Malibu Boats Inc (MBUU) 2016 Q4 法說會逐字稿

Good morning and welcome to Malibu Boats conference call to discuss fourth-quarter FY16 results.

(Operator Instructions)

Please be advised that reproduction of this call in whole or in part is not permitted without written authorization of Malibu Boats. 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 now turn the call over to Mr. Wilson to get started. Please go ahead, sir.

Thank you and good morning, everyone. Ritchie Anderson, the Company's Chief Operating Officer, is also on the call today. Jack will provide commentary on the business and I will discuss our fourth-quarter financials and initial outlook for FY17. We will then open the call for questions. A press release covering the Company's fourth-quarter and FY16 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 that actual results could differ materially from those projected upon 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. 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 FY15.

Against FY15 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 that a drive short-term benefit for a quarter's results. Our strategy and corresponding decisions are to build value for Malibu over a long period of time.

The US market as a whole remains healthy after four years of double-digit growth in US 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 spike 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 boat registration 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 Nino affect and substantial snow-pack 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 FY16 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 US 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 challenge is in much better condition for Malibu than it was a year ago. International dealer inventories improved throughout FY16 as dealers were unsure of the economic environment and they were hesitant to add wholesale units. We do not see much relief coming for 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 product which they can sell and take share.

We believe that our strategy is the most responsible and efficient way to manage the challenge. Where we are positioned today, with clean channel inventories and robust new product pipeline for our 2017 model year, leaves us in a position where wholesale shipments 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. This is important because we are constantly discovering ways to enhance performance, aesthetics and making 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 previously years on delivering a complete line of boats for our Axis brand, and 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 this 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 costumer to Malibu that we had previously not seen. It is that boat for the person that wants the most spectacular, most premium and highest performing boat in its sub-segment, 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 he 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. 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 added surf band technology which allows riders to control their wave and wake from a touch of the wrist. In addition, Surf Gate added hydraulic actuators to increase the quality and reliability of the system.

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

Model year 2016 saw Malibu begin to manufacture our trailers in-house. Discontinuation 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 phased 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 their 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 be exposed to the pleasures of wake surfing. As we have consistently stated, this sport 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 to wake surfing and to 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 sterndrive company can not come close to the solution offered by Malibu and an inboard 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 the 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 the 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 FY17.

I will speak about the retail data for 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 overall when compared to the prior year. And in total, we expect it to increase market share from 70 to 100 basis points for the calendar year. Our next closest competitor is well over 1,000 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 a leader in market share for the premium segment, for the entry segment and for the total performance sports 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 the clear leader in the entry-level segment. The strong position of the Axis brand has now allowed us to pivot our focus onto 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 targets markets that we believe will allow us to grow more in our segment.

The Malibu brand serves the 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 100% pure Malibu. The 21 VLX comes well-equipped with Surf Gate, our new G3.5 tower, a 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 tow-boat 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 sat on the sidelines holding onto 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 that 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 it 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 hulls that are deeper than ever, to produce monster wakeboard wakes. And when combined with our integrated surf platform featuring Surf Gate and the Power Wedge II, they also create an amazing surf wake.

Both boats feature Malibu's own quad hard tank ballast system with the all-new, this year, max ballast L-shaped rear tank. This is exclusive to Malibu's MXZ line. Both of the MXZ models feature gray anodized billet 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 which will 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 factory system. Every detail on the Malibu system was carefully designed, all the way down to the Malibu emblem on the amps, speaker grilles and sub-woofer cone. The proprietary Malibu stereo system now ensures better reliability, easier installation at the manufacturing level and an optimum output of sound, all while ensuring the best sound and quality in 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, our dealers were ecstatic.

Next is our new G3.5 tower which is standard on all Malibu Wakesetter models. This tower offers outstanding value without sacrificing renowned Malibu quality. The G3.5 tower introduces a new [latch] design, a new LED tower and anchor lights and optional side pulling points for surfing. The tower is built with aerospace-grade aluminum, has stainless steel hoops and anodized and powder-coated components.

For Axis in model year 2017, we have designed a new driver experience with a beautiful new dash and easy-to-use pushbutton commands to control all aspects of the boat. This allows for an easy and reliable way to customize huge wakes and waves 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 FY17. 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 Axis 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's 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've 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 of this while leading the industry in innovation and with less employees per unit.

We are pleased with our FY16 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 8 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 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.

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 a 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 FY17 is optimistic. As Jack mentioned, we believe our lower inventory levels and strong share trends can offset non-US 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 FY17 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 FY16. 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 FY16. 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 plant 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 FY16 results in spite of the tough international markets. We are very pleased with the 2016 model year new products and the impact we believe that it has had on market share. We believe the US 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 FY16 to maintain healthy inventory levels and a strong 2017 model year product pipeline set us up for strong financial performance in FY17.

With that, we'd like to open the call to your questions. Operator?

(Operator Instructions)

Mike Swartz, SunTrust.

Hey. Good morning, guys.

Good morning, Mike.

Wanted to dig into your international outlook embedded in your FY17 guidance or rough outline. Remind me, for FY16, I think at one point you had said wholesale volume to Canada specifically was down around 20%. 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. How to we think about that going forward? Are we now at the point where Canada is flat year over year and it's not that drag that we saw in 2016?

We have seen a significant amount of de-inventorying. So given the -- at retail in Canada it's come down the past two years in a material way. As you all are aware, we were a little bit surprised by the magnitude this year, given what we've seen from both the de-inventorying, meaning retail outpacing our wholesale 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. In terms of the licensing agreement with Chaparral, I think you gave some of the rationale behind the deal. Can you give us a little more color on what the package they are offering is and how that differs versus what you are offering on your boats? And secondly behind that, 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 height on the surf wave that we're able to get, that's not a part of the package. It's really that element of Surf Gate and their version of it. As far as the economics, and I'm sure you'll understand this, because every situation is different, we really don't disclose those.

Okay that's fair enough. Thanks, guys.

Tim Conder, Wells Fargo.

Hey, good morning, guys. This is actually Mark on for Tim. Just wanted to get your thoughts on the July retail that was out there and the cross that broader marine industry. I know Ski Wake 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 been an anomaly. But did you guys see any pick-up from July and August in September?

No, we really haven't. Mark, I'll say what we always do, that the July number is not fully developed yet. We at Malibu are very hesitant to focus on any one month, especially if it's the current month. But we did not see anything that indicates anything coming at us at the broader marine industry level. We think that it's just an aberration similar to the aberrations that we've seen all year long.

I would say last year this monthly registration data is very, very lumpy. We saw it in Q1 and that impacted April. And then you saw May be more flattish and June up substantially. So we think that there's a lot of lumpiness in this data and noise that when you look at it over longer periods of time, really gives you a better trend.

Okay, great. And then on market share expectations, I think you said between 70 and 100 basis points for the calendar year. 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're 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're pretty comfortable, especially given where we're at through July, with that 70 to 100 basis point gain in market share for the calendar year. That's more than what we thought it would be. We 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. 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. So the new product that we've 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? Or is that more broad based?

That's broad based. We're taking from our nearest competitors and we're taking from the small competitors.

Okay, great, thank you.

Joe Altobello, Raymond James.

Hey, guys, good morning. 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 thinking from a pricing standpoint in the US? Obviously your ASPs are up nicely this quarter, so it didn't seem 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'll say 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 the 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, okay. That leads into my next question on gross margin for 2017. I think, Wayne, you mentioned you expect it to be up slightly for next year. I'm 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?

I think there's an element of mix in play this year with the 25 LSV being so strong out of the gate and the M235 in its initial introduction. You're going to have -- 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, in terms of we don't talk about economics, but if you talk generally about the Volvo new stern-drive solution, with surf systems, those volumes, we monitor them. They aren't big right now. We don't think that product is going to work that great and compete that well with us. We are not modeling a lot of incremental 100% margin dollars there.

Okay, great. Thank you, guys.

Gerrick Johnson, BMO Capital Markets.

Hey, good morning. I had three questions. When you talk about market share, just to clarify, you are including those new stern-drive entrants or is it just inboards? 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 so minimal, I don't even 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 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 were likely purchasing stern drives anyway. They aren't moving out of our product into theirs.

Okay, got it. 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?

It's going to be low single digits on a like-to-like basis.

Okay. Lastly, you're increasing your warranty reserve, going from three- to five-year warranties. 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 to revenue and percent to units that you're building. We are seeing, and it's based upon a lot of the changes we have made over the last few years, but we're seeing that warranty curve go down, even though we have increased it to five years.

All right, great. Thank you, guys.

Rommel Dionisio, Wunderlich Securities.

Thanks, good morning. You talked about some of the sluggishness in the international markets. It's obviously currency-related, it's perfectly understandable. But I wonder if you could chat about the growth of the sports network. Wake surfing, is the popularity still growing? Or is this impeded that? I realize currencies are going to bounce around, but are you still seeing the consumer interest, the growth of the sport in some of those overseas markets?

We are seeing the growth of the sport, most definitely in the US, and we still believe it's in the early stages. The way that I'll color the international markets is, think about the international markets being a little bit behind the United States. Largely, they're still very much a ski orientation, more so than in the United States, and wakeboard orientation. 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 boats to ski and wakeboard.

Okay, thanks very much. That's helpful.

Jimmy Baker, B. Riley & Company.

Hey, good morning. Thanks for taking my questions.

Morning.

First, hoping you could talk about the impact of dealer turnover, particularly in Canada, on FY16 results or 2017 guidance. And then, 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. Not to say that those are mutually exclusive. But I'm hoping you could clarify what triggered your reduced second-half production, despite, as you pointed out, a pretty robust US ski wake-boat backdrop and your market share gains.

International was bad last year. I think that on our last call we had said that it turned out to be worse than what we thought it would be. It degraded throughout the year. International certainly was not as good as we had hoped that it would be.

Also in 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. This is not a new phenomenon, we announced that we were going to do it. In fact, we took some hits on it. But we turned out to be the only ones that were right in what was happening at retail. 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 US. 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. I think a great example of how we employ that and 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.

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.

I think the other point, Jimmy, in terms of 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've seen has even surprised us. And that's what's 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 market-share gain has been quite robust. And that's driven those numbers down lower than we even expected them to go.

Now, they're optimal in terms of that 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. As you highlighted your model introductions this year and last, as skewed toward the Malibu brand, I was hoping you could elaborate a bit on how you think about product planning relative to, let's say, the retail reception Axis versus Malibu. And also 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. The way that I've described it in the past and will today, is that first 18 months that we are looking at today, is pretty locked in. We've taken all of the data, we've taken all of the surveys, we've spoken with our dealers and our customers. So we've locked in that product and we're starting that phased-gate process that I referred to.

That second 18 months is more flexible. We are still listening to the data of the market. We're listening to what is going on in the retail environment. And then we're 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. As it relates to your question on 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 continued to completely load the boats.

So we felt like 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 inboard boat market, that new buyer coming from another segment or maybe buying a boat for the first or second time or since they've become an adult. Secondly, we know and we believe 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 boat out at a price point that is going to be very attractive to them.

As a result, they're 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's going to be a very strong model for us going forward, not only this year but in years to come.

Okay, understood. Lastly, I wanted 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 on an apples-to-apples basis would be flat or down year over year?

And just to clarify or get a little bit more color on that Surf Gate license agreement, if you're expecting it to be somewhat financially immaterial, can you talk about why go that direction given the potential dealer blowback and risks associated with another boat brand carrying the Surf Gate brand? I understand wanting to grow the feeder system, but help me understand why it's useful for you to put the Surf Gate brand if you're not out there if you're not seeing a financial benefit immediately?

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 it can do. 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. 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 and 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 lead them up there. And I use an illustration. You have a stern drive and you're out there and you're creating your 18-inch wake or wave. And then I come plowing by with my five-foot wave, I'm pretty positive you're eventually going to buy my boat.

We've 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're strategic and we make very good decisions for Malibu and on behalf of our dealers. I think that this is going to be another good one for us and for them.

And to your question, Jimmy, boat margin will be up. The primary driver of this business is boats. What happens to that boat margin is going to be what happens to our margin. Everything else is going to be a little bit of round (inaudible).

Okay. I appreciate the color. Thanks for the time.

Thank you.

(Operator Instructions)

Mike Swartz, SunTrust.

I want to dig in a little more on the 21 VLX. And around pricing, with that sub-$80,000 price point, it seems more like an Axis-type price point. The question would be, how are you getting there? How are you getting to that price point? Is it that you're 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 cost, in terms of what we're able to do to the boat, in the negotiation with suppliers. So I think that this, you're seeing it at full scale as it relates to the 21 VLX.

There is still clear separation between the 21 VLX and even a A22 or a T22. There's a fairly large separation of thousands of dollars between those boats. That's largely driven by all of the additional features that you're going to get with that VLX because you have the 12-inch touch screen, you have the Vibra 2 system, you have the full integrated surf package. So it has significantly more features which put it at that price point.

But We did feel like it was very important to be able to deliver a boat that was underneath that $80,000 mark. That's with a trailer. That's pretty uncommon, we believe.

Is that another way of saying that you're now relatively margin-agnostic between Malibu and Axis? Are you at a point where they're both carrying similar margins as well?

Yes, we've been there or very close to it for a while now. During our IPO we quoted that we were about at a 200 basis point difference between the Axis and the Malibu brand. That delta has been closed considerably over the last 2.5 years.

Most significantly on a comparable length model comparison, it's right on top of each other.

Okay, great. That's it for me.

Thank you. I'm not showing any further questions. I'll 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 product, 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.