Good morning and welcome to Malibu Boats Conference Call to discuss Third Quarter Fiscal 2016 Results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. Please be advised that reproduction of this call in whole or in part is not permitted without written authorization of Malibu Boats, and as a reminder, this conference call is being recorded. On the call today from management are Mr. Jack Springer, Chief Executive Officer and Mr. Wayne Wilson, Chief Financial Officer. I’ll 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 2016. We will then open the call for questions. A press release covering the company’s third quarter 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’ll now turn the call over to Jack Springer.

Thank you, Wayne, and welcome to our third quarter call. Malibu again met our financial objectives. Net sales increased 6%, adjusted EBITDA margin remains at strong at 20.6%, and adjusted fully distributed earnings increased 18% to $.40 per share. Through a disciplined operating strategy, we continued to execute at a higher level and perform well despite substantial international headwinds and an uncertain economic environment. This is the 9th consecutive quarter where we delivered our overall financial results, so we are in line are better than our internal forecast. We are particularly pleased in our ability to deliver results in spite of some lower volume numbers and we believe that is a testament to the numerous new products and vertical integration initiatives that we have put in place over the last few years. As we have discussed on the several earnings calls, the U.S. market as a whole remains healthy. After four years of double-digit growth rates in the U.S. – in U.S. unit registrations, we believe the growth rate for 2016 is likely to be in the mid to high single-digit despite the robust calendar first quarter. We know the recent marketing registration data has been above this rate, but seasonal period covered by this information is relatively small sample size. In addition, we believe that the warm weather as accelerated both registration substantially into the first quarter and early second quarter. As an example, Malibu set a record for the number of calendar Q1 registrations. We expect that registration is going forward were moderate and bring the growth back to our projected growth estimates over the course of this year. Speaking regionally, each major region is influenced by its own set of variables. California in the upper Midwest continued to benefit from higher lake levels. Houston and West Texas…

Thanks, Jack. Our third quarter results were in line with our expectations. It’s important to note that third quarter is the first full quarter to contain our Australian business results in both current and year ago periods. With that said, net sales in the third quarter increased 5.8% to $68.5 million. Unit volume decreased 2.6% to 955 boats, including 78 units from Australia. While unit volume was slightly below our expectations, revenues were about what we expected given the strength in our new, larger, more expensive models. Both Malibu and Axis performed well in the quarter with Malibu representing approximately 68% of unit sales at 650 units and Axis representing 32% of unit sales at 305 units. Consolidated net sales per unit increased 8.6% to approximately $71,769. The increase was primarily driven by year-over-year price increases and a higher mix of larger models with more optional features. Gross profit in the quarter increased 2.8% to $18.4 million, and gross margin decreased 79 basis points to 26.9%. The decrease in gross margin was primarily driven by international discounting and gross margin pressure in our Australian unit. Selling and marketing expense decreased 5% to $1.6 million in third quarter. As a percentage of sales, selling and marketing expense decreased about 26 basis points to 2.3%. General and administrative expenses excluding amortization decreased 27.1% to $4.5 million. As a percentage of sales, G&A expenses decreased 295 basis points to 6.5%. The decrease was primarily due to a decline in legal acquisition offering related costs, which in the third quarter last year were related to our Nautique litigation, Australian acquisition, and the tender offer completed in April 2015. This was partially offset by higher stock compensation expense associated with share based equity awards that were granted in the second quarter of this year. Adjusted…

[Operator Instructions] Your first question comes from the line of Joe Hovorka from Raymond James. Go ahead, your line is open.

Thanks, guys. Just a couple of quick questions on your international business. It sounds as if the gross margin down slightly versus up slightly last quarter is all related to the international markets. Is that correct, increased discounting there?

Yes.

And so the dollar has weakened over the last three months. Is it an issue more of end market demand being weaker than you expected as opposed to FX? I would have thought the FX move would have been somewhat of a positive for – maybe for demand and for gross margins.

We think that it will be. We’ve not seen that yet, Joe. What we are hoping for first is stability and that’s going to be the first stage of it. And then I think if that currency can hold or drop further, then we will start seeing increased demand, but we have no idea when that will occur.

Okay. So the increased promos that you’re doing right now are the increased incentives on the international market would have been just because the retail continues to lag?

Yes.

Okay. And there are another public boat company that does not compete in the ski segment on wakeboard segment. They actually commented that their Canadian business was starting to pick up. Is that a – is it geographic differences maybe? Is it because they are in a different segment, they will see it somewhere first and then it will gravitate towards your segment? Or what would cause some of those differences or maybe the way you think about that?

No, I think you’re exactly accurate, and the regionality does play into effect. I think the company that you are referring to seeing growth out of a different region, the East region. In our case, we have a very strong business and have always had a very strong business in the Western Canada. That has been pretty drastically affected by the oil and gas drop as well as the currency. Eastern Canada for us is a smaller market than Western Canada by far.

Yes, Joe, this is Wayne. So I think there’s probably, to Jack’s point into your question those – that the geographic mix issue as well as our dealers have been very disciplined in terms of that maintaining appropriate inventory levels there. So, that’s been something that’s exacerbated the volume issue at wholesale because they have brought down those inventory levels to match that retail demand.

Okay, great, thanks guys. That’s all I had.

Your next question comes from the line of Mike Swartz from SunTrust. Go ahead, your line is open.

Hey, good morning, just a piggyback on Joe’s last question regarding Canada, can you maybe give us a little color where inventory level stand today? And just given the deceleration in the wholesale shipment volume we have seen the last couple quarters, should we expect that same rate to continue over the next six, nine months?

Yes, I don’t think we should expect that a deceleration. I think we’ve dealt with – we have probably taken 100 units out of the channel internationally over the past 24 months, so probably split relatively evenly between the last two fiscal years. And so when you look at that, and when the U.S. was growing at a higher rate, it was easier for the U.S. to absorb that. But with an expectation that in calendar 2016, the U.S. will be a little bit below the growth rate that was experienced in calendar 2015, it is just not prudent for us to try and have that be absorbed into the domestic channel.

Perfect segue. Just talking about the U.S. market, we’ve obviously seen as you have indicated the strong growth in the first quarter. I mean, what’s giving you kind of pause that the U.S. does not hit double-digit unit volume growth this year? Is it something that you have seen in April and going into May they gives you a little pause?

Now, going into May we really have not seen anything. I think April we are going to find that that was also pretty strong month. If you talk to the various people in the marine industry, and they project out what they think they see for 2016, they’re predicting single-digits, not double-digits anymore. The second factor that I do believe is in play is because of the warm weather, people are registering those boats and taking those boats a little bit quicker, so I believe that we are seeing a shift.

And to add to that, Mike, I think if you look at just the general trend, 2014 was 16% grower. 2015 was a 10% grower. I think we look at it and say that trend is two data points and maybe it is not a trend, but there is little bit of a downward slope. It is still growing, and that is what we wanted to make sure we communicated in our comments, and growing well. But when you look at last year as an example, if there was a warmer spring – we look at the growth rates that we’ve seen and analyzed those growth rates in calendar 2016 today and pulling forward 3% of Q2 registrations would result in the growth rates that we are seeing today. So, it’s not crazy to think that the high growth rates that we are seeing in Q1 could be a very modest pull forward of that registration activity.

But wouldn’t the offset to that be as well that you haven’t seen the full-year impact of better water levels, weather, however you want to qualified in places like Texas and California that are very big states for you? So I would assume that there should be, for lack of a better word, some cushion based on that alone.

We would hope that would be the case. But we have not seen it yet, so we are not going to predict that. We would hope that would be the case. And Texas, frankly, has been a very strong area for us and for the marine industry in the first quarter.

All right, I will leave it at that. Thanks guys.

Your next question comes from the line of Tim Conder from Wells Fargo Securities. Go ahead please.

Hey, good morning guys. This is actually Marc Torrente on for Tim. Just hoping to get some additional color on U.S. trends by region. Are you seeing any incremental areas of weakness or concern, or any areas where channel inventories are an issue? And then also I guess going back to the El Niño benefit, have you seen – or how much initial pickup have you seen from I guess the boat show season out there in March and April? How much benefit are you kind of expecting this year?

I will address several points on that one. What we’ve seen, the boat shows were up a little bit this year, but it was – it does not correlate to this growth rate that we have seen in the first quarter. I think that’s part of the reason that we say that we think we are going to see that upper single-digit growth. If we look at the entirety of the U.S., as I have stated in my comments, we have seen pretty large growth in our market share, in our units we captured, 66.5% of every incremental units sold. From a strength point of view, Texas is up about 50% and our market share is pretty considerably there. So that is a strong area for us. Another couple of strong areas I think for the industry in general and for Malibu, has been the Southwest in terms of Arizona, Nevada, Colorado. Those have been pretty good markets. Alabama has just been outstanding for us. We made the dealer change a year ago, and that market is up 25%, yet Malibu was up nearly 70%. So we are just blowing away the competition in Alabama. The weak areas are going to be – right now what we are seeing, and this is a little bit odd, given what we are hearing about El Niño, California in the first quarter is down 25% to 30%. And so that is a little bit of a surprise, and we will see what happens as we go further into the spring, and see if California becomes stronger, which I would hope that they would.

And we were talking to the California deal last week, and they feel good. I think they feel like El Niño is benefiting them. I don’t know how much of that is going to get pulled into this year. The inventory levels, to your question on inventory levels, are healthy. They are down a little bit on a weeks’ basis year-over-year. The international guys have managed their inventory levels aggressively to make sure they aren’t over inventoried, and the U.S. has picked up a little bit, but that has left very little growth in inventory levels, which we are happy to see. And so I think we feel very comfortable where inventory levels are at.

Okay, great. And then on the timing of marketing events, it was lower expense year-over-year in the quarter. Is that something that we could see tick up in Q4?

I don’t think there’s going to be a dramatic tick up in Q4.

Okay, great, thank you.

I mean there will be a seasonal tick up, but not a dramatic tick up year-over-year, I guess, to make sure I am clear on it.

Okay, got it. Thank you.

Your next question comes from the line of Scott Hamann from KeyBanc Capital Markets. Go ahead please.

Yes, thanks. Good morning. Just in terms of the gross margin, can you give us like an order of magnitude of some of the big moving pieces? I mean the international discounting efforts, how much was that a drag this quarter and that kind of obviously, I guess change in your outlook is you’re going kind of see’s that? So just maybe for the year, what some of the big pieces are embedded within your guidance?

Yes, so the two big drivers of that, you’re going to see 10 to 20 basis points come up drag from the Australian business, and about 50 basis points on the international discounting currency related stuff. Those are the two key components.

And then on the positive side, I guess, it is pricing and mix and stuff like that?

Yes, that would translate. If we are down slightly, that would have been about a 50 basis point gain on the road – year-over-year, and that would have been driven by a combination of the trailer business, larger models, and low operating leverage. It is split pretty evenly between those three things.

Okay. And then, on the international, can you just remind us in terms of ex-Australia, what percent that is of the volumes that we are kind of looking at here? And then kind of where Canada sits in there?

Yes. Ex-Australia in the U.S. segment, we’re about – we’re almost 20% volume in the prior year, and so – and with Australia representing – or sorry, with Canada representing about two-thirds of that.

Okay. And I think you said international wholesale was down 20%. What kind of retail numbers have you kind of seen there over the last few quarters?

So that wholesale number is north of 20%, call it probably mid-20%s. And we think about half of the decrease is de-inventorying and half of that is retail.

Okay, all right, great, thanks.

Your next question comes from the line of Gerrick Johnson from BMO Capital. Go ahead, please.

Hey, good morning. I just wanted to follow up on Scott’s question about gross margin. And looking at the components a little bit more closely, anything to comment on, on warranties and reserves there? And then also come on the trailer business, how is that impacting net sales per unit and gross margin in the quarter? Thank you.

So in terms of warranty expense, we have increased our accrual rate because we increased to a five-year program, but we priced that into the new model year. So the actual expense in the P&L is a little bit higher because just like we offered more content in the boat, we offered more warranty. But from a warranty experience perspective, we aren’t seeing anything that is increasing our materially negative relative to the P&L. On the trailer business from a gross margin perspective and ASP perspective, on the ASP side, what we’ve seen as we thought it would be a little bit of a drag on the ASP and it has not been as we’ve seen higher option uptake rates, because of our competitive offering. We were able to actually deliver more to the dealer and consumer at a more efficient price. So that has actually driven up that or made that stay more flat to slightly up. And on a margin basis, that trailer business is a little bit of the 50 basis points or so that I talked about, answering Scott, in terms of additive just being an accretive investment.

Great, thanks, Wayne.

Yes.

Your next question comes from the line of Jimmy Baker from B. Riley & Company. Please, go ahead.

Hi, good morning guys.

Good morning.

Good morning.

Jack, you talked about the geographic basis for some of your market share gains. I was hoping you could just talk about that more from a model or a segment perspective. And then when you think about domestic inventory, you are keeping that roughly flat year-over-year despite I think a wide-space model that is out and the strong trajectory of year-to-date retail. So I guess my question is just does that relatively conservative inventory positioning have risk of making your more conservative domestic full-year retail outlook a self-fulfilling prophecy?

Look, I think that from having a conservative inventory position, I don’t think our dealers – there is plenty of inventory in the channel. The flat discussion in terms of inventory levels includes down internationally, which means we are up the U.S. So, now that is up on the unit count basis. It is slightly down on the weeks’ basis. So, I think we feel like that our dealers are appropriately inventoried and that bodes well for our business and the health of our dealers and the profit margins that they can make. So, I don’t think it is a self fulfilling prophecy. We feel like there is plenty of inventory in the channel that if the retail demand is there, can absolutely be fulfilled.

Jimmy, one of the factors that we look at is weeks’ inventory on hand at a retail level or at a channel level. And that is right on a par with what we’ve seen and where we were at a year ago. So we believe that the inventory is adequate in the channel, and it doesn’t need to be inflated any further.

Jimmy, to your question on a by model basis, what we are seeing with respect to share, in the past six months, the Malibu and Axis performances have been very strong across the board. And so, the portfolio of that Axis product and the acceptance of that brand as the leading entry player is extraordinarily strong. So it’s – over the past six months, it has really done very, very well. But, we are also seeing in the Malibu brand very, very strong acceptance of the 2016 product. And that 2016 product has performed extraordinarily well, and we think positions us well in 2016 from a share perspective as well as, as we look forward into models 2017, we are very excited about that product pipeline as well, which is heavily focused on Malibu.

So as we talk about that growth in the first quarter of 66.5% of every new unit, incremental unit, both the entry-level Axis and the premium level Malibu far surpassed any of our competitors in growth.

Okay, very helpful. And then can you just talk about when you made the decision to pull back on international wholesale shipments or when the dealers signal to you that their reorder patterns would be weaker than what was assumed in the prior guidance? And then I guess if you could think about it this way, if you had continued at a discounting pace that would have allowed you to maintain the prior gross margin guidance, how much of an additional cut do you think you would have made to those – to the wholesale shipment guidance?

I think coming out of the later boat shows and heading into the Q4 operations is where we really needed to make the call in terms of taking down our expectations for those guys. And as we got more clarity around what we believe to be the accurate U.S. growth rate, so it is not all international in terms of – I think the gross margin is really driven by some of that discounting on the international side. But also as we look at the U.S. market coming out of boat shows and the feel of the market, and the pace at retail and what we are hearing, I think it was the combination of all those things in the early part of spring here that made us want to be diligent about making a smart decision here. Can you repeat your question around – on the discounting side?

Well, just if you had continued with discounting at, I guess, more of your initial plan level that would have allowed you to maintain the gross margin guidance, how much of an additional cut do you think you would have had to make in terms of wholesale shipment reductions?

I think that is what Jack was getting at, which is – we are not sure how much we got for what we gave. I think that is what we are indicating, is we are not focused on using that to try and drive that demand. I don’t know how much more we would’ve had to cut to maintain, versus if we could have not cut – given us much and still gotten the same.

Okay, sure. Just last, I just have a quick balance sheet question. I’m hoping you could just talk a little bit about the jump in AR. I think your DSOs are the highest we have seen since you came public. Now I just was interested in what those receivables are comprised of and what drove that increase in the quarter, if it is just a timing issue.

Yes, I mean AR is most significantly, in our business, driven by boat shipments in the two weeks preceding it. So there has – there was probably just a big rush shipments and it kind of depends on what dealers it goes to. If they do go to dealers that have – where we floor it on the Wells Fargo commercial distribution finance, it gets flow through faster. And if it, there’s a couple large dealers that don’t floor on that, that probably pay a little bit slower, so it’s driven by a little bit of that mix, and it will leave itself very quickly.

Okay, thanks Wayne.

Yes.

[Operator Instructions] Your next question comes from the line of Rommel Dionisio from Wunderlich Securities. Please go ahead.

Thanks very much, good morning. Just two questions. First, and sorry if I missed this one, but I know you said that dealer inventories in the U.S. are at a healthy level. Is that true for both Malibu and Axis brands, or is there a little difference between the two? And I think your comments were on an overall level. And second is, I think you mentioned, too, that the 2017 model lineup, which we are certainly looking forward to, will be somewhat Malibu focused. Just from a strategic sort of standpoint, the upper – the premium end of the market has been somewhat slower growing in the last few years on the entry-level end. So just maybe your thoughts there in terms of are you seeing something different in the marketplace or expecting something different in the marketplace over the next several years that would sort of warrant greater investment in Malibu as opposed to Axis. Thanks.

I think on your first question, the inventory levels, we talked about it at that Malibu global level. If we look at Malibu and the Axis brands, they are pretty equivalent. We don’t see any softness from an inventory standpoint between one brand or the other. And I think that really, as we look at the explosion of a 22% growth in the first quarter, that was fairly evenly distributed between Malibu and Axis that pushed at a lot of retail inventory out of that channel. In regards to the product itself, what we did is we spent 18 months to two years really building that Axis brand. So, going back in history little bit, a brand that began with one model in 2009, a second model in 2010, and in a period of 18 months we brought out three models and really rounded out that Axis brand. And that is really what’s generating that growth that we have seen because of the acceptance of every single product in that Axis brand that we brought out. So, as we made that brand a complete fluid brand then we’ve turned our attention toward Malibu, and there are some key areas where we believe it’s underrepresented. There is an opportunity. It is not quite a white-space, because we do have product there, but there is a very – there are a couple of very key areas for us that we think we can grow market share just as we did this year when we pinpointed that 20 foot segment. And so we believe very strongly that the areas that we focus, the product that we are bringing, is going to play very strongly in that premium market. And so that is – it’s really not necessarily that there is any shift that we see going on. But that premium market, from a dollar standpoint, is still 70% of our total segment.

Good, thanks very much.

I am showing no further questions at this time. I would now like to turn the conference back to Mr. Jack Springer.

Thank you very much. Malibu again had a very good quarter, in which the improved domestic environment, our discipline, and our operational excellence drove results. We are very pleased with the new product performance in based on the last six months, we are seeing good gains in all segments of our market share. We are pleased with the results. We want to thank you for joining our call today, and for your confidence in Malibu. Have a great day.

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day. You may all disconnect.