Malibu Boats Inc (MBUU) 2017 Q3 法說會逐字稿

Good morning, and welcome to the Malibu Boats Conference Call to discuss Third Quarter Fiscal Year 2017 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 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 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 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 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 records 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 very strong combination, especially with the confident consumer base that is ready to purchase.

The U.S. market remains healthy and the performance sports boat segment continues to grow.

There have been 5 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 percent 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 in dealer feedback.

We are 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 were robust.

We have grown considerably faster than the market in California, and we believe that, that trend may continue.

Texas remains the #1 state in volume.

We believe Texas will continue to grow, despite oil prices.

The DFW, and Austin, San Antonio markets continue to experiences 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 seasonal results.

And we did not have the benefit of the early spring that we saw in 2016, which is also a mitigating -- has a mitigating effect on that early calendar year-over-year growth.

The boat show season is over now.

And the results are 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 dealers set boat show records and other dealers had shown 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 highs 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 2 model years.

In model years 2016 and '17, I will remind you that we introduced 7 new Malibu's and only 1 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 basis points 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 entry 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 isn't 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.

Low oil prices will continue to be a headwind and oil-based economies 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 currency 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 2 model 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 full 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 pickleforks to 22 MXZ, and the 24 MXZ.

We have seen that excitement in the form of orders being higher-than-expected for those models.

The 21 VLX is doing what we expected and 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 hard-core waterski enthusiast and recreational skier's like.

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 23 LSV will continues its dominance as the best-selling performance sports boat for the 8th-year running.

In our Axis brand, the A22 and the T23, continue to be pillars of 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 sports boats and among those in the entire Marine industry.

We have 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 builds more boats, releases more new models annually, than all of our direct competitors, while taking on impactful, profitable vertical integration projects.

We have been successfully integrating power, machine parts and trailer manufacturing, and we are now bringing engine manufacturing in-house as announced last November.

The engine initiative is advancedly -- 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 MasterCraft.

As you may recall, Malibu had 2 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 are very pleased with the agreement.

The agreement calls for a one-time upfront payment of $2.5 million and a license agreement for royalties on both sold by MasterCraft that uses the licensed technology.

Our belief and understanding is this will encompass all surf systems, offered under MasterCraft and MasterCraft NXT brand boats 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 expense through Q4, although that will be offset by the upfront payment we are receiving.

Of course, we are also pleased that Malibu's incredible surf innovations were validated yet again.

This now means that the second, third and fifth largest performance sports boat companies and the second largest sterndrive company are all licensing our weight surfing IP.

As we have explained, we took and we look at the ROI on all licensing for our weight surfing IP.

We look at the ROI associated with revenue from one-time payments and royalties offset by our litigation and other expenses.

We will experience double-digit 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 technologies, which includes Surf Gate, in just the 7 issued patents.

Adding to that strength of IP, 4 additional patent applications have not issued today.

We have also demonstrated 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 volumes 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 a 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 the third quarter increased 12.6% to $77.1 million.

Unit volume increased 10.4% to 1054 boats, including 69 units from Australia.

The Malibu brand represented approximately 72% of unit sales, or 758 boats and Axis represented approximately 28% or 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 a mix shift to the Response TXi and 21 VLX models.

Including the impact of $90,000 from our engine vertical integration initiative, gross profit increased 16.1% 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 in the third quarter.

As a percentage of sales, selling and marketing expenses were 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 MasterCraft litigation, engine vertical integration expenses and incentive compensation.

Excluding amortization, MC litigation expenses and our engine project.

General and adversative expenses increased $0.2 million.

Adjusted EBITDA for the quarter increased 19% to $16.8 million, and adjusted EBITDA margin increased 117 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 distributed diluted earnings per share increased 22.5% to $0.49 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.

For a reconciliation of adjusted EBITDA and adjusted fully distribute net income to GAAP metrics, please see the tables in our earnings release.

We are very pleased with our third quarter results.

And our outlook for fiscal 2017 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 MasterCraft 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 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 up to perform well in the future.

With that, we would like to open the call to your questions.

Operator?

(Operator Instructions) Our first question is from the line of Tim Conder of Wells Fargo Securities.

Gentlemen, just a couple of 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 what your indicating for Q4, as far as shipments or any margin related items, [excluding] litigation?

No.

So, just kind of breaking that question up.

In terms of pull forward, there's no pull forward, really it's just a cadence thing.

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 as much of that growth as you can, because you can get the boats out in the field.

And 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 seems like you guys are teeing 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 this?

Yes, if you're looking at inventories, are you are comparing that to, I think your comparing that to June, which is the seasonally low number.

If you look at on a year-over-year basis, that's 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, it's behind, it sounds like -- obviously, you guys will continue to be vigorous in defending any other infringements from elsewhere.

But how should we think about if you exclude the one-time settlement.

Your legal expenses looking into fiscal '18 on a year-over-year basis?

And then also your royalty income collectively.

How should we think about those changes year-over-year, looking fiscal '18 versus fiscal '17 excluding the one-time settlement payment?

Yes, so this is Wayne.

Specifically with respect to litigation-type expenses, this concludes any surfing intellectual property litigation that we currently have.

So on a prospective basis, at this point, that number would go to 0. And then with respect to the royalty stream, look, we do not specifically disclose any of the royalty streams on our IP.

With respect to our -- these license agreements.

So I think the short of it is, what we've have said in the past, it has the ability to impact margin overtime in a low double-digit basis point way.

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 as to how much it's going to impact.

Okay.

And then, for the litigation expenses, how much I guess, excluding the settlement did you have or expected to have here in '17, related to the MasterCraft that would in essence go away then for '18?

Yes, so it would have been consistent with our past guidance.

I think we said was about $3 million this year.

Is what we have previously said.

So we think that number would've probably ended up just north of that $3 million for the year.

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

Okay.

And then lastly gentlemen, it sounds like you're expecting very earlier on, but has little bit of growth starting to show up in Canada?

Is that fair as we think about it, on a go forward basis here?

Yes, I think that's fair.

The boat shows, as I said, we had double-digit growth there, that was good to see.

There is a psychology I think that might be starting to take effect and people are getting used to the currency difference, to the extent that we actually see that currency overtime come back to 1.25 or 1.20, I do believe that there is pent up demand.

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

Our next question is from the line of Michael Swartz of SunTrust.

Hey, just wanted to touch on it.

Jack, you were making comments about the Axis brand actually taking market share last year.

That strikes me as pretty impressive, given the competitive environment, given the fact that you really haven't introduced a 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, I would agree with you.

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 that we had, if we go back 2 years ago, our intent at that point in time was to make Axis a real brand, to take it from 2 models to 5 models, that span that entire link segment of 20 to 25 feet for the most part.

And I think that, that has worked very well, and the fact that we had no introductions this year, by the year 2017, and we only had 1 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's helpful.

And then just maybe help us understand Wayne, where production rates were in the quarter?

And maybe how are you thinking about them over the next quarter or 2. I know that you've 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'm trying to think about how all these pieces tie together relative to your outlook over the next couple of quarters?

Yes, so we stepped up production in the February timeframe and in -- as you guys that have followed us for a while know that it takes us a while to get new -- whether it takes 3 months or 24 months.

Where we wait and make the step to buy 2 boats per day in terms of throughput.

So we like to do that, when we think that there is 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 and call it fiscal Q4.

We want to be making that shift in fiscal Q3.

So in the coming quarters 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 and in that quarter.

It'll still be a good growth quarter, we'll still be running at 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 online.

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

So I think we feel that from a cadence perspective, we've made that move outside of our normal operating -- our normal operating reductions as we bring new things online.

We aren't going to see a move there.

What I would say is, in fiscal Q3, we have 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 a true number of days, units per day in the quarter, it's just going to come across as a higher number, because we had more Fridays, a lot more Fridays in our fiscal Q3 than -- we'll have a couple in fiscal Q4.

I guess I was going to my next question, if you see demand coming 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 want to say starve the market, but maybe produce some of that demand into your '18?

Based on the demand that we saw, we did see increased demand then we added a couple of Fridays in Q4.

So we accomplished that demand, and we added additional that we could have added if we would have needed to.

We are also very cognizant that as we get into that June timeframe, we want to make sure that the inventories stay fresh, and we know that dealers are going to want that new product, and so that's another reason that we'll back off a little bit from a standpoint of comparing it to Q3, to make sure that we start out that fiscal Q1 very strong.

Our next question is coming from the line of Joe Altobello of Raymond James.

First question, I guess for you Wayne, just to clarify, when does the agreement with MasterCraft begin?

The agreement with MasterCraft was entered yesterday.

So it starts May 1?

2 (inaudible)

Okay.

May 2. So why no change, I guess, to your outlook in terms of things like ASPs 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 just not going to be that big.

Okay.

And that would be the same for fiscal '18, I would imagine?

Yes.

I mean -- we don't give a very tight range on our guidance, right.

So a modest increase, I would say, I'm not going to modify the guidance to say a modest increase-plus.

So I just don't think it's big enough to warrant a change in that verbiage.

Okay.

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 these sales at boat shows, which sound like they were very strong.

And then maybe the conversion of leads coming out of those boats shows.

Was there a strong continuation of that demand through March and April?

Yes.

I'll kind of answer that in 2 parts.

One of the things that we saw at the boat shows, I believe I commented on this in the last quarter.

We saw buyers, we did not see shoppers.

So the people that were attending the shows, were buying while they were at the show or they were buying very quickly, after the got into the boat, especially in the southern states, in the next week or so.

But we've had -- we've seen the continued demand and we have seen that the prospects that were unearthed 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 are just simply a lot more encouraged from an economic point of view than they were prior to that.

Okay, Got it.

And then last one for me if I could.

Any thoughts on potential acquisitions at this point?

We're always looking at potential acquisitions for the last, I would say, 18 months or so.

One of the key questions we've been asked over and over, is we have generated from tremendous amount of cash and 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 make sense and fits our 4 criteria that we've outlined for you before.

We will make that acquisition.

So to answer your question, we've looked at a few things, but nothing has really come into baring yet.

Our next question is from the line of Scott Hamann of KeyBanc Capital Markets.

Just a couple of questions, 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 a regional variation there?

And then where do you sit currently with the 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 due to the fact that you also have that oil and gas dynamic in the Western.

But East had a very good boat show season and had pretty strong growth.

The west was, I would say, anywhere from slight growth to more flattish in nature.

Then as we're -- the second part of your question was what?

Just around the, where do you sit with the channel inventories thereafter 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 factoring any wholesale benefits there in this fiscal year, it would be next fiscal year, we would probably see that?

That would be correct.

Okay.

And then in terms of California, obviously, we've been kind of waiting for the lakes to fill up, and 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 taken a little bit more inventory.

And the comment I'll make on California, is that there was strong growth last year.

We captured 90% of that growth.

So therefore, our dealers are pretty confident, and they are taking inventories as they're going along.

Okay.

And the last one I have is on gross margin.

Wayne kind of made a comment around fourth quarter, that obviously implies kind of flat to down.

What are the big inputs that are kind of driving that?

So, in terms of just the margin pressure in Q4, on a year-to-year basis, as we kind of 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's really what driving it.

Our next question is from the line of Rommel Dionisio of Wunderlich Securities.

I wonder if I could ask specifically about that Texas region.

Just wanted to try to reconcile the fact that you did have rain followed by the year ago, so that improved lake levels but kind of acting that could be the factor on oil related jobs.

Could you just talk about how that market is doing, on that significant one for the market overall?

Sure, thank you.

Texas is doing well, still the #1 state.

It did grow again last year, first quarter has shown that through the boat show season, that it's continuing that growth.

And one of the ways that I'll always differentiate it, is that you have Texas, much like the United States, it's 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's 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 and that's going to be about 5 units.

So the impact is not that large.

Dallas/Fort Worth is if not the largest, one of the largest boat regions, boat selling regions for the PSB's in the nation.

Also San Antonio, over the last 2 to 3 years has grown significantly.

So that's really where the bread and butter is at.

Okay.

And maybe just update on the vertical integration initiative on engines, I think you mentioned the costs, Wayne, in your commentary, just want to make sure everything was on track there for timing?

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

I mean we have engines and boats running.

I mean we feel good about the progress we've made.

Our next question is from the line of Jimmy Baker of B. Riley.

This is Austin Drake on for Jimmy.

Is it fair to assume that the MasterCraft license rate is similar to that of your prior licensees?

We have confidentiality provision that prevent us from speaking specifically to that.

But in general, the framework that we use to evaluate these things doesn't change and the volumes between those 2 entities are pretty similar.

Okay, Got it.

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

Yes, I mean -- 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, the margin potential here is north of 200 basis points, specifically when you look at the both engine initiative and the licensing streams.

We talked a little bit about what those impact it could potentially be from a number of basis points on the licensing streams but also we've said that there's potentially a couple of 100 basis points in margin, on the engine vertical integration initiative.

So we'll be balanced in terms of how we play that, but I think we believe that there's going to be couple of 100 basis points that gets realized.

Okay.

And I know you're not providing specifics as for your fiscal '18 guidance yet.

But just directionally, how do you see your growth trajectory relative to fiscal year '17?

And just can you shed any light on Malibu versus Axis mix in fiscal year '18 as a function of new launches?

I don't think we're prepared to give any guidance right now on fiscal '18.

The market has grown relatively consistently and our market share has performed well.

So -- but with respect to the potential mix, we're going to have some more Axis model, a couple of Axis model's coming out.

So there's probably going to be a little bit of a swing towards Axis, we did have, obviously, in this quarter and year-to-date, some mix shift to the response to TXi and the 21 VLX 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.

And our next question is from the line of Gerrick Johnson of BMO Capital Markets.

Another gross margin question.

In the press release, you mentioned headwinds to gross margin, the increased labor and warranty costs.

So I have 2 questions here.

Seems like this is the first time that labors called out.

Can you talk about the labors environment?

What you're seeing there?

And then number 2, the warranty expense, has the increase this quarter, explained by the expanded period of coverage that you mentioned last quarter, or are you seeing higher claims?

Yes, so on the labor side, look, 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 2. We specifically called out materials as the primary -- one of the primary drivers of that margin expansion and so as evidenced by the financial performance, the materials has dramatically outweighed both the labor and warranty.

And on the warranty side, I tell you it's a smaller factor than the labor, in terms of that headwind and it's going to be primarily driven by just the puts and takes of the accounting 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 5-year and just how those estimates are calculated.

And at this time, I'm showing no further questions.

I'd like to turn the call back over to Mr. Jack Springer 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 to cover the fiscal fourth quarter, when we will also share our new products for fiscal year 2018 as well.

Have a great day.

Ladies and gentlemen, thank you, for your participation in today's conference.

This does conclude the program.

You may now disconnect.

Everybody, have a good day.