MarineMax Inc (HZO) 2007 Q1 法說會逐字稿

Greetings, everyone, and welcome to the MarineMax Inc first quarter 2007 earnings conference call. [Operator Instructions] At this time, for opening remarks and introductions, I would like to turn the conference over to Ms. [Nickie Saks]. Please go ahead, ma'am.

Thank you, operator. Good morning, everyone, and thank you for joining this discussion of MarineMax's first quarter fiscal 2007 earnings. I'm sure that you've all received a copy of the press release that went out this morning, but if you have not, please call Linda Cameron at 727-531-1700 and she will fax or email one to you immediately.

I'd now like to introduce the management team of MarineMax. Bill McGill, Chairman, President, and CEO, and Mike McLamb, [CO] of the company. Management will make some comments about the quarter and then will be available for your questions. Mike?

Thank you, Nickie, and good morning, everyone. Before I turn the call over to Bill, I'd 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 10K and other filings with the Securities and Exchange Commission.

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

Thank you, Mike, and good morning, everybody. We appreciate you joining us today as we share with you our results for the recently completed first quarter, fiscal 2007. I'll keep my comments relatively brief today, as not a lot has changed since our last call a few weeks ago on January 8th.

Since that call, a number of industry reports have been released, reinforcing that the softness in the industry is being felt to a greater level. From our perspective, these reports also confirm our belief that MarineMax has again gained significant market share in the December quarter.

The best we can tell from these reports is that the industry is down 10% to 15% in the December quarter in the segments in which we operate, which follows a 12% decline in the September quarter. This deterioration in the industry is unfortunate, but also presents MarineMax with opportunities to grow, as we discussed on our last call.

Our strategy of capitalizing on our formidable balance sheet and taking market share by bringing in new customers and driving sales has been quite effective. To that end, while the industry saw a 12% decline in the September quarter, we posted a 30% unit growth, and while the industry reportedly is following the same trend in the December quarter, our units were up slightly. We believe that our sales, which have been much stronger than the industry, are resulting in a very strong market share gain.

As we discussed two weeks ago, while our higher-end customer base is more resilient than that of the entire industry, it is proving to take incrementally more effort and marketing to secure that purchase decision in these challenged times.

As we have mentioned before, we have a very high repeat customer ratio, along with a proven track record of taking care of our customers and helping them fulfill their passion and dream of boating. This results in our customers enjoying their shopping and purchasing experience, enjoying their boats with their families and friends, and eventually trading into larger boats with MarineMax. As such, the investments in marketing and promotions that we make today will yield future revenues and earnings as we expand our family of boaters.

While we are disappointed with our earnings performance, let me comment on a few of the positives beyond the market share gains. For the first quarter ending in December, we delivered positive same store sales growth in the neighborhood of 14%. This growth compares favorably to the negative 4% same store sales growth that we had last year, when we had Hurricane Wilma to contend with.

While in the past we have had positive earnings in the December quarter, we did expect to post a loss as a result of the increased seasonality caused by the two large northern acquisitions that we made last year.

While our margins are down and below where we expected them to be, they did not fall dramatically. The main reason for this is that we continue to expand our higher margin businesses. The impact from the growth in the higher margin business is more meaningful in a quarter with relatively less boat sales, like the December quarter, which exaggerates the impact to our margins.

The boat show season is ongoing throughout the country, with many major shows upcoming or in progress. The results from the show thus far confirm our belief that we can generate mid-single digit store sales growth in an environment that has certainly weakened. Traffic at the boat shows is generally trailing last year, but we believe we are capturing a greater share of the sales at the show.

As we work through fiscal 2007 and put the investments in place for the future, we will also capitalize on growth opportunities as they arise. I will add that the Surfside and Port Arrowhead acquisitions continue to track according to our integration plans. The ice storm that hit Port Arrowhead in early December did cause substantial damage to our facility and many marinas in the area. It is still hard to predict the near term and the long term impacts from the damage due to the storm.

During good times and through challenging periods, MarineMax has historically outperformed the industry, and we will continue to pursue growth in the coming quarters and grow our family of customers. I will now ask Mike to provide additional details on the quarter and guidance for 2007. Mike?

Thank you, Bill. I would add, given the reported softness in the industry, our 14% same store sales growth is very strong and speaks to how well our team executed during the quarter. For the three months ended December 31st, 2007, fist quarter revenue rose approximately 30% to $234 million, from $181 million to the comparable quarter last year. This increase was driven by same store sales growth at 14%, which was almost entirely driven by an increase in our average unit selling price.

We also drove incremental improvement in our higher margin businesses, which contributed to the same store sales gain. Gross margin dollars were up $12.7 million, or 29%, while our gross margin percentage dropped to 24.3%. The decline in gross margins was due to a decline in boat margins, partially offset by the incremental growth in our higher margin businesses, such as finance and insurance, service, and parts and accessories.

With our focus on these higher margin areas, MarineMax is in a unique position to be aggressive with the margins on our core products of boats in order to drive market share gains.

Our selling, general, and administrative expenses increased to $56.9 million, or 24.2% of revenue, versus 22.3% last year. Much of this quarter's SG&A increase is attributable to an increase in incentives and promotions for our team and marketing dollars, both of which helped to drive sales during the quarter. In addition, the acquisitions that we made in 2006 have a lower operating margin percentage in this quarter due to seasonality, which drives up our SG&A percentage, as expected.

Interest expense increased to $6.5 million due to the rising rate environment and additional borrowings associated with acquisition-related inventory increases. Our tax rate was up to 40.4%, which should approximate the annual rate as well.

Finally, our net loss for the first quarter was $3.8 million, or $0.21 per diluted share, compared to net income of $664,000, or $0.04 per diluted share, a year ago.

Turning to our balance sheet, at quarter end, we had $13.1 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 quarter end.

We ended the quarter with $545 million in inventory. Removing the acquisitions and the inventory associated with the Cabo brand that we recently expanded with, our same store inventory increased approximately 7% in the quarter. The increase in same store inventory has consistently dropped from 16% at the end of the June quarter to 11% at the end of the September quarter to 7% now, as we predicted it would a few quarters ago.

Our rolling 12-month same store sales growth is about 10%, which exceeds our same store inventory growth. We expect that same store inventories will continue to fall in line with our same store sales growth as we move through the fiscal year.

Our receivables rose over the prior year due to the acquisitions. The increase in property and equipment is due primarily to the Port Arrowhead and Surfside acquisitions, where we acquired three pieces of property, including a very 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 that the excess fair value over the carrying value of our real estate exceeds $60 million.

Customer deposits decreased year over year, but as we've said repeatedly in the past, our deposits are very lumpy, and not necessarily an indicator of future business. One or two large yachts can drive sizable increases or decreases in this line item.

Our revolving line of credit grew to $399 million at the end of the quarter, which is up from the same period a year ago, primarily as a result of the acquisitions that we completed. Our equity is just under $350 million at quarter end, which is more than $18 per share from a book value perspective. Adding in the excess real estate value net of taxes raises our book value per share to above $20. Overall, our balance sheet remains in great shape, and we are committed to strengthening it.

Now let me discuss our guidance for fiscal 2007. Our business is difficult to predict, and our visibility is limited, especially in challenged times. As such, historically we have refrained from giving quarterly guidance. Based on everything we know today, we are reiterating the guidance we gave on our January 8th update of $1.40 to $1.50 per share on a fully diluted basis. The company's 2007 guidance assumes same stores sales will be in the mid-single digits, and excludes the impact from any potential material acquisitions that we may complete.

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

Thank you, Mike. I'd like to leave you with a few very important thoughts. At MarineMax, we do not just sell boats, but rather we provide a recreational solution for families, which caters to what we call the lifestyle boating. Namely, it's stress relief and a family escape. The key is to get our customers involved. And in turn, we create an experience that families can keep with them for years.

We are the industry leader today, and expect that we will broaden that by increasing our market share over the near term and the long term. We have a strong team and a balance sheet that will support our continued growth. While we cannot control the economy, we can impact our destiny. In challenging times, we take market share, and in good times, we drive incremental gains in cash flow. 2007 is the year for gaining market share, as we invest for the future.

And we will continue to be opportunistic. We remain extremely confident in our team and our company, and thank you for your continued support. With that, we'll open the call up for questions. Operator?

Thank you. [Operator Instructions]

We must have done a good job, Bill.

And we'll first hear from Ed Aaron of RBC Capital.

Operator, we can't hear Ed.

Okay. Just a moment.

Maybe some technical difficulties.

Mr. Aaron, your line is open.

Seems like a technical difficulty, operator.

Next, we'll hear from Donald Trott of Jefferies and Company.

He sounds just like Ed.

Good morning.

[Crosstalk]

Hi. Do you have any indication in terms of the sales that you're generating as to what percentage are old, returning customers, and what percentage might be people who are just coming to MarineMax for the first time?

We haven't looked at it real recently, but in the past, it's been about 45% was repeat. In the -- I would say that in the September quarter, it was a lot more than -- or a lot less than the 45% as we got incremental business through the World's Largest Boat Sale.

Right. I think you said on that sale, 70% of the inquiries were new customers. That's --

That's correct. And in the December quarter, our guess would be that there was a higher percentage of new, just like there was in the September quarter. And we're seeing that -- we're seeing some of that at the boat shows, as well.

Okay. Thank you very much.

Thank you, Don.

Next, we'll take Ed Aaron of RBC Capital.

Hi. This is [Paul Burton] for Ed. Sorry about the headset issue. Just wanted to get a little more clarity, if you guys had anything on sort of boat sizes that are being sold in your stores, and also anything at the sale. Any more color on that kind of stuff.

I can tell you that the December quarter is typically a quarter where you sell --

Larger.

-- more larger boats, and less boats below 20 feet, just because things tend to slow down up north. And I think that's relatively consistent this year over last year. From a show perspective right now, we're selling small boats at the shows, and large. The mix picks up right now, which is what we'd expect. And so we're out there trying to make it happen, whether it's a small boat or large boat, today.

Yes. The smaller boats, at a lot of the shows, we're seeing an increase in business. But I think it's more we're starting -- we're taking more share.

Okay. Thanks.

Thank you, Ed.

Next we'll hear from Greg McKinley of Dougherty and Company.

Yes. Thank you. Guys, I wonder if you could comment on a couple of things. You mentioned how significant your market share gains have been, given your sales amidst the difficult industry. And I think you also indicated that maybe your success with the higher margin F&I and parts and accessories was giving you some pricing leverage to go out and get that market share.

Can you comment in terms of the reasons why you think you're gaining the market share that you are? Is it that those higher margin non-boat sales sort of subsidize you being more aggressive with pricing? Or is that really the driver of your market share gains?

I think that, Greg, some of it is pricing, but also some of it is the incentives and all that we've thrown to our sales team, is part of it.

Okay.

And the marketing.

And the marketing efforts that we've really pushed.

We're out there more prominent, trying to bring prospective customers into the stores, and then also taking the product to the customers --

With off-site events.

-- with off-site events. And so we're out there being more aggressive from a marketing perspective. So it's both reasons as to why we're taking share. The World's Largest Boat Sale, you can argue that it was much more the marketing push than it was the pricing discounting.

Yes. Okay. And then could you give us an update on Cabo? I think maybe now you have distribution rights on both coasts of Florida. Is that brand, is that a major contributor to the ASP gains that drove the comp here in December? Can you just give us a sense for how that's -- what -- first of all, maybe what do you see the market size being for that brand where you have those rights, and how it's started off for you?

Yes. We got the entire state of Florida sometime actually in early October, if I remember right. Market size is -- it kind of depends on who you talk to and what information you go look at. But it looks to be potentially a $40 million market. Given the environment today, I don't think that that's the realistic expectation for us in year one. We've got to grow with the brand. It was not a major driver of same store sales growth or of the AUP in the quarter.

Okay.

But I do want to add that we're pretty pleased with the quality of the product. We think it fits in well with our strategy. It fits in well with our -- helping to drive other business, like the Hatteras sales and the Hatteras brand. And we're certainly pleased with really the first two months of business with Cabo, which was really late October, then November and December, [post] the Lauderdale Boat Show. We're pleased with the brand and think it's going to work real well with MarineMax.

As well as the excitement of the team and for the brand. So we think long term, it's going to be a very great addition to our family. It's a premium product.

Okay. Great. And then maybe last question, guys, could you just characterize how you think the difficult industry conditions are impacting your competitors, and what impact that's going to have on maybe the acquisition market? How attractive or available some of these franchises are going to be in this market?

I think without question, we are taking market share, and we are taking sales away from our competition right now. You can see it just in the boat shows, and I know that some of the people on the call have been to boat shows. And when you're in our display and you're standing up on an elevated platform and you look around the boat show, you clearly see a lot more people at our display. You see more activity. There's more unit sales going on.

So that's definitely impacting the competition around us at those shows. And in some cases, we actually hear it, where we'll be talking to the other dealers and hear that their sales are down, and they're probably losing it to us. But as far as acquisitions --

We continue to have dialogue with the dealers that we've consistently had dialogue with. And when it makes good sense for them and for us, we'll do it. Obviously, if things slow down a little bit, which they have, it becomes a little bit more challenging with acquisitions, because they say, "Hey, I really want to sell when times are better."

Okay.

Because they know it's slowing. But that doesn't mean we aren't in some serious discussions.

Yes. Thank you.

Thank you, Greg.

Next we'll hear from Laura Richardson of BB&T. Ms. Richardson, your line is open.

She sounds like Ed did.

I'm hearing no response.

Can you hear me?

Now we can hear you.

Yea, yea. Yes. Technical difficulties on my end as well. Just wondering if you guys have had any thoughts on the downturn in the industry and really how long you see it lasting compared to the, let's say, 2000. The situation the industry was in in 2000. Do you think we -- that we've -- have we seen the worst of it, do you think? Or is it too early to tell?

I'm trying to find the crystal ball here, Laura. But I can tell you that the economic signs out there sure indicate that things are starting to recover. However, as we mentioned on our last call, we do think the housing industry has had an impact on us, perhaps more than we anticipated, because a lot of our customers were speculating in condos and that type of thing, especially in Florida.

But I think there's some positive signs on the horizon, but we're not -- we're surely not seeing it in boat show attendance, because overall, it appears that that's down some. And we're not seeing it in the showrooms, as well. But we're going out and getting it.

So to compare it to 2000, I think that's pretty hard to do, because there's a lot of different factors going on today, like the housing market. But we're hoping it'll return soon. But in the meantime, we're just going to keep pushing.

Okay. That's a fair answer. Thanks, Bill.

All right, Laura.

Next, we'll hear from Jeff Allen of Silvercrest Assets.

Good morning.

Good morning, Jeff.

I think you guys suggested a minute ago that the margin miss was much more due to marketing and promotions than it was to boat discounting. Could you just sort of confirm that? That's one thing. And then could you please provide us with a little more detail on what exactly goes into some of these SG&A costs that you were referring to? Product incentives and team member incentives and so forth?

Jeff, the question that was asked was what drove the market share gains. And what we were -- the question was was it more of a pricing that drove it or more of marketing and spiffs and so forth. And I think our conclusion was, what we were saying, is more of it, while some is the lower price points, most of it is through the intensive and -- intensified marketing and intensified promotions for our team, which both those go through the SG&A line. Spiffs on products and reduction of price points go through the gross profit line.

And the increases in the SG&A are really coming primarily in two areas. One is personnel, and literally spiffs and promotions for our team to help to really to go after it a little bit harder in these challenged times.

A kind of commission special, if you will?

Correct. Correct. To go after it and to work harder and to get the customers back into the stores and to show them the product, and just really just even execute better than they otherwise would have. And then the other part of it is true marketing costs. Whether it's some print media, direct mailing, the costs -- or take the product ops side.

You've got to -- one thing to keep in mind is when we do off-site events, it's not quite as easy as maybe an auto dealership doing off-site events. Our product doesn't have wheels. You've got to somehow transport and get it there. Then you've got to stage it, set it up, clean it, prep it. There's a fair amount of work that goes -- involved -- in it. And all of that goes into the SG&A line. So that's what driven the increase in the SG&A in the September quarter and also the December quarter.

And then the other thing, I mentioned it during the prepared comments, but we did expect to have some degradation at the SG&A line anyhow because of the acquisitions that we completed. They both have sizable stores and sizable operations, but they don't sell as much product during the wintertime because they're up north. So you get a natural deterioration in the operating margin caused primarily through the SG&A line, which is what we had anticipated.

Okay. Then one follow-up, if I may. How would you suggest we track your progress on inventory? I know your same store sale inventory increases have been trending down.

Correct.

Still increasing same store on an absolute level. And as I track it just sort of simplistically, trailing four quarter sales over trailing average inventory, your turnover is declining. When we would -- and I know that's impacted by the acquisitions and everything. But --

Seasonality [inaudible].

What do we look for in terms of -- I assume you'd like to have leaner inventories, all else being equal. How do we look for progress there?

Well, I think what we said, Jeff, at the end of the June quarter, where we finished the June quarter with 1% same store sales growth and a 16% increase in same store inventory, and that was the same time when were forecasting the model year with most of our manufacturers. And we are buying less product in the 12 months from July 1st through June 30th, which is basically our model year in our industry. And the amount less that we're buying is high single digits, 8%, 9%, less in dollars.

So if we're 8%, 9% less in dollars, and if we do the mid-single digit same store sales growth, which is also a dollar related growth, you would think, as we wrap this -- at least this model year up, which is through June, you're going to see a decline in same store inventories. And that's kind of how we're tracking. And from our perspective -- now I will add --

By the June quarter, which you call the end of the model year, that would be you'd expect the same store sales decline?

Yes. It would be, if you go from 16%, and then with your 9% less and mid-single digit, it would be flat to declining slightly at the end of June.

Same store inventory would be down at the end of June?

Correct.

Okay.

Or flat, because we were 16% up last year.

Right.

So you've got to peel that 16% off the revenue, and lack of -- or less buying of product now. So that's what we'd expect.

And so -- but if your same store sales fall short, then that would --

Correct.

That would leave you a little bit higher. Okay. All right. Thank you.

Thank you.

Thank you.

[Operator Instructions] Next, we'll hear from David Goldsmith of Baron Capital.

Hello, guys. It's actually [Laird]. A couple of questions, one for Bill and one for Mike. For Bill, can you just help me understand how we -- the tradeoff between marketing spending, increased commissions, and spending for team members, and gross margins on the boats, and how do you look at that? When do you increase one versus the other? And going forward for the rest of the year, which one -- do you expect to have increased marketing and employee commissions for the rest of the year?

Laird, I'd say that our strategy going forward is to increase the marketing and the efforts to even a greater extent. More off-sites. Perhaps some more boat sales types of event. So we're working on a few of those right now, to really go capture some market share. Make sure we're doing even a greater job at boat shows with displays and that type of thing.

Also, with that, we'll involve incentives for the sales team, and boat shows, and events to keep them excited and pushing, so we can get that market share. But at that same time, our push in the company is to keep the team more focused on the lifestyle of boating and what it really does for the individual and their family rather than let's make a deal.

And maybe we got hung up in that a little bit too much in the December quarter, and even in the September quarter to some extent. And so we're trying to slow that down a little bit. But we'll take the dollars that we would have put into incentives for the -- not incentives, but in discounts and rebates to the product, and we'll throw it into going out and getting more aggressive in the marketplace. That's what we'd like to do.

Now that being said, we understand that in some areas, we are going to have to do some discounting of the products, which will impact the margins.

Got you. And for Mike, how much do you have left on your stock repurchase authorization? And under your credit facility, how much are you able to buy back per year?

Thanks, Laird. We have a million share repurchase authorization, which is probably -- went out probably a year ago November. And I'm going to say we have 650,000 shares left under that. And obviously, it's our intention to continue to buy shares back under that plan pursuant to the provisions that the plan was put in place for, which is to offset dilution from options and so forth.

And then on our line of credit, I believe it's a $20 million cap, Laird, is what it is under the line. I think that's accurate. It's $20 million is the restriction line.

Okay. All right. Thanks a lot.

Thank you.

Our next question will come from Justin Boisseau, Gates Capital Management.

Justin Bousseau. Hi. Thanks. A question again about your inventory, or more specifically, given the acquisitions, when will your peak revolver quarter be? Was it this December quarter, or will it be the next quarter?

It's this quarter, March, that we're in now. Seasonally, the inventories always build because the manufacturers want to ship a level set throughout the year. So the peak revolver period would be the end of the March quarter. Literally, March 31st.

And then is all of your inventory owned inventory? A lot of what you're financing with that revolver? You don't have any inventory in your stores that's on consignment from a supplier, do you?

Not from a supplier. No.

And do you have any ability to put back any of the inventory if it becomes stale or doesn't sell, back to the supplier?

No. But our biggest leverage that we have is to cancel product.

Right.

And when you buy, if you look at our inventory, you can figure out that we're buying $50 million, $60 million a month, or something close to that. And if we were -- if things ever got real bad -- we had this question come up in '01, especially after 9/11. You start reducing something that's that big a month, it comes off the balance sheet pretty quick.

Right. Okay. Thanks. That's all I had.

And it appears there are no further questions at this time. Mr. McGill, I'll turn the conference back over to you for any additional or closing comments.

Thank you, operator, and thank you, everyone, for joining this call, and for your continued belief and support in MarineMax. We'll see you on the next call. Thank you.

That concludes today's teleconference. Thank you all for your participation.