Jack Springer - CEO Wayne Wilson - CFO Ritchie Anderson - COO.

Tim Conder - Wells Fargo Mike Swartz - SunTrust Joe Altobello - Raymond James Scott Hamann - KeyBanc Capital Markets Rommel Dionisio - Wunderlich Securities Austin Drake - B. Riley & Company Gerrick Johnson - BMO Capital Markets.

Good morning and welcome to Malibu Boats Conference Call to discuss Third Quarter Fiscal Year 2017 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, 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 will turn the call over to Mr.

Wilson to get started. Please go ahead, sir..

Thank you. And good morning, everyone. Richie 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 third quarter financials and outlook for fiscal 2017. We will then open the call for questions.

A press release covering the company's third quarter fiscal year 2017 results was issued this morning and a copy of that press release can be found in the Investor Relations section of the company's website.

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 the 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 will now turn the call over to Jack Springer..

Thank you, Wayne. Good morning and welcome to our call. Again, Malibu had an excellent quarter; all financial metrics were a record for the fiscal third quarter with double-digit increases in every category.

Net sales increased 12.6% to $77.1 million, adjusted EBITDA increased $16.8 million or 19% and adjusted fully distributed earnings increased 22.5% to $0.49 per share.

These results show that our strategies of leading product innovation in the industry having a strong dealer network and being a best-in-class operator are a very strong combination, especially with a confident consumer base that is ready to purchase. The U.S. market remains healthy and the performance of both segment continues to grow.

There have been five straight years of double digit growth coming in the calendar 2017 and we believe that healthy growth will continue into the foreseeable future. We know the recent monthly registration data has shown results that are slightly down year-over-year but the seasonal period covered by this information is a relatively small sample size.

In addition, the comps have been quite stout but that factor will begin to moderate. As we said last year when the available data showed a 20% plus growth rate, we don't believe that this data represents the true state of the current environment; as it was overstated last year we believe it is understated this year.

Based on the difficult comps from 2016, sentiment in the marketplace, both show results and dealer feedback; we were confident that growth will continue in the U.S. market. The United States is performing well for our segment continues to be the bright spot, the regional economies of the U.S. are very diverse with various factors affecting each one.

Growth in California has been driven by higher lake levels among other reasons and the results are robust. We have grown considerably faster than the market in California and we believe that this act/trend may continue. Texas remains the number one state in volume. We believe Texas will continue to grow despite oil prices. The DFW and Austin St.

Antonio markets continue to experience increases year-over-year. Malibu has been and will be the dominant player in the state. In other regions weather is a significant factor on early season results and we do not have the benefit of the early spring that we saw in 2016 which has a mitigating effect on that early calendar year-over-year growth.

The much of the season is now over and the results were fantastic for Malibu. In North America we saw our shows generate double-digit growth over the 2016 boat shows. It was very encouraging to see our strong results occur in every region of the country, not just a couple of regions.

We had several dealer set boat show records and other dealers had shows that were better than any year since the shows of a decade ago. In Canada we saw very good results over last year as well with growth again in the double-digit category.

We now have the final market share data for calendar year 2016 and Malibu is at historical high at just over 33%. Both Malibu and Axis grew in 2016. This is great for Axis since our focus has been on the premium Malibu brand for new product introductions the last two model years.

In model years 2016 and 2017 I will remind you that we introduced seven new Malibu's and only one new Axis, and no new Axis boats were being introduced in 2017 model year. That makes it all the more remarkable that Axis continued to grow share in calendar 2016.

Our stated goal is to grow market share in total about 20 to 30 basis points per year and we are pleased to see growth much higher than that. Malibu continues to be the leader in market share for the premium segment, the interest segment, and the total performance sports boat segment in a dominating manner.

International markets are still weak; however, our second largest international market Canada has shown recovery. Some Canadian boat shows had surprisingly good results while others had modest gains compared to 2016.

For the season, we saw a healthy double digit gain in boat show results but it's also reasonable to note that last year was a low threshold. While this is a materially impacting wholesale shipments yet, hopefully last year was the trough and we will now see healthy growth.

The Canadian dollar continues to be weak but we believe the economy has adjusted somewhat. Lower oil prices will continue to be a headwind in oil-based economy such as Alberta and Western Canada. The rest of the world remains largely unchanged and the strong U.S. dollar has continued to be an issue.

Although there has been some appreciation in currencies such as the Mexican peso, the Brazilian real, and the South African rand; those markets are much smaller than Europe and Asia which have seen further weakening of their currencies.

International markets will recover but we do not know when they will recover and we can only stay prepared for when they do. Our decision to focus on the premium Malibu brand, the last two mile years has paid off. All of the new models have performed well and the results have been better than expected.

We filled our available order book for the second half of the year much earlier than in previous years, and it has been four for the fourth fiscal quarter for some time now. Dealer inventories are healthy, so we are well equipped for the prime selling season.

Customers and dealers are excited about the premium pickelforks [ph], the 22 MXZ and the 24 MXZ. We have seen that excitement in the form of orders being higher than expected for those models.

The 21VLX is doing what we expected, it's bringing in those 2006 to 2012 customers who wanted Malibu at an affordable price with the performance and features that make our boats so special. The new RESPONSE TXi is a hit domestically and internationally. It is engaging hardcore waterski enthusiasm and recreational skiers lack [ph].

It is certainly a statement when the new TXi sets a world record before it's even introduced which occurred in November. In addition, the 23LSD will continue it's dominance as the best-selling performance sports boat for the eighth year running. In our Axis brand the A22 and the T23 continue to be pillars at the entry level brand.

We are very proud of our commitment to operational excellence and we believe that we have -- we are the best operator in performance spots boats and among those in the entire marine industry.

We've continued to scale our business to account for growth while not losing sight of our goal to build high quality boats with innovative features at the highest operational efficiency. Malibu build more boats, releases more new models annually than all of our direct competitors while taking on impactful, profitable vertical integration projects.

We've been successful integrating tower, machine parts and trailer manufacturing, and we are now bringing engine manufacturing in-house as announced last November. The engine initiative is advancing along nicely. We are on-schedule and on-budget for bringing Malibu built engines to market during model year 2019.

Yesterday there was a press release announcing the settlement of our litigation with Master Craft. As you may recall, Malibu had two cases pending for trial. One, originally scheduled for May was rescheduled for August 14 and the second was scheduled for October of this year.

We were very pleased with the agreement, the agreement calls for a 1 time upfront payment of $20.5 million and a license agreement for royalties on both sold by Master Craft that uses the license technology.

Our belief in understanding is this will encompass all surf systems offered on a Master Craft and Master Craft in XT brand both that utilize surf systems. As with previous settlements, we do not disclose the amount of ongoing and future royalties.

Due to the settlement occurring in April, we will see additional legal experience through Q4 although that will be offset by the upfront payment we are receiving.

Of course we are also pleased amount as incredible surf innovations revalidated yet again, this now means that the second, third and fifth largest performance sports both companies in the second largest [indiscernible] company are all licensing our weight surfing IP.

As we've explained, we took and we look at the ROI on all licensing for our weak surfing IP. We looked at our ROI associated with revenue from onetime payments in royalties offset by litigation and other expenses.

We will experience double digits ROI with our strategy over the course of time, we are also aware that other companies like chaparral and Target have been brought under licensing arrangements as a result of our pragmatic, yet aggressive approach in defending our IP.

We have developed a formidable set of IP around our surf of technologies, which include Surf Gate in just the seven issued patents, adding to that strength of IP four additional patent applications are not issued today. We have also demonstrated they were -- that we are willing to defend our intellectual property and we will continue to do so.

In summary, Malibu had a record third quarter exceeding our financial targets, during calendar year 2016 domestic retail volume grew 11% and Malibu grew much faster at retail, seeing significant growth in market share.

Domestic demand continues to be strong, and we believe early registration numbers are up function of tough year-over-year comps, and do not reflect the current environment. International markets have not improved, but we are ready when they turn around. Canada however, has shown some improvement.

New product is performing well, and both of our brands are well positioned in the marketplace. Our engine initiative is progressing on schedule and we are excited to introduce a new vertical integration advantage, operationally we continue to excel in our operating at high efficiency.

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

Thanks, Jack. Net sales in third quarter increased 12.6% to $77.1 million. Unit volume increased 10.4% to 1,054 boats including 69units from Australia. Malibu brand represented approximately 72% of unit sales or $758 and Axis represent approximately 28% for 296 boats as both continued to perform well.

Consolidated net sales per unit increased 2% to approximately $73,200; the increase was primarily driven by year-over-year price increases and lower discounting, offset by mix shift to the RESPONSE TXi and 21VLX models.

Including the impact of $90,000 from our engine vertical integration initiative, gross profit increase 160.1% to $21.4 million, and gross margin increased 84 basis points to 27.7%. Selling and marketing expense increased 13.7% to $1.8 million on the third quarter, percentage of sales selling and marketing expense was flat year-over-year.

General and administrative expenses excluding amortization increased 34.4% or $1.5 million as a percentage of sales G&A expense increased 126 basis points to 7.8%.

The increase was due to legal expenses related to the Master Craft litigation, engine vertical integration expenses and incentive compensation, excluding amortization MC litigation expenses and our engine project. General administrative expenses increased $0.2 million.

Adjusted EBITDA for the quarter increased 19% to $6.8 million, and adjusted EBITDA margin increased 170 basis points to 21.8%. Net income for the quarter increased 35.9% to $8.8 million, while net income margin increased 198 basis points to 11.5%.

Non GAAP adjusted fully distribute diluted earnings per share increased 22.5% to $0.49 per share, this is calculated using a normalized SCEcorp [ph] tax rate of 35.5% in a fully distributed weighted average share count of approximately 19.3 million shares.

For reconciliation of adjusted EBITDA and adjusted fully distributed net income to get metrics we see the tables in our earnings release, we are very pleased with our third quarter results and our outlook for fiscal 2 017 is largely unchanged, we do not provide detailed earnings guidance but our outlook for fiscal 2017 is based on the following factors.

An increase in unit volume in the mid-single digits, with respect to cadence second half growth will be weighted more to Q3, from a volume mix perspective, Axis is expected to represent a proportion of unit sales moderately lower than fiscal 2016.

Consolidated net sales per unit is expected to increase in the low to mid-single digits for the full year with Q4 lower than our year-to-date performance. Gross margin is expected to be slightly up for the full year. Year-over-year margin expansion began happening in Q2, and has continued in Q3, in Q4 we will see some pressure.

Legal expenses net of our settlement with Master craft are expected to approach $1 million, adjusted EBITDA margin is expected to increase modestly.

Finally regarding capital expenditures, we are currently planning approximately $10 million in spend, that includes an expenditures of approximately $5 million related to our engine vertical integration initiative. In closing, let me just say that we are very pleased with our third quarter fiscal 2017 results, they exceeded our expectations.

Based on conversations with our dealers and retail customers we still believe there is resilient growth in the U.S market and our strong product offering sets us to perform well in the future. With that, we'd like to open the call to your questions, operator. .

Thank you. [Operator Instructions] Our first question from Tim Conder of Wells Fargo securities. Your line is open. .

Thank you. Gentlemen, just a couple things on the quarter here first. Wayne, are you alluding or was there any pull forward from Q4 into Q3 for any reason here, just given the upside versus what was out there in Q3 and then which are indicating for Q4 as far as shipments or any margin related items ex [ph] to litigation. .

Now, just kind of breaking that question up in terms of pull-forward now there is no -- there is no pull forward really it's just a cadence, I think we did take volume throughput up during the quarter, and that's one of the things that helps to drive that growth on a year-over-year basis.

And just seasonally this is the time where you want to take it in as much of that growth as you can, because you can get the boats out in the field, so they can retail when it's nice and warm..

Okay. As part of that then your inventories at the company level were up 33%. How should we think about that versus the channel I guess, and it just says that he guys are teaming up for a very good season here obviously the fiscal year ends in June here, but for a very good season.

Just any additional color on that?.

Yes. So if you're looking at inventories are you comparing that to -- I think you're comparing that to June, which is the seasonally low number, if you look at on a year-over-year basis it is very much in line with what we're doing from a production -- higher production levels.

So in terms of inventory at the dealer level, we're seeing that essentially flat on a year-over-year basis when you look at the weeks and we feel good about where those sit today..

Okay, helpful thank you, and then Jack, on the litigation. So good behind sounds like obviously as you continue be vigorous in defending any other infringements from elsewhere, but how should we think about if you exclude the onetime settlement.

Your legal expenses looking in the fiscal eighteen in the year-over-year basis, and then also your royalty income collectively, how should we think about those changes year-over-year looking fiscal 2018 versus fiscal 2017, excluding the onetime settlement payment?.

Yes, so it is specifically with respect to litigation type expenses this year -- this concludes any surfing intellectual property litigation that we currently have.

On a prospected basis at this point, that number would go to zero and in -- with respect to the royalty stream, look we do not specifically disclose any of the royalty streams on our IP -- with respect all these license agreement.

So I think the short of it is what we've said in the past is it has the ability to impact margin over time in a low double-digit basis point, but that assumes people continue to use infringing products and those types of things, so I mean at this point, we don't have a specific view on how much it's going to impact. .

Okay. And those were for the litigation expenses. How much in excluding the settlements and did you have or expected to have here in 2017 related to the Master Craft that would in essence go away then for 2018. .

So it would be consistent with our past guidance, I think we said it was you know about $3 million this year was what we had previously said, and so we think that number bill would have probably ended up just north of that 3 for the year..

Currently there are no plans to have that $3 million next year..

Okay. And then lastly Gentlemen, it sounds like you're expecting very early on a little bit of growth starting to show up in Canada, is that -- is that fair as we think about it on a go forward basis here. .

Yes, I think that's fair, the boats shows as I said we had double-digit growth there that was good to see. There's a psychology I think that might be starting to take impact and people are getting used to the currency difference to the extent that we actually see that currency over time come back 125 or 120, I do believe that there is pin up demand. .

And what I'd say is we haven't seen that really manifest itself at wholesale yet, in terms meaningful growth in Canada also. .

Okay, thank you gentlemen. .

Thank you. Our next question from the line of Mike Swartz of SunTrust. Your line is open..

Good morning guys. I just wanted to touch on it Jack, you're making comments about the Axis brand actually taking market share last year, that strikes me is a pretty impressive given the competitive environment, given the fact that you really haven't insured dues to whole lot in the Axis category over the past 24 months.

So can you maybe help us understand why that is, why you think you're seeing the share gains there..

First of all our agreement it is impressive, we did not necessarily expect that, and I think it points out to the strength of the entire brand.

And the strategy we had if we -- if we go back two years ago, our intent at that point was to make Axes a real brand, to take it from two models to five models that span that entire link segment of 20 to 25 by the most part.

And I think that that has worked very well, in the fact that we had no introduction this year, earlier 2017 and we only had one last year yet, we picked up market share again, I believe comes back to we have the right product in the strength of the brand. .

Okay, that is helpful.

Just maybe help us understand Wayne, where were production rates were in the quarter and how are we thinking about them over the next quarter or two, I know that you said from a seasonal perspective a little better throughput this quarter and we should expect a little moderation in gross margin going forward, so I am trying to think about how all these pieces tie together relative to your outlook over the next couple quarters.

.

Yes. So we stepped up production in the February timeframe and as you guys that followed us for a while know that it takes us a while to get new weather, taking months or 24 months, where we wait and make a step to invite two boats per day in terms of throughput.

So we like to do that when we can because there's a permanent shift in terms of the amount of volume that needs to be supplied to the marketplace and specifically though we don't want to make that shift in call it fiscal Q4 we want to be making that shift in Q3.

So in the coming quarter what you'll see is that we're going seasonally that's just not as great of a quarter from a volume perspective, it doesn't make as much sense to do the higher volume in that quarter, it will still be a good growth quarter, we will still be running at it in 18 per day as we go into model year change in June, we may slow that down a little bit just to bring new things on line.

And do that kind of through the July you know, August timeframe and then take it back to where we want it to be just so as we introduce new things in the line.

So I think we will that from a cadence perspective we've made that move outside of our normal operating -- our normal operating productions as we bring new things online, we aren't going to see a move there. What I would say is free in fiscal Q3 we had a lot of Fridays that we ran because of the demand that we're seeing.

And so you see a little bit more outperformance if you look at on true number -- number of days or units per day in the quarter it's just going to come across as a higher number, because we have more Fridays -- we have more Fridays in our fiscal Q3 then we will have a couple in fiscal Q4..

I guess I was going to my next question is if you see demand come in a little stronger than anticipated, I guess would you be able to scale up in the fourth quarter if you needed to or would you simply kind of I don't see start the market, maybe produce some -- push some of that demand into your year 2018..

Based of the demand that we saw we did see increased demand and we added a couple of Fridays in Q4, so we have accomplished that demand and we had additional that we could have added If we would have needed to, we are also very cognizant that as we get into that June time frame, we want to make sure that the inventory stay fresh and we know that dealers are going to want that new product, and so that's another reason to back off a little bit from a stand point of comparing it to Q3, to make sure that we start out that Fiscal Q1 very strong.

.

Okay, great thanks guys that's all for me. .

Thank you, our next question is coming from the line of Joe Altobello of Raymond James. Your line is open..

Thank you guys, good morning. First question I guess to you Wayne, just to clarify when there's the agreement with Master Craft began. .

The agreement with Master Craft was ended [ph] yesterday..

Okay, so it's May 1. .

May 2..

Thank you. So why no change I guess to your outlook in terms of things like APS's or EBITDA margin at least for the fourth quarter or is it really immaterial at this point. .

In terms of the for Q4, I just think it's not going to move -- the materiality is not going to that big..

Okay. And that would be the same for fiscal 2018 I would imagine. .

Yes, I mean we don't give a very -- a very tight range on our guidance right, so I mean that was a modest increase say -- I'm not going to modify the guidance to say a modest increase plus. I just don't think it -- it's big enough to warrant a change in that verbiage..

And then secondly in terms of the boat show season obviously you guys have talked about a very successful season.

I was curious if you could talk about or sort of strip out the sale that boat shows which sounds they were very strong, and then maybe the conversion of leads coming out of boat shows, was there a strong [indiscernible] of that demand through March and April. .

Yes it was.

I'll kind of answer that in two parts, one of the things that we saw at the boats shows, I believe I commented on this in the last quarter, we saw buyers we did not see shoppers, so the people who were attending the shows were buying while they were at the show or they were buying very quickly after they got into the boat especially in the southern states in the next week or so, but we've --- we've seen the continued demand and we have seen that the prospects that were on Earth during that boat show season, they have come back, there's definitely interest and I think it goes to the conversation we had last quarter when I commented, that we have seen a definitive change in the market mindset since the election, and I think people were just sort of simply a lot more encouraged from an economic point of view than they were part of that.

.

Okay, got you. Just one last one for me if I could.

Thoughts on potential acquisitions at this point?.

We're always looking at potential acquisitions for the last I would say 18 month or so. One of the key questions we've been asked over and over is we generated tremendous amount of cash what are we going to do with the cash, and we're looking for the most strategic use of that cash.

So to the point in time that we find that acquisition that makes sense and it fits our four criteria that we've outlined for you before, we will make that acquisition. So to answer your question we look at a few things but nothing has really come into bearing yet. .

Okay, great. Thank you guys..

Thank you, our next question from Scott Hamann of KeyBanc Capital Markets. Your line is open..

Thanks, good morning guys. Just come a question in terms of Canada can you give us a little bit more detail just in terms of what do you think is driving some of that, is there -- there regional variation there and then where you said currently would have been channel inventory there. .

Yes, there is a regional differentiation.

Scott, what we saw is that the eastern part of Canada came back a little bit stronger than the western part, I think that is the fact that you also have that oil and gas dynamic in the western, but east had a very good boat show season and they had pretty strong growth, the West was I would say anywhere from flat growth to more flattish in nature.

Then then as we were over the second part of your question was what. .

Just around where you sit with the channel inventory is there after a few years of destocking..

Channel inventories are significantly down versus the last couple of years, so we believe that we have been able to work with our dealers there and get them into a channel inventory state that is good for them and positions them for when the market does come back pretty strong that they're going to start taking inventory quickly. .

But to Wayne's point, I guess you're not really flat during any wholesale kind of sits there and in this fiscal year it would be next fiscal year, we would probably see that..

That would be correct. .

And in terms of California. Yes, obviously we've been kind of waiting for the lakes to fell up and as that's happened now, what have you heard out of your dealers with respect to them willing to take on more inventory now that we're kind of at that point. .

I think they have to take a little bit more inventories, in the comment I'll make in California is that there was strong growth last year, we captured 90% of that growth, so therefore dealers are pretty confident and they are taking inventories going along. .

And I also want to ask about gross margin, Wayne kind of made a comment around fourth quarter obviously implies kind of flat to down. What's one of the big inputs that are better kind driving that. .

So in terms of just the margin [34:05] for on a year-over-year basis, as we kind of thought and talked about earlier in the year when we recalibrated our dealer incentive program that there's some stuff that's more seasonal in nature in that program that will impact Q4. That is really, what is driving..

Alright, thanks..

Thank you, our next question comes from the line of Rommel Dionisio of Wunderlich Securities, your line is open. .

Thanks, good morning.

I wonder if I can ask specific about that Texas region, I just want to try to reconcile the fact that you did have green [ph] fall about a year ago or so that improved [34:49] but kind of acting that could be the factory oil related, can you just talk about how the markets today and it's significant one for the market overall, thanks..

Sure, thank you.

Texas is doing well still the Number 1, state it did grow again last year, first quarter has shown that through the motions season that is continuing that growth and one of the ways that I always differentiate it, is that you have Texas must lack the United States is divided up into diverse economies, when you speak to that Dallas Fort Worth market and that Austin San Antonio market they are a completely different dynamic and economy than what Houston or west Texas is and that's where the great majority of boat sales occur.

Houston as an example if you have used this before, if you have a 10% decrease that's going to be about five units. So the impact is not that large.

Dallas Fort Worth is if not the largest, one of the largest boat regions -- Boat selling region for the PSPs in the nation, also San Antonio over the last two to three years has grown significantly so that -- that's really where the bread and butter is at. .

And maybe just an update on a vertical integration initiative on engines, I think you mention the costs Wayne, in your comments, I just want to make sure everything's on track there for timing. .

Everything is perfectly on track, from a stand point of meeting our schedules and meeting our budget we could not be happier..

I mean we have engines in boats running, I mean we -- we feel good about the progress we've made. .

Great, thanks very much guys. .

Thank you. Our next line is of Jimmy Baker of B. Riley, your like is open..

Good morning guys this is Austin Drake on for Jimmy. Is it fair to assume that the Master Craft license IP is similar to that of your prior licensees. .

We have confidentiality provisions that prevent us from speaking specifically to that, but I mean in general the framework that we used to evaluate these things doesn't -- it doesn't change and the volumes IPs are between those two entities are pretty similar. .

Okay, got it, and then can you frame a longer term gross margin opportunity as you benefit from the ramping licenses and vertically integrating your engines it seems there's significant improvement yet to be had, but just wondering if we should assume some of those will be -- some things will be reinvested and not really seen in financials. .

We've done that in the past and I think we specifically talked about that on the trailer initiative, I think that's a good question, we think that they you know the margin potential here is north of 200 basis points, specifically when you look at the boat engine initiative and -- and the licensing streams.

We talked a little bit about what those could potentially be from a number of basis points on the licensing streams but also we've said there's potentially a couple hundred basis points and margins on the -- on the engine vertical integration initiate.

So we will be balanced in terms of how we play that but I think we believe that there's going to be a couple hundred basis points that gets realized. .

Okay. And I know you're not providing specifics for fiscal 2018 guidance yet, but just directionally how do you see your growth trajectory relative to your fiscal 2017 and just can you shed any light on now there's Axis mix in fiscal year 2018 as a function of new launches. .

I don't think we're prepared to give us any guidance right now on fiscal 2018.

The market is grown relatively consistently and our market share has performed well, but with respect to the potential mix we're going to have some more Axis model, the couple Axis models coming out, so there's probably going to be a little bit of a swing towards -- towards the Axis.

We did have obviously in this quarter in year-to-date some mix shift to the RESPONSE TXi and the 21VLX on the Malibu side. So in terms of the overall financial impact of that shift I'm not sure it's going to be material. .

Got it, thanks for the color guys..

Thank you, our next question comes from the line Gerrick Johnson of BMO Capital Markets, your line is open..

Good morning. Now the gross margin question. In the press release you mentioned head winds to the gross margin being increased labor and warranty costs, so I have two questions here.

Since that this is the first time that that Labor's called out, can you talk about the labor environment, what you're seeing there, and then number 2, the warranty expense is increases quarter explained by the expanded period of coverage that you mention last quarter or are you seeing higher claims, thanks. .

Yes. So on the labor side look that the labor market is a tough labor market, we don't think that it's anything that will hurt our business long term from a margin perspective.

But it is the more meaningful of those two, we specifically called out materials as the primary driving -- one of the primary drivers of that margin expansion, and so as evidence to buy the financial performance the market -- the materials have dramatically outweighed both the labor and warranty.

And on the warranty side that I tell you it's a smaller factors in the labor in terms of that headwind, and it is going to be primarily driven by just the puts and takes of the accounting for you -- for a major estimate.

So there might be a very modest increase in warranty experience, but really, it's going to be driven by that five-year and just how those estimates are calculated. .

Right, okay thanks Wayne..

Thank you and at this time I am showing no further questions, I would like to turn the call back to Mr. Jacks for any closing remarks. .

Thank you very much. Malibu had another great quarter and we appreciate your joining our call this morning, we look forward to our next call and cover the fiscal fourth quarter when we will also share a new products for fiscal year 2018 as well, have a great day. .

Ladies and gentlemen thank you for your participation at today's conference, this does conclude the program, you may now disconnect, everybody have a great day..