MarineMax Inc (HZO) 2006 Q3 法說會逐字稿

Good morning. My name is Melissa and I will be your conference operated today. At this time I would like to welcome everyone to the MarineMax Inc. third-quarter 2006 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) At this time I would like to turn the call over to Mr. Brad Cohen of Integrated Corporate Relations. Please go ahead, sir.

Thank you very much, operator. Good morning, everyone, and thank you for joining this discussion of MarineMax fiscal 2006 third-quarter earnings call. I am sure that you have all received a copy of the third-quarter press release, but if you have not please call Linda Cameron at 727-521-1700 and she will fax or e-mail one to you immediately.

I would now like to introduce the management team of MarineMax, Bill McGill, Chairman, CEO, and President; and Mike McLamb, Chief Financial Officer of the Company. Management will make some comments about the quarter and then we will be available for your questions. Mike?

Thank you, Brad. Good morning and welcome to MarineMax's fiscal 2006 third-quarter earnings conference call, which is also being broadcast over the Internet. Before I turn the call over to Bill, I would like to tell you that certain of our comments are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements involve certain risks and uncertainties that may cause actual results to differ materially from expectations. These risks include but are not limited to the impact of seasonality and weather, general economic conditions and the level of consumer spending, the Company's ability to complete and integrate its acquisitions into existing operations, and numerous other factors identified in our Form 10-K and other filings with the Securities and Exchange Commission.

With that in mind, I would like to turn the call over to Bill.

Thank you, Mike. Good morning, everyone. We appreciate you joining us as we share the results of our third quarter of fiscal 2006, our thoughts on the industry, and a remainder of 2006 as well as fiscal 2007. We are pleased to report another record quarter with net income increasing 27%, driven by revenue increase of 38%. For the quarter we posted diluted earnings per share of $0.90, which was an increase of 22% compared to the third quarter fiscal 2005.

I am most proud of the fact that MarineMax once again posted positive same-store sales growth. While admittedly the growth was incrementally less than we originally had planned and hoped for, the fact that our team was able to produce positive growth of any amount on top of the 37% growth we had last year is a very notable accomplishment. There is no doubt that the retail environment for our industry and many others became more challenging during the quarter and once again considering the magnitude of the comp that we were up against during our biggest seasonal quarter, our comp growth is something to be proud of.

Once again we attribute our strong performance to the MarineMax team who have continued to rise to the occasion and deliver strong results quarter after quarter. We would like to thank our 2200 team members for their exceptional efforts and unrelenting commitment to properly executing our customer centric strategies.

I would like to take a minute to comment on how we see the marine retail environment. Obviously you undoubtedly heard the comments by Brunswick a few weeks ago. Brunswick has the largest scope within the industry and they have clearly indicated that things have softened. MarineMax, which operates primarily within the high-end of the industry, has always maintained that the economic or external factors that adversely affects the industry as a whole will impact us much less. Our experience and specifically mine over the last 33 years, supports this fact. Nonetheless we did see that even within the space that we operate, the retail environment became more challenging during the quarter.

For some detail on the quarter, we had a strong April, a May that was a little weak, but a June that started and finished well. I will also tell you that the softness is not across the board. The largest segment that seemed to have softened is boats below 23 feet. While it is true that boats below 23 feet are a smaller portion of our revenue, they contribute greater in the summer quarters as northern markets come into their season. Generally sales of boats above 23 feet have held in there, but it takes a greater selling effort than it did last summer.

Despite the macroeconomic factors that have been widely discussed, we were able to maintain positive sales growth for a number of reasons. First and foremost I believe it is because of our outstanding, passionate team that executes our strategies well. It is also the highly differentiated MarineMax operating model. We continued to win new customers and serve existing customers by offering the broadest premium product selection of boats and providing industry-leading services.

Finally our core high-end customer is continuing to display resiliency as they have in the past. There are still many customers seeking boating as a lifestyle that helps them escape from the stress of their daily life while staying close to home with their families, enjoying the family bonding aspect of boating.

We continue to be happy with the progress we are making on our higher margin businesses such as finance and insurance, service and parts, and accessories, which expanded modestly as a percentage of our business during the quarter and helped to offset some of the boat margin pressure we experienced as a pushed to drive sales and gain market share.

Despite the indication of more difficult sales environment, we are also seeing evidence of continuing stability. As an example, our gross margins have held up and even expanded, due primarily to the growth of higher margin businesses. While we did not experience significant pricing pressure, we were more aggressive in marketing activities during the quarter that contributed to our increased expenses. Again understand in 2005 we had outstanding growth in the June quarter and this year we actually surpassed it. This should provide clear evidence that while it is true the environment has become more challenging, it is clear that the high-end marine industry is not falling off the face of a cliff.

As with any challenge, there is an opportunity if you just look for it. For us, the opportunity is market share gains as the retail environment is challenged.

Before I turn the call over to Mike, I would love -- to go over the numbers in more detail, I want to make a few comment about the few acquisitions that we completed during our second quarter. The integration efforts of both Port Arrowhead and Surfside are going as planned. We are pleased with the performance of both and believe that both have even more long-term upside than we originally expected when we acquired them. I want again to say how happy we are that the teams of Port Arrowhead and Surfside 3 Marine joined the MarineMax family.

As part of the integration process, the Company encourages new team members to participate in the Company's ongoing investment in the team through education through both MarineMax University, or other ongoing online training programs, we strive to introduce and assimilate best practices throughout the entire organization. We believe this ongoing focus to education is the key differentiator of the Company. Just last week we attended the SeaRay dealer meeting in Knoxville, Tennessee for our store managers, including Port Arrowhead and Surfside were there to preview and demonstrates the 2007 models. The gathering was a great opportunity to get more passionate about the products, which by the way our great, and MarineMax as well as an opportunity to build comradery with the newest additions to our family.

I would now like to ask Mike to review the third-quarter results in more detail and provide you with updated guidance for fiscal 2006 and 2007. Mike?

Thank you, Bill. I would also like to express my thanks to our team for delivering another strong quarter. Posting positive comp growth on top of the strong quarter last year in a softer environment is impressive.

For the three months ended June 30, 2006, revenue jumped over 37% to $421 million, including a 1.2% increase in same-store sales, which again follows a 37% increase in the same quarter last year. This growth came primarily from the expansion of our higher margin businesses. Substantially all of the remaining growth in the quarter came from the acquisitions that we completed during the March quarter of this year.

Gross margins expanded significantly to 23.79% from 23.08% in last year's June quarter. This increase is primarily attributable to the incremental growth that Bill mentioned in our higher margin businesses. I will add the other than a drop in business below 23 feet, the mix of our sales during the quarter was generally similar to last year.

Our selling, general and administrative expenses increased 42% to $65.3 million or 15.48% of revenue. Excluding the additional expense added for stock options this year, SG&A as a percentage of sales would be about 15.25% compared to 14.99% in the year ago quarter. The main reason for the remaining increase in SG&A as a percentage of revenue is due to the lack of leverage from less same-store sales and incremental costs from increased marketing efforts or increased [spiffs] to the team to secure business in the current retail environment. Ultimately, these costs are investments in the future as every boat we sell today has the potential to turn into one or more sales in the future.

Interest expense increased to $5.9 million due to the rising rate environment and additional borrowings associated with the cash deployed to complete the acquisitions and higher inventories primarily from the acquisitions. Our tax rate was up to 39.85%, as we had projected, due primarily to the higher tax structure in New York and Connecticut.

Finally, net income for the third quarter increased 26.7% to $17.5 million or $0.90 per diluted share, compared to net income of $13.8 million or $0.74 per diluted share a year ago. Excluding the impact of expensing stock options, net income increased almost 32%.

Now I will make a few comments on the nine months ended June 30, but I will only hit the highlights. Revenue was $889 million, which includes approximately $141 million from in the two acquisitions and same-store sales growth of 4.1%. Keep in mind that same-store sales growth through the June quarter last year was up 22.5%. Gross margins are up modestly again primarily due to the expansion of the higher margin businesses I referred to earlier. Excluding the impact of stock option expenses of approximately $2.5 million and the hard costs we incurred associated with Hurricane Wilma of approximately $1.2 million, SG&A as a percentage of sales actually dropped to 17.09% from 17.25% last year.

Finally excluding those same charges, net income is up about 24% year-to-date. Keep in mind our same-store sales growth of 4.1% includes the impact of Hurricane Wilma, which adversely affected our largest market, Florida. The exact extent of the impact of Florida is hard to measure, but intuitively it has had an impact.

Turning to our balance sheet, at quarter end we had $28.2 million in cash, but as I've said in the past, we utilize excess cash to reduce our inventory financing. So we have substantial cash in the form of unleveraged inventory. At June 30, we had equity and inventory of approximately $120 million.

Our receivables doubled over the prior year due to the acquisitions, but also very much due to the strong second half of June. This year with June 30 being the Friday before the July 4th weekend, we had a lot of deliveries, which resulted in receivables versus cash as we closed the month.

Inventory increased to $436 million from $298 million at the end of June last year. Of the increase over $84 million is attributable to the Port Arrowhead and Surfside 3 acquisitions. Excluding these two acquisitions, inventories increased 18% on a same-store basis. Our same-store inventory increase is due to lower sales this quarter than we had anticipated and some strategic purchasing we made in the early part of the quarter and the year. I will add that our inventory is fresher today than a year ago, meaning that it has been at our stores on average for fewer days than last year. While inventory levels are higher than we previously anticipated, we are still comfortable with the levels.

Additionally as I will elaborate on in the guidance discussion, we are forecasting to purchase less product in model year 2007 in terms of dollars than we did in model year 2006. This coupled with our same-store sales growth will bring our inventories down.

The increase in property equipment is due primarily to the Port Arrowhead acquisition, where we acquired three pieces of property including a large marina. Our real estate is a growing asset with substantial value over its carrying amount, with most of it located on the water in desirable parts of the country. While we have not done recent appraisals, we have estimated the excess fair value over the carrying value of our real estate is at least $60 million.

Accounts payable dropped substantially due to the timing of payments to our suppliers this year versus last and the subsequent drawdown on our line of credit. Customer deposits are up 43%. Most of this increase is due to the acquisitions, but as we have said in the past, our deposits are very lumpy and not necessarily an indicator of future business. The timing of the acquisitions also impacted the balance of our revolving line of credit, which grew to $315 million at the end of the quarter but is down on a sequential basis from the March quarter. I would add that during the quarter, we increased our borrowing capacity to $500 million to allow future growth.

Our equity exceeded $340 million at quarter end, which is almost $18 per share. Adding in the excess real estate value raises our book value per share to approximately $20. Overall our balance sheet remains in great shape and we are committed to strengthening it.

Now let me discuss our guidance for the remainder of fiscal 2006 which is basically our fourth quarter. First as we have reiterated, our business is challenging to predict quarter-to-quarter, which is one of the reasons that we only give annual guidance. Last year we posted another very strong comp store growth rate of 23.8% in the September quarter. Again, many companies would have a hard time trying to grow in the face of that comp growth. Nonetheless given all we know today, we are striving to produce same-store sales growth in the mid single digits, which should allow us to end the year in the mid single digits overall.

We expect modest gross margin pressure on the boats we sell, but also expect the higher margin businesses to offset most if not all that pressure. From an SG&A perspective, last year if you remember we expensed $1.7 million in the September quarter related to a legal matter that is still being appealed. This year we have stock option expenses of about $1 million and we will likely incur additional marketing and other expenses to move the product. As such, SG&A will approximate last year's on a percentage basis.

Given these assumptions, we are tightening the guidance we established during our March call to a revised range of $2.08 to $2.13 per diluted share for the full year. Our guidance excludes the impact from any potential material acquisitions that we may complete.

Now that we're almost done with the year, it looks like the impact of expensing stock options will be $0.15 for the full year, which is on the high side of the range noted during the last quarter and it is $0.05 higher than when we started the year.

Now I'll provide our initial thoughts for fiscal 2007. Keep in mind that visibility 15 months out is difficult to predict in today's environment. We expect that the marine retail environment will continue to see challenges brought on my current macroeconomic issues. We fully expect that these issues will have the potential to give us gross margin pressure and may make it more expensive to gain each incremental sale through such items as marketing expenses. We will make these investments to drive same-store sales. As such our operating margin in 2007 will likely be flat to slightly up.

Today our best estimate is that the same-store sales growth will be in the mid single digit range for 2007. We expect the higher end of our products to contribute the bulk of this growth. Given that we will likely see gross margin pressure and additional expenses, yet we are expecting same-store sales growth, we believe that the best estimate for 2007 earnings per share overall is a range of $2.15 to $2.25 excluding the impact from any potential material acquisitions that we may complete.

Given what we know today, in 2007 we expect to be buying less inventory in dollars than we did in 2006, which is consistent with our current same-store sales expectations. While we are not done with our forecasting with each manufacturer, our purchases are expected to be down in the high single digit as a percentage. Accordingly as we make it through next model year our inventories will decline.

I will add that our expectation of 2007 is based on what we see and feel today. It does not contemplate any worsening of the issues in the Middle East nor increased economic issues; however and likewise, it does not contemplate improvements from today's environment either.

Before I turn the call back to Bill, I want to again comment on the December and the March quarters. Consistent with my comments on prior calls, as we move out of the southern markets it will be increasingly difficult to show profits in the December quarter. From a modeling perspective, due to the Surfside and Port Arrowhead acquisitions, the December quarter should be modeled at a slight loss to breakeven. The March quarter again given the loss to breakeven position of the acquisitions in that quarter, should be modeled close to our results of last year.

Now I would turn the call back over to Bill for additional comments.

Thank you, Mike. As Mike indicated, our outlook for 2007 results is for a solid year from a cash-flow generation perspective. But we will enter the year with the understanding that the consumer has become more sluggish. Having said that, with the strength of our balance sheet, our trained and motivated team members, and unsurpassed customer-centric retailing strategies, we are excited about being positioned to excel. To that end, we are continuing our team member focused strategies including our top-grading effort, which ensures that we have the best person in each position based on his or her skillset and that they are developed.

Before we take questions, I just wanted to reiterate a few points. MarineMax is the leader in the boating retailing industry and over the past eight years through both good and challenging economic times we have consistently outperformed the industry. We understand and deliver excellence for our customers day in and day out. This Company stands apart from its peers and we expect to continue this tradition into the future as we focus on driving cash-flow and returns to our shareholders.

While our core business segments are performing well, we are cognizant of the current market environment. At this time we are taking advantage of the uncertainty around us. With our exterior store footprint and solid balance sheet, we are able to be opportunistic and welcome the challenges and then turn them into opportunities where few if any of our competitors are able to do so.

We are also preparing should the market deteriorate. As we have historically displayed, we view downturns as opportunities to grow. We are able to be more aggressive in sales and marketing supported by our inventory, enabling us to take advantage of significant market share gains, which long-term generates repeat and referral business. Additionally such periods often leads to a favorable acquisition environment as smaller competitors do not have the means or desire to weather the softening.

The entire team and management will continue to drive our performance and to improve on the execution of our long-term strategy of building a world-class organization that is focused on delivering to all of our shareholders increased value year after year.

I would like to now turn the call over to the operator, who will open the call up for your questions.

(OPERATOR INSTRUCTIONS) Jonathan Cramer.

Just a quick question. On your sales where you saw strength in terms of region and brand?

Are you asking, did we much of a variation in the June quarter, Jonathan?

That's correct, in terms of --?

No, it was pretty consistent (multiple speakers) around the country in the June quarter. I think comments we'd made to the March quarter was that Florida was still a little behind the rest of the country, but in the June quarter I think all the regions were pretty consistent.

How about in terms of brand?

There wasn't any big change in how the brands performed overall. I think the biggest thing that we noted was product below we said 23 feet in the call. You could even say smaller than that, but the smaller product, the series that we saw were a little softer this year. At least we didn't sell as many this year as we would have liked to and as we did last year.

Okay, and the Feretti Boats, they were selling well?

We don't comment specifically on a brand like that, but I can tell you the mix, I think I made a comment, the mix of products other than this one segment were pretty comparable to the prior year, which would tell you they were all pretty decent because we had 37% growth last year.

But this is not the peak season for the real large products like Feretti. But it held up.

Thank you.

Ed Aaron.

A couple of questions for you. First could you give us a sense of what you're seeing thus far in July? Then assuming that July trends have been decent, at what point do your thoughts on the market and the cycle kind of change? Because I think that last quarter you might have had a bit of a different view about the overall environment. What really changed your thinking? Was it something that you saw more so in your business or was it something maybe you kind of took away from the SeaRay dealer meetings? And people that you had talked to there and what you saw in terms of products and so forth? Thanks.

July has started off fairly strong, Ed, because our team has not backed off of the push that we have created. They are selling the lifestyle boating more than they have in the past and additionally, we are giving them some rewards through incentives and we also have some discounts on some of the boats and rebates that are coming from the manufacturers. We have not backed off on that and we are seeing that business is still okay in July. The message here is that we're having to work a lot harder to get the business, but the business is there and our team is determined to get it because as we said and as you know, when you gain market share, those are your customers for life the way we give the experience to our customers. So you get repeat and referral business from it.

As far as really what changed, I think it's all external. It's all the noise about what's going on in the Middle East. It is the noise of what is happening with Wall Street. It is the noise of what retailers are reporting that are not discretionary dollar type retailers has created a little uncertainty with some of our customers. It makes it a low harder to get them to go ahead and sign up for their next larger boat or to actually get into boating.

Okay, great. Then on the purchasing side you mentioned that you're going to be down somewhere in the high single digit area for purchasing. Can you talk about the margins of that? Usually when you increase your purchasing you get better terms. Does that reverse itself based on your current plans? I'm assuming that you're still going to be ordering considerably more than most other boat dealers, which for your manufacturing partners would probably give you some reward for that. So I'm just trying to get a sense of how those two balance out. Thanks.

Ed, the decrease in our purchasing won't bear on the pricing that we get from our suppliers. That won't affect the margins. The thing that would affect the margins is if we become -- if we want to be more aggressive in the marketplace in '07, but that won't affect the pricing at the manufacturers.

But from a long-term perspective, it is incumbent upon us to gain all the market share we can gain back to the point I made about future sales and repeat business. So we are getting more aggressive on a going-forward basis to go after that market share not only through the experience that we offer and the passion that our team has, but also through in some cases some margins on specific models.

Okay. Are you able to estimate the EPS accretion on the quarter from the acquisitions?

I don't have that in front of me, Ed. It obviously contributed. I would tell you -- and this is kind of bad -- last year June quarter we were at $0.74. Honestly at a 1% same-store sales growth you're not looking at a whole lot of contribution from the former companies. You can assume that most of the EPS growth would have come from the acquisitions.

Two more quick question and then I'll open it up. The options expense coming in at $0.15, why is that on the higher side? Lastly, can you give us some interest expense guidance for '07?

On the options, we had estimated the March quarter -- actually we started the year estimating it would be $0.10 and there's assumptions that go into how you calculate that. And at the March quarter, we said you know what, it may be more than $0.10. It could be $0.10 to $0.15 and now that we are basically right upon the end of our year or coming close to it, it is going to be $0.15. And really if you think about it, that's $0.05 higher than where we started the year so in substance, we sort of raised the estimate from the beginning of the year if you think through the GAAP part of how that works. Because that's $0.05 more of an expense that we did not plan for when we started the year.

From an interest perspective, the interest has creeped up in the Company due to rising rate environment, due to the cash we spent on the acquisitions, and due to the inventory in the acquisitions. I guess to a lesser degree due to the extra inventory we have on a same-store sales basis.

I would tell you from a modeling perspective, we're sitting here through nine months it's something like 1.46% of revenue is what interest is. I would be modeling something around there, 1.4, 1.35, something like that. I do believe with us buying less and having same-store sales growth that we certainly have the opportunity to have less interest dollars next year subject to what the Fed does. But that would be my guidance on interest and my comment on the options. Hopefully that answered your question, Ed.

It did. Thanks.

Laura Richardson.

Just wondering what you envision the balance sheet looking like at the end of next year in terms of -- well we know inventories now but how about the cash and the borrowing?

Here's what I would say. If you look at the overall cash on the balance sheet right now, which is the equity and inventory which today is $120 million, we have a huge receivable balance because of what happened with the timing of the year, a $40 million increase, which really all of that turned into cash within days following the close. I would expect that the cash that is the buried on the balance sheet either through equity and inventory and other places will be higher by our net earnings the next 12 months. That sounds pretty basic, but where it's at is a little bit of a question. Are we going to have it in equity and inventory? Are we going to have a strong close to June again?

But the balance sheet is going to get stronger as we go through this year. During our fiscal '06, we made some investments in the long-term in terms of the Surfside and the Port Arrowhead acquisition with the cash expended and with the goodwill we put on the balance sheet, but those companies are very profitable companies and are going to contribute to the strength of the balance sheet going forward.

Just one more specific balance sheet question and then you actually gave me the segue I wanted into the acquisitions. So what would the borrowing you think be at the end of next year? Or even the end of this year? It should go down -- if inventories are going down, borrowings going to go down?

I would say that in both cases the borrowings should go down at 9/30 and also next year. The only thing that sometimes is challenging and I think we have talked about this on the calls before, our manufacturing partner from Italy, Feretti, tends to ship products to us in time for the Fort Lauderdale Boat Show, which typically means they come in September and they come in October and if they all come in September, we could buy inventory time for the boat show versus some of them coming in October. But based on what we know now the borrowings should go down for both periods.

Then for cash flow, what are you thinking depreciation should be next year in CapEx?

Depreciation next year is probably going to be around $7 million I believe and CapEx is probably going to be like $4 million.

Okay. Then it sounds qualitatively like you are happy with the acquisitions. I just thought maybe you could say a little more like how they are performing compared to what you expected when you bought them.

I think, Laura, the most important thing is the culture is the hardest thing to instill into a new team member or a new acquisition. The good news is both Port Arrowhead and Surfside 3, the teams have the same culture and the same passion and a lot of the same strategies that we have in MarineMax. The best news is that they have embraced MarineMax was open arms and they are truly part of the team. So the opportunities that we have brought with the systems improvements, which was some improvement to Port Arrowhead, substantial improvements to Surfside 3, are a welcomed opportunity for the team there. The teams are very, very excited, more specifically, if you take Surfside 3 they also have four dealer partners which are under the now Surfside 3 MarineMax banner that were not part of their family as such but actually represented some markets that were more a little distance away from their primary stores. And they have actually embraced MarineMax with open arms as well.

So it is beyond what we had -- where we had hoped to be at this point in time as far as not only system improvements and putting on their MarineMax hat, but also the excitement level that they are showing.

The dealer meeting was a great opportunity. We do what we call a proprietor club, which is basically all the store managers and senior managers belong to it and we actually do to an reward trip for those that hit certain performance levels. And so this was an opportunity for the new team members to be at this proprietor club and the comments that came were this is better than we ever dreamed it is and MarineMax was even better than what we thought it was, looking in versus being part of the team.

So I would have to say it is going very, very well. You see that in that they delivered good results basically within their six-month window of Port Arrowhead and the whole three months, because we just acquired at the end of March for Surfside 3.

Laura, just one more comment more for you. The questions you were asking on depreciation and amortization you're looking to build up the cash flow of the Company. Don't forget about stock option expensing also. That is a non-cash charge that is becoming a big number for all companies, not just (multiple speakers).

Yes. Have you investigated all the option dating stuff?

You know what, we didn't really need to investigate it but we did look. We know factually that we are not going to be pulled into that whole pot. We have been a very good Company when it comes to granting options as it relates to --

And consistent.

Yes, shareholders and consistently, but that is irrelevant question in today's world.

Okay. Thanks, guys. Good luck.

Joe Hovorka.

Actually two quick questions. What percent of your sales are boats below 23 feet, the part that you had said was weak? And then secondly, I know some of the Hatteras models, as well as some of the large SeaRays had been I guess you'd call it a backlog, they have been sold out for sometime. How is that trending? Is that lengthening, shortening? Are or those models still sold out?

Joe, the percentage of our sales below 23 feet in terms of units -- I'm actually looking for the data point, I think I have it. It is something like 25% of our units or something like that. It is a big percentage of our units, maybe even a little bit higher than that. It probably is a little higher than that, but as a percentage of our revenue it obviously is a much smaller piece. So I don't have a percentage of revenue. Percentage of units is probably 25% or 30% a unit and it is a smaller piece of revenue than that. What was you second question, Joe?

Some of the Hatteras models and large SeaRays have been sold out for a couple quarters, maybe even longer. Is that trend still continuing? Is that --?

Hatteras continues to be lining it up with their new models and continues to be sold out until several years into the future. The larger SeaRays as I think we may have inferred to have held up reasonably well, pretty good during the environment that we see today.

And when you say that Hatteras is sold out several years into the future, does that mean that you've got deposits on boats going out to '08 and '09?

For sure into '08. I'd have to look into '09, maybe even in '09, but definitely.

It is not all of the purchases we will make, but it is a good percentage of them for specifically the larger products. They've done a great job.

A great job with the new models they've come out with.

Okay, great. Thanks, guys.

Donald Trott.

Good morning. I have a couple of questions. First one is you have estimated $0.15 a share of 123(R) expense this year. What do you estimate the burden will be next year?

$0.15 to $0.20, which is in our estimates.

Okay. Secondly, there had been a prior estimate put out for next year Port Arrowhead and Surfside 3 combined would add about $0.14 to $0.18 a share. Given that they have been in this year during the sweet spot in terms of seasonality, how much do you anticipate they are contributing this year? In other words what is the year-over-year anticipated swing in the per-share contribution?

On the March call, we were asked that same question and really what we said when we acquired Port Arrowhead and we acquired Surfside, in the press release we said what their annual EPS contribution would expect to be but both those companies lose money in December quarter. So really we got them for the best part of their profit production for this year, if you think. So technically they actually would be a drag on earnings next year.

And they lose a little money.

Excluding the benefits that we think with their management team we can bring to the table with them and try to make them a more profitable company than it otherwise would be, but if you just look at their business, plug in the MarineMax with no changes, it would by definition being a drag because the loss of December quarter and breakeven to slight loss in the March quarter.

Right. So in other words just trying to work this into model, if we assume that the year-over-year decrease in their contribution is like $0.05, $0.06 a share, is that a reasonable generalized assumption?

Yes, that is probably reasonable. I don't have that in front of me, Don, but that is probably reasonable.

Okay. Final question is given the somewhat softer environment in the industry than previously prevailed, does this likely lead to increased acquisition activity on your part?

As we have said on most all of our calls and discussions, Don, the acquisition candidates are there. There's still a big stockpile of dealers that would like to be part of MarineMax that we are in discussion with and it is really more of a question does it make sense for us as much as does it make sense for them, but it is really more for us. So the timing is not necessarily because you know things are bad that that is when we're going to jump in and make more acquisitions. We've got to first answer the question which we always do, does it make sense for us? Do we have the people and the systems and have we done our due diligence from a people and numbers perspective to where we feel comfortable this is now time to launch it?

But you are not going to see us go out and try to gobble up what we did last year or this year with two major acquisitions. You're not going to see that repeat because we've still got a lot of work that we're doing to bring them up to the level that we need to -- of performance and have them in the family. So we don't want to spin a wheel off of it, but there are plenty of opportunities. We just will work our way through when is the best time and when is it right to make the acquisitions?

Thank you very much.

Jeff Allen.

Two quick questions. Brunswick has I think said that historically the high-end of the boat market tends to weaken after the low-end, so the question is would you subscribe to that notion? Secondly, I think you said mid single digit same-store sales guidance for the fourth quarter and next year. The question is that just sounds a little bit aggressive for what sounds like it's going to be a weaker environment. Could you just talk about how you get comfortable with that and how aggressive or conservative you think that estimate is?

We don't really subscribe to the idea that the high-end seems to soften after the smaller boats. We haven't really experienced that and quite frankly we're not going to play in the game if it does happen. We're just going to do whatever it takes and do extra, so barring some other major world events that has an impact on all businesses, we don't see any indication of it. We are not hearing from customers that are buying high-end product or potentially on some of the smaller products saying this is not where I want to go after the boat I have. In fact I'll give you a couple of examples.

Everybody talks about fuel price and the truth is fuel has not kept up with the inflation of a lot of things and still is half of what is in Europe. The truth is, we are not hearing any comments from our customers that are concerning the boating aspects of fuel. Give you an example, 150 boats to the Bahamas, no comments. Lots of fuel used. We did a 1200 mile excursion through the Bahamas with a little less than 20 boats and in the Bahamas you're paying $5 a gallon for fuel and no comments.

It is -- people with discretionary dollars today especially in the challenging times, they want a recreation that gives them an escape and they want to do more with their family. That's what boating provides. That's the focus we keep hammering into our sales team who are boaters head is that you've got to sell the lifestyle. This is not a logical decision except for what it does for you and your family, and it is an emotional purchase.

Discretionary dollars are increasing for those that have them. High net worth individuals and ultrahigh net worth individuals have accelerated their net worth, so they are continuing to grow. We think the high-end market is going to continue and some of that if you talk about Hatteras and some of the other larger products we sell, the customers are a year or two years out on getting the products and they are not saying get me out of it. Mike, do you want comment on the mid-single?

I would comment, just give you a couple of thoughts on what gives us confidence on the mid single digit. If you go back to 2001, where you had a recession, you had stuff heating up in Iraq and then you had 9/11 along with I think the dotcoms were beginning to melt down, it's a fact that our same-store sales were down 9% that year but half of that was because we lost the month of September and without that we would've been down like 4%, which I realize that's negative from a comp perspective but the environment then was much worse than it is now.

And the big thing about that environment is the word uncertain, and that impacts our customers more than any other single thing. They don't make the decision -- I'm not going to do it. That is not the bulk of our customers. They say I'm going to wait-and-see what's going to happen, and that is what 9/11 brought.

But the big boats back then held up pretty darn well. In fact in '02 and '03 we had mid single digit comp growth those years. A lot of that was driven by the larger product, which held up pretty well. Then I'd give you just one other little thing to think through. We posted positive comp growth against 37% comp. You don't do that if things have dropped dramatically. Now if these June quarter had the same comp as the September quarter does, September last year we did like 23.5% -- if the June quarter had that, we would've had double-digit comp in the June quarter. Of course the June quarter did not have 37%. So you could almost make an argument that our comp in the fourth quarter potentially could be double digit.

But what we're saying is given the environment as we see it, given the environment as we're talking to dealers, as we're talking to our team and our customers, we think the prudent way to model the Company is at the mid single digit range. We feel with confidence also in '07 that given what we need or see today and granted that's a much further out time period to try to predict, but we still feel pretty confident that single digit is the right number from a modeling perspective.

Okay, thanks.

Kevin Sonnett.

Mike, can you go over again the $350 million in short-term borrowings and what percentage or may it's all that is actually -- almost more like in accounts payable -- it's really just inventory financing? And how that affects your ability in the capital markets and how do the rating agencies or other players look at that as it relates to either long-term debt or actually debt versus more just a payable.

Thank you, Kevin. In a dealer environment if you look at all the publicly traded auto groups, no one looks at floor plan financing as anything other than an accounts payable. So you don't add it back to the market cap and try to come up with the enterprise value of the company. It is just like an accounts payable. The reason why dealers like us and the auto dealers have a floor plan vehicle is because it is a titled product, unlike most companies that don't sell a titled product. We have to have a different mechanism in place to finance it which is why you have the floor plan financing. But it is all tied against the leveraging of the inventory and we, unlike the auto dealers again, we run our business and we run our inventory financing almost as a piggy bank, if you will. Every single dollar this Company generates goes against that line. Most of the auto dealers don't have that luxury. And they also have long-term debt that they've got to pay off. We don't have any long-term debt other than asset-backed mortgages.

So we actually have equity and inventory and if you guys are on the call today, if you pull up any of the auto dealers, they are all one-for-one in inventory, meaning their inventory is $2 billion, their floor plan is $2 billion. We are the only dealer out there that has equity and inventory of any magnitude.

And we are adjusting that every single night according to the cash received.

Yes, it is a daily function. And I can tell you the line today is substantially less than it was at the end of June because all those receivables and all the cash came pouring in in the first couple of days and week of July. We don't carry a customer receivables, with a few exceptions on service, our receivables are primarily from banks that funded the contract for the customer.

Okay, the full balance, the 315 is all inventory financing?

That's correct.

Can you just walk me through that math to get to the equity and inventory value? I didn't quite get that.

It's very simple. You take $425 million or $435 million in inventory, which is the inventory balance, and you subtract out the $315 million and debt on the inventory. That is $120 million.

And none of the A/P is related to the inventory?

Very little at this June 30. You see how the A/P went down last year to this year? It went down like $25 million because we paid the manufacturer on June 30 this year versus last year we paid them on July 1. So that was -- we drew on the line of credit after we pay it but there's very little -- there is some in there, Kevin, but it would be comparable to last year. Actually it would be less than last year's.

So what you're saying is across the board as you go to access the debt market in any way all the various constituents, it's not just your view or the vendor's view, it is really very widely accepted? That is just simply viewed as inventory financing. It doesn't affect your ability to borrow at more favorable rates?

Absolutely not, no.

[Justin Lucia].

Actually Jeff Gates, Gates Capital Management. I just had a question, with regards to the Surfside acquisition, I think that you guys had talked about paying like $47 million including the value of the stock, but can you just refresh my memory? It looks like when I looked at the cash-flow statement for the March Q that that acquisition must not have included any inventory.

The acquisition did include the acquisition of inventory, but it was not in the business purchase price. We buy the inventory separately.

Okay. Did you assume any payables against that?

Not technically. We literally paid off their payables and put it onto our line of credit. We bought the inventories and financed it is a way to think about it.

It looks like there's like about 120 million or something like that.

I think that's right. I think actually our March press release on the balance sheet we put an asterisk that says what Surfside's inventory was an what Lake of the Ozarks was and my memory was it was around 120 million.

And we paid them the equity in the end, inventory.

Okay, great. Thank you.

[Tom Lightcap].

I came in a little late on the call. Can you just recap where the gross margin strength for the quarter came from?

Yes, most of it came from the incremental increases in our higher margin businesses, F&I, service, parts and accessories, brokerage. I will stress incremental, but when you have an incremental increase in a business that has a high margin, higher margin, it pumps it up. I think we made the comment that we did see substantial pricing pressure on the boat, so they were okay during the quarter too plus the higher margin businesses.

We had more expenses to make those sales.

Now were you as far as the pricing pressure, were you seeing your margins being squeezed on the higher end boats or the lower end boats, since that demand was softening more?

I would say more on the lower-end boats.

More on the lower-end. We didn't see a whole lot so it would be more on the lower-end boats. One of the -- it would be on the lower-end boats.

You were saying that the lower-end boats in terms of units, the boats below 23 feet, make up about 25%, 30% or so of your units. I'm just trying to get a feel for where the comp growth came from? You were still able to pull out a 1% comp despite this about 25% of your units being down. So I'm just really trying to figure out where --?

Keep in mind that's the 25% of our units that are down equates to much less revenue. The average ticket down there you're probably talking $25,000, whereas our average unit selling price as a Company is in excess of $100,000 and we did say that the product above that held up pretty well, so you can assume we may have since growth there. And then the higher margin businesses is what grew it.

Okay. All right, great. Thanks very much.

At this time there are no further questions.

Thank you, operator. I'd like to thank everyone for participating in our third quarter conference call and web broadcast this morning. Mike and I are available after this call to answer any questions that you may have and thank you for joining us today and us getting together and if we can sell you a boat, that will help us for next quarter.

This concludes today's conference. You may now disconnect.