We have spoken with our dealers and our customers; and so we have locked in that product and we are starting that phase gate process that I referred to.

That second 18 months is more flexible, and we are still listening to the data of the market, we are listening to what is going on in the retail environment, and then we are making adjustments, if we need to make them. Pulling out a potential model and putting something in its place.

What we have seen largely over the last couple of years, is that, people are migrating to larger boats. That's why, last year, the 25 LSV was important to us. That's why, one of the reasons that the M235 was important to us, because we are seeing that transition to larger boats.

The market, the sweet spot, or the middle of the plate for the market continues to be the 21 to 23 feet, and as it relates to your question on that VLX, the 21 VLX, we have had customers over a fairly long period of time say that, the price is going up. But at the same time, the people that are buying boats continue to completely load the boats.

And so we felt like that, that 21 VLX is a great opportunity for the two segments or the two demographics that I mentioned earlier. One is that new to the in-board boat market, that new buyer coming from another segment or maybe buying a boat for the first or second time or since they have become an adult.

Secondly, we know and we believe that that demographic of the Malibu customer, who bought a boat in 2005, 2008, 2012, that it might have been a Sunsetter or one of our older models, we know that we are putting a very-very well appointed [ph] boat out at a price point that is going to be very attractive to them.

And as a result, they are going to be able to get an inflation adjusted boat that's really at the same price as what they bought theirs for, with a lot more features, including the Surf Gate and the ISP features. So we think that it is going to be a very strong model for us going forward, not only this year, but in years to come..

Okay. Understood. And just lastly, I just want to go back to the 2017 gross margin outlook.

I understand you can't quantify the Chaparral license impact, but can you say if your boat gross margins, kind of on an apples-to-apples basis would be flat or down year-over-year? And then just to clarify or get a little bit color on that circuit license agreement; I guess, if you are expecting it to be somewhat financially immaterial, can you just talk about why go that direction, given the potential dealer blowback and risks associated with another brand -- another boat brand carrying the Surf Gate brand? I understand, wanting to grow the feeder system, but just help me understand why it's useful for you to put the Surf Gate brand, if you are not out there, if you are not seeing your financial benefit in the deal?.

Well, first of all, I think it's important to note, that our belief, and probably anyone that you talk to, recognizes that surfing is still very early on, and many-many people are ignorant about what it is and what I can do. And so exposure of surfing to a greater population, should be important for every single one of us.

Secondly, that Surf Gate brand is something that we consider very strongly. It is ours, Malibu owns it. We are going to do the right thing by it and make the right decisions for it. And so as a result, you are not going to pervasively see that brand out there.

But in that market, in that segment, which today is a very small segment, we think it will continue to be on the stern drive side.

The ability to give one player Surf Gate and expose that Malibu Surf Gate by Malibu brand is going to leave them up there, and I use an illustration; you have a stern drive and you are out there and you are creating your 18-inch lake or wave, and then I come plowing by with my five foot wave, I am pretty positive, you are eventually going to buy my boat.

And we have given our dealers, like I said earlier, we did not give the entire integrated surf package. We gave a component of it. But our dealers, by far, still have a great competitive advantage. They have much more of an innovation in place.

And so largely, we have demonstrated the ability that we are strategic, and we make very good decisions for Malibu and on behalf of our dealers, and I think that this is going to be another good one for us and for them..

And to your question, Jimmy, I mean, boat margin will be up. The primary driver of this business is boats, and what happens to that boat margin is going to be what happens to our margin. Everything else is going to be just a little bit of [indiscernible]..

Okay. Appreciate the color. Thanks for the time..

[Operator Instructions]. We do have a follow-up question from Mike Swartz with SunTrust. Your line is open..

Hey, just want to dig in a little more on the 21 VLX, and just around pricing, and with that sub $80,000 price point, it seems more like an access type price point.

So I guess, the question would be, how are you getting there, how are you getting that price point? Is it that you are just accepting somewhat of a lower margin on that sale versus maybe the rest of the Malibu brand portfolio?.

Mike, I probably didn't elaborate on it greatly, but I think I made a key statement that's pretty important, as it relates to the 21 VLX and really all new models. We are constantly making our models more proficient, in terms of costs, in terms of what we are able to do to the boat, and the negotiation with suppliers.

And so I think that this -- you are seeing it at full scale, as it relates to the 21 VLX.

There is still clear separation between the 21 VLX, and even at A22 or a D22, and there is a fairly large separation of thousands of dollars between those boats; and that's largely driven by all of the additional features that you are going to get with that VLX, because you have the 12-inch touchscreen, you have the Viper II system, you have the full integrated surf package.

So it has significantly more features, which put it at that price point. We did feel like that it was very important to be able to deliver a boat that was underneath that $80,000 mark. And that's worth a trailer, and so that's pretty uncommon, we believe..

And is that another way of saying that you are now relatively margin agnostic between Malibu and Axis? Or are you at a point where they are both kind of carrying similar margins as well?.

Yeah we have been there, very close to it for a while now. During our IPO, we quoted that we were about a 200 basis point difference between the Axis and the Malibu brand. And that delta has been close considerably over the last 2.5 years..

And most significantly on a comparable length model comparison, its right on top of each other..

Okay, great. That's it for me..

Thank you. We are not showing any further questions. So I will now turn the call back over to Mr. Springer, for closing remarks..

Thank you very much. We are very pleased with our 2016 fiscal year and we are excited for 2017. Our operations and our products, our dealers, are all performing at a high level. We want to thank you today for your interest in Malibu and for joining our call. Have a great day..

Ladies and gentlemen, this does conclude the program, and you may now disconnect. Everyone, have a great day..