Good morning and welcome to Malibu Boats conference call to discuss second quarter fiscal year 2017 results. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. Please be advised that reproduction of this call in whole or in part is not permitted without written authorization from 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. Richie Anderson, the company’s Chief Operating Officer, is also on the call today. Jack will provide commentary on the business and I will discuss our second quarter financials and outlook for fiscal 2017. We will then open the call for questions. A press release covering the company’s second 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. Malibu had an outstanding quarter and we performed better than expectations. Net sales increased 11.8%, adjusted EBITDA increased $13.6 million, and adjusted fully distributed earnings increased 26.7% to $0.38 per share. All three of these metrics represent new fiscal second quarter highs for Malibu. Our new product, culture of innovation and strong dealer base has allowed us to continue to grow in a challenging global economy. The marine industry and the performance sports boats segment has grown consistently since 2011 despite having a national or world economy that was struggling at times. We believe we are beginning to see a positive change that we can all hope lasts for a long time. We believe Malibu will benefit, like many businesses, from the end of the uncertainty surrounding the US presidential election. The stock market has responded and consumer confidence has risen, which should be a tailwind for the domestic markets. As we talk to customers, many of whom own their businesses as well as our dealers, there is excitement over several changes they perceive are on the horizon. First, though for tax relief and changes in the tax structure is encouraging to our customers and our dealers, many also believe that the Affordable Care Act has been a costly drain on their business and they look for a change. Third, the relaxing of environmental regulations is looked at as a potential stimulus for business growth. The last positive factor I have heard is the potential for the XL and Dakota pipelines being built. Not only is there a belief that this will create jobs, but this could also be very helpful in reversing the negative trends we have seen in Western Canada for over two years. The US market remains…

Thanks, Jack. Net sales in the second increased 11.8% to $67.7 million. Unit volume increased 6.6% to 924 units, including 83 units from Australia. The Malibu brand represented approximately 72% of unit sales or 664 boats and Axis represented approximately 28% or 260 boats as both continued to perform well. Consolidated net sales per unit increased 4.9% to approximately $73,200. The increase was primarily driven by a higher mix of Malibu models and lower discounting, combined with year-over-year price increases across the line. Including the impact of $120,000 from our engine vertical integration initiative, gross profit increased 12.2% to $17.8 million and gross margin increased 10 basis points to 26.3%. Selling and marketing expense was essentially flat at just under $2.2 million in the second quarter. As a percentage of sales, selling and marketing expense decreased about 40 basis points to 3.2%. General and administrative expenses, excluding amortization, decreased 17.6% or $0.7 million. As a percentage of sales, G&A expenses decreased 180 basis points to 5.1%. The decrease was due to a $1.3 million reduction in the Marine Power judgment made by the court based on post-trial motions filed by Malibu. Excluding amortization, the change in the Marine Power judgment, MC litigation and our engine project, general administrative expenses decreased $600,000. Adjusted EBITDA for the quarter increased 22% to $13.6 million and adjusted EBITDA margin increased 160 basis points to 20.1%. Net income for the quarter increased 35.3% to $7.7 million, while net income margin increased 190 basis points to 11.4%. Non-GAAP adjusted fully distributed diluted earnings per share increased 26.7% 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. For reconciliation of adjusted EBITDA and adjusted fully distributed net…

[Operator Instructions]. We’ll be taking our first question from the line of Tim Conder from Wells Fargo. Your line is open.

Thank you. Congrats, gentlemen, and good morning.

Good morning.

Just a couple of things. Let’s delve into weather here. Jack, you alluded to – that the – you had El Niño last year and good rains here over the last couple of months in California, things looking much better, how are units – if you look at calendar 2016, how are industry units in the region – California, Arizona, I think, maybe part of Nevada – how you guys look at it versus where they were in the prior peak?

For calendar year 2016, the unit increases has been about 25%. That’s primarily out of California. And we are substantially higher than that, but that’s what we’ve seen in that Western – what we call the Western region.

Okay. And where is that West versus prior peak if we look at calendar 2016 numbers?

Even with those growth rates, the Western US, as we have defined it, is going to be substantially below 50% of that peak. So, even with those great growth rates, it’s still under half.

A lot of room to run.

Okay. And all been restrained by the drought over the last several years?

Yes.

Okay. Then, staying on the weather theme here, we’ve kind of seen some drought conditions developing in parts of the Southeast and Northeast. How are you seeing from some of the early indications from dealers there? Is that having any impact at this point or not?

We have heard of no real impact in the Southeast at all or Northeast. Frankly, we’ve had some pretty good sell-through even since that November/December time frame. And thus far, we’ve not seen any degradation in the boat shows.

Okay. And then gentlemen, if you would on the engine integration, just remind us where you believe you’ll see the primary benefit on the margin pick up there? And then you said, again, it will be ready to go for model year 2019 and it’s on budget. So, we should start seeing in – where we should start seeing in the calendar there? I think probably the middle of calendar 2018, I would think, we should start seeing some of those benefits flow into the P&L?

So, in terms of timing, it’s going to come online sometime in fiscal 2019. So, they might not flow immediately at the beginning of that fiscal year. In terms of what those benefits will look like, what we’ve put out there as our target return profile, is about 200 basis points of adjusted EBITDA margin expansion in a full operational year. So, again, if that’s coming online a little bit later in fiscal 2019, you would get some portion of that, but in a full year impact, it’d be couple of hundred basis points of EBITDA margin.

Okay. And then lastly, gentlemen, just to clarify here, no timing benefits or anything here in the quarter just reported? Just a good, solid, little bit better than expected, is that the way we should perceive it?

I think there is a little bit of timing in terms of just the way our new dealer program works where you’re probably going to see – and we alluded to that in the commentary around gross profit margin profile where you probably can see a little bit more margin pick up here and maybe a little more pressure in Q4 on a year-over-year basis. So, there’s a little bit, but in general I think it’s mostly a nice quarter.

I guess another way to ask it, Wayne, would be versus 90 days ago, for your full-year outlook, what you saw in the current quarter here was just good, solid performance and we should kind of view that as modest upside rather than timing?

Correct.

Okay, great. Thank you.

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

Hey. Good morning, guys.

Good morning.

Hey, just following up on Tim’s last question about the incentive programming – or sorry, the new incentive program and just the timing of, I guess, maybe unit volume and inventory and gross margin. How do we think about that playing out for the year? Is it material enough versus kind of the legacy incentive programs to really change the cadence or the shape of the year?

It has just a little bit of impact in terms of how that margin plays out throughout the year. And that’s going to be a little bit – a little bit more pressure in Q4. So, where we would’ve expected some healthier gross margin expansion, right, if you – for this quarter – adjust for the engine initiative, it’s a 30 basis point year-over-year expansion of gross margin/ And Q3 will have – it will be an attractive gross margin expansion as well. And Q4 will be just a little bit more pressured. You won’t see – that’s what brings us down to the slight for the year. That’s kind of the cadence and how it how it plays out with the new program.

Okay. That’s fine. And then next question. I think on the prior call you had expected mid-single-digit volume growth in the second quarter. But you are maintaining – and you end up doing around 7%, but you are maintaining your full-year outlook. So, is there just something that was pulled forward into the second quarter? Just any thoughts on that.

I think there’s a few more shipments. So, a small number of shipments – Richie getting some more boats out – can move those numbers around a little bit. But I think for the full year, is there any potential for a little bit more volume? Yes, but not – we’re not moving it massively. I think we like where inventory levels are at and would like to keep them low and margin strong and discounting low.

So, Mike, to answer your question little bit more specifically, no sales or no units from the third quarter were pulled into the second quarter. We expect a third quarter commensurate with what we’ve communicated.

Okay, that’s helpful. Thanks, Jack. And then just final question, this year you are looking – or expecting, embedding in your guidance a flat international market. Can you just give us some context of maybe what the international markets did the past two or three years for you, I guess, from a wholesale unit volume perspective, if you have maybe just the rule of thumb or an easy range?

Yeah. Wholesale – the primary driver is Canada and it was down 20% at wholesale last year. And the year before that would’ve been something – somewhere similar. We saw both the retail market decreasing and the de-inventorying that needed to occur that drove those numbers down.

So, safe to say the international markets the last two years, given the – how big Canada is for you, would’ve been down likely in the double digits, and this year you are saying more flattish? Is that…?

That’s correct.

Okay. That’s helpful. Thanks, guys.

Our next question comes from the line of Joe Altobello from Raymond James. Your line is open.

Thanks. Hey, guys. Good morning.

Good morning.

So, first question, I guess, is on the industry. Obviously, you guys mentioned a very good performance in 2016. Units up, I guess, low doubles, it looks like. And Jack, you talked about tax and regulatory relief and what you are hearing from not only your dealers, but customers as well. So, how should we think about 2017 in terms of overall unit growth for the industry? Could we see another year of low double digits? Given that, plus the better weather you are seeing in the last…?

I would counsel that low double digits right now, as I look at it, is probably aggressive. It’s probably going to approach the double digit, but low – I’m not quite willing to go there yet. It depends on how many more executive orders we get probably. But I think that there are some positive factors that we have not historically had the benefit of for the last two or three years. We also have some very strong comps. And so, we’ve got to mitigate that growth with those comps that we’re looking at in that 10 to 12% growth.

Got it, okay. And then in terms of the – I guess, the more pro-growth environment post-election, have you guys seen any notable change in terms of purchasing activity post-election or is it more just sentiment at this point?

What I would point to, Joe, is the comment that I made in terms of how the boat shows seem to be a little bit different this year. And in the two comments that I made – and this is pretty – coming to us from just about every show. One is that historically, over the last two or three years, there have been a lot of shoppers, but not necessarily buyers. And we’re seeing in the shows more buyers as the higher percentage. Secondly is our dealers are ecstatic with the fact that they’re walking out of the shows with what they consider to be very well qualified leads and those leads are a little bit higher than what they’ve been in past years. And so, I think that comes back to just how people are feeling, the consumer confidence. We need certainly, I would say, to see some of these factors that we think are going to happen or the people are positive about actually be put into place. But, generally speaking, our demographic is that customer that is going to be most affected by the four things that I mentioned.

Okay, great. That’s helpful. And just one last one. ASPs, I guess, your outlook for this year is a little bit better than it was three months ago, up low to mid versus up low. And again, I apologize if I missed this, but what was driving the – what is driving the improved ASP outlook?

Yeah. It’s a combination. We have a little bit of a tailwind in Australia with respect to translation there. We also are seeing – as we’ve discussed before, we’ve kind of pulled back on trying to support that international market from a discounting perspective a bit, and that’s helped support it – that impact of that pullback has been a little bit more larger than we expected and, frankly, the mix of MXZs has impacted it. So, those are kind of the three components that have driven up our expectation from low to low to mid-single-digits.

Perfect. Okay. Thanks, guys.

Thank you.

Our next question comes from the line of Jimmy Baker from B. Riley & Co. Your line is open.

Hey, good morning, Jack. Good morning, Wayne. Congrats on the quarter.

Thanks.

Thank you. Good morning.

Most of my questions have actually been addressed at this point, but I was just hoping you could – and just trying to understand some of the offsets to the Q2 upside that maybe kept you from raising the full-year guide a little bit more. Can you just elaborate on the Q4 dealer incentives that you talked about or the Q4 dealer plan and how that impacts the quarter? And if we should think about that continuing into the next fiscal year at all?

Yeah. It’s pretty simple. There is a component this year that’s tied to some retail activity that impacts it. It’s really – and that’s the quarter where you see registration data come in, so there’s going to be a small – a small component on a per unit basis that will end up manifesting itself in the P&L. That’s it.

Okay, got it. And just maybe one for you, Wayne, on that capital structure and uses of cash. So, looks like you had another solid quarter of cash generation, but this time stockpiled more of that cash on the balance sheet rather than paying down a portion of your debt. How are you thinking about leverage during this period of heavier spending on the engine integration?

I think in terms of capital allocation, we’re still focused on finding those unique opportunities, those opportunities that are unique to us to put capital to work. And so, we’ll continue to source those and work those opportunities, not dissimilar to the trailers and engines and the Australia tuck-in M&A. So, we continue to do that. In the near term, I think our plan would be to focus on that and look at investing in the engines and paying down a little bit of – a little bit of debt here in the near term. And come next year, there might be a different conversation based off of where leverage levels are and where the season comes in.

Okay. And then lastly, just on the international front, can you just speak to – you talked about kind of feeling like we are at a bottom here in most of those markets. Can you just talk about dealer inventory positions and at what point you might expect to see some restocking out there?

Dealer inventory internationally is pretty lean. The most significantly – Canada is the biggest driver of that. And as we talked about it last year, it’s been down 50 units and 50 units on consecutive year-over-year bases. So, I think we feel comfortable with that in terms of what we’re seeing at retail and the behavior of our dealers in Canada. And that’s the primary place where there is a meaningful amount of inventory. And in the rest of the world, it’s not a concern for us at all; and I think, frankly, as those pick up, those reorder and restocking and potentially adding to inventories is the potential upside.

Understood. Thanks very much for the color.

Yup.

Our next question comes from the line of Rommel Dionisio from Wunderlich. Your line is open.

Thanks very much. I know there have been a few questions on Canada already, but just to maybe add two more if I could. First, Jack, in your comments, it was very encouraging what you said about these early boat shows, like Toronto there. But two things. One, do you get a sense that there’s a lot of pent-up demand in that market given some of the sluggishness we’ve seen industrywide for the last couple of years? And second, could you also talk about dealer health? Obviously, it has been a challenging couple of years. And are the dealers in financial shape well enough to take advantage of this potential reversal or at least the stabilization of that market? Thanks.

Thank you. On your first question, I think that there is pent-up demand, but we’ve not yet reached the point where we can see that unleashed. I think that if we can get some help as it relates to the currencies, and that currency can drop to – I don’t know what the right number is, but I’d say 1.25 or below, along with the Western Canada, the oil and gas situation, strengthening. That will release that pent-up demand. And I think that there may be a little bit that we’re seeing. But I will probably classify it somewhat as more of a new norm. The Canadian population have experienced this now for two years, and so I think the hopefulness of it going away is not as strong as it was two years ago or even a year ago. And they’ve faced that new norm, and so as time has – as each year goes by, of course, the boats get a little bit older. I think that’s what we’re seeing versus the true release of pent-up demand, which I think will be very strong when the times comes. The second question, remind me of that please?

It was just the dealer health check. It's obviously been a tough, lean couple of years for them. And just, are they in a financial position to take on inventory or just – with specific regards to your dealer network there. Thank you.

Yeah. That’s a great question. We have a very strong dealer network that is very strong financially, both in the United States and in Canada. One of the things that – when we went through the recession that we did is, as we added or as we supported dealers, we made sure that they had that financial capability to withstand whatever might come their way. And so, I would portray our dealer base in Canada as very strong financially, not anything that we are worried about and they’ve been thus far able to weather every storm.

Okay, great. Thanks, Jack. Congrats on the quarter, by the way. Thanks.

Thank you.

Our next question comes from the line of Gerrick Johnson from BMO Capital Markets. Your line is open.

Good morning. Your prior CapEx guidance was formulated before you announced the engine initiative. And so, you've lifted that by $2 million, but you did say earlier that the initiative adds $5 million. So, where do we get $3 million of savings in CapEx?

We had, prior to our announcement of the engine initiative, discussed purchasing a facility adjacent to our Tennessee manufacturing facility, and so that is rolled into the engine initiative, $5 million, at this point. So, we were purchasing that building regardless, but we knew that the engine initiative had a high likelihood of occurring, and so really it’s an incremental to – related to modifications to that building – equipment, et cetera as we set it up.

Okay, got it. You've got quite a few licensing arrangements now with your IP. Can you talk about the contribution from that high-margin royalty income into your gross margin and your P&L?

Yeah. In terms of the gross margin impact, it’s going to be less than half – on a year-over-year basis, less than half of that improvement is coming in the form of licensing.

And how about from a revenue sizing standpoint?

It’s not significant.

Okay. And my last question – at the last boat show, that joystick control and bow thrusters from some competitors were kind of the hot new innovation that at least they were pushing. Is this a viable differentiator, a competitive advantage for these guys? And do you guys have anything like that in your portfolio?

As I said earlier, I think our competitors are going to complete. And they’ve brought up product – I wouldn’t call that at all a viable differentiator. My understanding of the take rates are that they're not that high. But they’re going to compete, all of our competitors are. What we believe is that Surf Gate and our ISP platform continues to dominate the market, it continues to bring customers into the market. And then, to take a step further, one of our beliefs is that as it relates to innovations, it’s very important for us to bring a number of innovations each year that will generate the type of demand along with our new boats. And I think it’s working. Quite frankly, it’s working well when you consider the fact that we’ve gained well over 100 basis points of market share. Clearly, Malibu is winning.

Great. Thank you, Jack.

[Operator Instructions]. No other questioners in the queue at this time. So, I’d like to turn the call back over to management for closing comments.

Thank you very much. We are very excited about the quarter that Malibu experienced. It was an excellent quarter and we believe that most factors, certainly domestically, are positive right now and should lead to continued reasonable growth. The performance sports boat segment is performing well and Malibu is performing better than the segment. We want to thank you for your time this morning and joining this call. Have a great day.

Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program. And you may all disconnect at this time. Everyone, have a great day.