MarineMax Inc (HZO) 2007 Q2 法說會逐字稿

Good day, everyone and welcome to the MarineMax Inc. first-quarter 2007 earnings conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to Mr. Brad Cohen of Integrated Corporate Relations. Please go ahead, sir.

Thank you very much, operator and welcome to today's call. I am sure that, by now, everyone has 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 e-mail one to you immediately.

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

Thank you, Brad. Good morning, everyone and thank you for joining this call. 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 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'd like to turn the call over to Bill.

Thank you, Mike and good morning, everyone. Our remarks today will be brief as we spoke to just two weeks ago and shared our updated expectations for the quarter and fiscal 2007. Our outlook has not changed since that time.

As we described on that call, retail conditions in the marine industry have become more challenging. It is more difficult -- it is a more difficult sales environment than we had previously anticipated and we are experiencing more pricing pressure in the marketplace. While we are disappointed with our earnings through this challenging industry cycle, the bright spot is that we continue to have success selling boats and growing significant marketshare.

During the quarter, our same-store sales were up 2% in dollars while our unit growth was up in excess of 20%. This unit growth compares to the industry, which is reportedly down as much as 20% in the segments in which we operate.

The primary factors negatively impacting our results as noted on the earlier call is a greater than anticipated amount of pricing pressure coupled with our projected increase in expenses to capture the business. The softness in the marine industry is unfortunate, but it also presents MarineMax with opportunities to grow and invest in future potential sales as we have discussed previously.

By outselling our competitors, we continue to take marketshare. Given that a significant amount of our revenue is from receipt and referral buyers, these marketshare gains will generate future growth in revenue and earnings as the industry recovers.

Additionally, we are focused on maintaining the strength of our balance sheet and we have taken steps that include working with our manufacturers as partners to buy less product during this quarter.

Although, we remain concerned about near-term sales conditions and are not sure when the industry will begin to recover, we are prepared to capitalize on the opportunity in front of us while working to mitigate the impact to our profitability.

We will focus our efforts on operating our business more efficiently and building long-term customer relationships. I am confident that MarineMax's strategies and strengths will once again yield strong revenue and earnings growth into the future.

I will now ask Mike to provide a view comments on the quarter and fiscal 2007.

Thank you, Bill. For the three months ended March 31, 2007, our second-quarter revenue rose 13.5% to $326 million. Our same-store sales increased 2% or $6 million following a 14% increase in the same quarter last year. Keep in mind that the March quarter saw three years of double-digit growth from a same-store sales perspective until this year.

Revenue from stores that are not eligible for inclusion in a same-store sales base contributed approximately $35 million. Gross margin dollars were up $5 million, but our gross margin percentage dropped about 130 points to 22.6%. The decline in gross margins was due primarily to a decline in boat margins partially offset by the incremental improvements in our higher-margin businesses such as finance and insurance, service and parts and accessories.

Our selling, general and administrative expenses after adding back $2 million of business interruption insurance proceeds increased to $62.5 million or 19.2% of revenue versus 17.4% last year. As such, our SG&A is up about 170 basis points. About one-third of the increase in SG&A as a percentage of revenue is the result of the increased seasonality expected from the two acquisitions that we completed a year ago during the March quarter.

The balance of the increase is attributable to additional incentives and promotions for our team and marketing dollars, both of which helped to drive sales during the quarter. Interest expense increased to $7.5 million due to the rising rate environment and additional borrowings primarily associated with the acquisitions we made last year. Our tax rate was about 39%. As noted on the call for the December quarter, we expect our tax rate on an annual basis to be slightly greater than 40%.

Finally, our net income for the second quarter was $3.3 million or $0.17 per diluted share. However, backing out the $0.06 for the business interruption insurance proceeds results in $0.11 per diluted share compared to net income of $8.6 million or $0.46 per diluted share a year ago.

Turning to our balance sheet, at quarter-end, we had $23.5 million in cash, up from $14.9 million a year ago. Additionally, we have substantial cash in the form of unleveraged inventory as we utilize excess cash to reduce our inventory financing. We ended the quarter with $548 million in inventory. On a same-store inventory basis when you exclude the inventory associated with Cabo, which is a brand that we recently expanded with, our inventories are up approximately 3% on a same-store basis, while our rolling 12-month same-store sales is up about 7%.

Since the June 2006 quarter when our same-store inventory had increased 18%, our same-store inventory growth has steadily decreased as we expected it would. We said then that the same-store inventories would fall in line with our same-store sales growth as we moved through the fiscal year. And they have each quarter.

As Bill mentioned, working with our manufacturers, we took action to reduce our purchases, which will take effect this quarter. This should help with our margins, reduced our carrying costs and keep same-store inventories falling. We are comfortable with our inventory position.

Customer deposits decreased year-over-year, but as we have said repeatedly in the past, our deposits are very lumpy and not necessarily an indicator of future business. Our revolving line of credit balance is $450 million at the end of the quarter, which is up from the same period a year ago due mostly to the inventory increase I discussed earlier.

Overall, balance sheet has gotten stronger year-over-year adding to our competitive advantages. Our current ratio is better, our equity has increased over $34 million year-over-year, which has resulted in our book value per share approaching $19 before considering any upside value in our real estate, which we have estimated previously at $60 million or about $2 per share of additional book value after tax. Our strong balance sheet allows us to have greater flexibility when growth opportunities arise.

Now I will briefly discuss our guidance for fiscal 2007, which is unchanged from the discussion we had two weeks ago. It is first important to reiterate that we have very little visibility. It is hard to see how May will look, let alone the rest of this year. We continue to feel the effects of the softer environment in just about every segment in which we operate, including increased margin pressure as the competitors feel more of the impact from the softness.

While we are hopeful conditions will improve, it is extremely difficult for us to predict when that will happen and all data points indicate that we are in for a challenging summer selling season, which is when we normally make 70% to 75% of our annual profits. Based on everything we know today, we are reiterating the guidance we gave on our April 12 update of $0.45 to $0.65 per share on a fully diluted basis for fiscal 2007.

This guidance assumes same-store sales will be flat to low single digit and excludes the impact from any potential material acquisitions that we may complete, as well as the $0.06 per diluted share we recognize in the second quarter arising from the proceeds of business interruption insurance.

While we are disappointed with our earnings outlook, it reflects the current industry conditions which have deteriorated further than we had previously believed was likely. As always, we will keep you posted if we see any other material changes in the industry.

I will now turn the call back to Bill for a closing remark before we open it up questions.

Thank you, Mike. While these are difficult times for us and for the rest of the marine industry, I am completely confident that MarineMax will reap significant rewards from this down cycle. Our premium brands, outstanding team and customer-centric strategies create significant competitive advantages. These advantages are what are allowing us to outperform our peers and drive marketshare gains.

Although we are disappointed with our recent performance and reduced guidance, I am proud that we are accomplishing what we are accomplishing given the environment in which we are operating. The marine business will recover and we will be positioned to capitalize in its many positive benefits.

Thank you again for your continued support and thanks to our team for their extra efforts and for their passions for our customers on this lifestyle of boating as we deliver the boating dream. With that, we will now open it up for a line of questions.

(OPERATOR INSTRUCTIONS). Hakan Ipekci, Merrill Lynch.

Two questions. One is given the recent gains, can you give us an idea about your current marketshare and do you have a plan or goal in that aspect? The other question is aside from acquisitions, can you talk about some of your new store opening plans with the existing portfolio? Thank you.

I can say from a new store perspective, we have typically opened up one to two stores a year. It's possible we could have one more what I would call low overhead on the water facility open up this year. We are in discussions in a couple of different markets.

On a marketshare perspective, we are seeing very sizable increases from really -- we have always had incremental increases, but starting in the September quarter through the March quarter, they are very sizable, which we expect that's going to continue as we move through the summer selling season. We definitely see us as the anomaly right now in the industry in terms of our unit growth.

In a lot of the markets, we are a full nine points of share ahead of a lot of our competitors and so that is a huge gain in such a short period of time. So we are truly taking marketshare and I think there is a lot more marine dealers out there that are really suffering the woes of this economy right now.

So those nine points, is that new gains or is that kind of building up on existing difference.

It is building from an existing difference basically.

Correct.

And the gains that we have been having, as we said, starting last summer through today are truly large gains.

Okay. Great. Thank you.

Thank you.

Steven Rees, JPMorgan.

Thanks. Can you talk about your sales performance kind of across your system and various geographies? I know you mentioned on the last call that perhaps declining real estate values are impacting consumer behavior. I mean do you see Florida as a whole underperforming the rest of the system and are there any pockets of strength?

The weaknesses are pretty well across the country. I mean obviously Florida being a very significant part of our business is being exceptionally weak. Has had a bigger impact on our Company, but we are also seeing it in the Northeast. Now the thing we are not sure of, Steven, is in the Northeast, as you probably know, we haven't had a lot of good weekends recently.

Yes, that's for sure.

We are still looking to see -- are we going to have a good spring selling season and delivery season in the Northeast or how bad is it? But Ohio for us continues to be a struggle with the Detroit issues and we are seeing some -- I think some good business in the mountain area. But other than that, it is pretty well across the board. It is mostly all regions and whatever is causing this and we all have our theories, it seems to be impacting most all of the regions.

Everybody.

Okay. And then for Mike, just in terms of what sort of gross margin assumptions have you made for the remainder of the year. Is it similar to what we saw in this quarter and then perhaps you can remind me like what the gross margin percentage is for some of the smaller product versus some of the larger boats.

Yes, we have talked about as much as 150 basis points decline for the entire fiscal year. Typically, the smaller boats have pretty good gross margins on it. Although honestly from 17 to 60 feet, they are usually pretty similar. We are out there and we are taking share. We have certainly some price point products with lower margins than that, but when you bake everything in and factor in our expected mix change, it is likely for the full fiscal year in that neighborhood of 150 basis points down.

But it looks like this quarter you sold a lot more of the smaller products just given the number of units that you mentioned.

That's correct.

Is that -- are the larger products still pretty soft?

When you define larger, let me define it. If you talk about the Ferretti and the Hatteras, kind of the very upper end business -- Azimut and so forth, that product continues to be holding up fairly well. Now keep in mind we don't sell a ton of units, so it may be hard to be see trends there. But based on what we are writing daily and selling daily, we are not concerned about that segment of the business.

The segment 40 to 58 feet in that arena for really the industry is softer now than we would like to see it and that is why you get a relatively small same-store sales increase with a dramatic big increase in units because we are moving a lot of boats below let's call it 24 feet.

Right. Any plans to do like another world's largest boating sale. I know you did it last fall. Are you considering that this spring or summer?

It is certainly in our thought process and in our plan for sometime this summer. Now how it is captured and what it is called is still in the works, but the thought would be that we would do something again this summer.

Okay. Great. Thank you.

Ed Aaron, RBC Capital Markets.

This is Paul Burton for Ed. Just have a couple of questions. One, wondering if you could first give us any color on your April sales trends and then second, just thinking about the equity market right now, historically has been pretty strong and when it has been strong, it has had a positive effect on the boating market. So wondering based on your experience whether you think that this current market might also impact or have an effect on the weak boating market?

Well, Paul, April I would have to say has not started off real robust and I addressed that a little bit earlier on the call that a lot of the Northern markets -- weather has kind of not allowed it to gain the momentum that it should be gaining right now. So it is still a little too early to tell, but we are still feeling the impacts of whether it is the housing and maybe the fuel price or whatever it is that has got people in a wait and see mode. So the doors are not being knocked down at our stores as an example. It's kind of flat traffic to say the best.

So we are having to go get the business with off-site events and boat shows that we are coming off of right now as they are finishing up. As we said on earlier calls, people get excited at the shows and they even sign contracts and then they go home and we have more fallout than normal. But it is too early to tell on what the quarter is going to be because we just don't have that visibility.

And as far as the stock, the impact of the equity markets, I guess in theory you would think that would bode well for discretionary type items, especially the premium end of the discretionary type items. But to the extent it is going to bode well, we are still waiting for that positive impact.

Okay. Thanks.

Thanks, Paul.

Scott Barry, Credit Suisse.

Hey guys, Mike, just a question for you and then maybe a question for Bill as well. Do you have a sense for post the Port Arrowhead and Surfside acquisitions, what percentage of your business in the first half of your fiscal year comes out of the state of Florida?

Yes, I am going to tell you that it is about -- now it is reduced to about 43% or so, Scott. Still the lions share of our business. I think that is the right number. Let's say it's about half. It used to be more than that, but I think when you add those two in there, they increase the top line. The number I am giving you is a percentage of the top line. Florida normally is a bigger percentage of the bottom line and it would be a bigger percentage of the number I just gave you because the Northern operations do lose money during the December quarter and certainly the March quarter this year.

Great. No, that's helpful. And then just with your value pricing, you typically get a premium -- obviously get a premium. Are you outright discounting and are you still getting a premium to the other players out there or maybe you could discuss some of the other forms of promotion you are using to move the volume?

Scot, we are -- we are discounting off of the value price more now than we ever have and in some cases, we are actually reducing the value price on specific models and in other cases, we are offering internal and also manufacturer rebates to reduce the price -- the value price of the boat.

But the biggest thrust that we have had and you have heard us say this on previous calls that we have is to try to get our team out of the whole pricing mentality. That is kind of what we slipped into with things slowing down and inventories building a little bit and with rebates coming and we have got a real focus in our Company right now to get back to delivering what we do best, which is -- what does boating do for me personally as a boater and what does it do for my family and start shifting away more and more from, hey, it's about price.

But that being said, people are coming in from competitive dealers and saying Joe's boatyard down the [sale] is offering us 25%, 30% off and so it is hard to stay away from it. But we are doing a lot of promotions in the form of -- other than price as well with card giveaways and that type of thing and we are doing more with classes and more getaway trips. So we are spending a lot more in those efforts in order to really sell what we do best is, which you know, which is this emotional side of the brain.

Okay. Great. And then just one last question. You said you were going to reduce your wholesale purchases. Have your manufacturing partners come back and offered you more attractive pricing to try to get you guys to get a little bit more aggressive in terms of your wholesale buying?

In certain models, they have, Scott, but at the same time, they understand this is a long-term story and so as a result, you need to do what is right for the long term and so in a lot of cases, they are saying let's don't do any more price here; it hurts the brand. Let's work our way through it and so the right answer is to reduce the purchases.

Understood. Okay, thanks very much, guys.

Thank you.

Thanks, Scott.

Jonathan Cramer, Cowen & Co.

Good morning. Just want to get a little more color on the aging of your inventory and what you are seeing in terms of '06 models in the industry.

I'd tell you our aging is very similar to the same point in time last year, which is how we compare it year-over-year. We do not -- well, we still have some '06s. We have what I would call a reasonable level of '06s as we head into this time of year. Obviously because we have decided to cut back purchases from the manufacturer, given the environment out there, we had some concerns with what our original inventory projections were, but in the whole scheme of things -- I think I made the comment during the prepared remarks that we are comfortable with where our inventory is and from an aging perspective.

There has been some discussion in the industry that it is too heavy with noncurrent product with '06s. From our perspective, we don't think that is the case with the type of brands that we carry. There doesn't seem to be too many '06s out there as an example for Sea Ray ands certainly not Hatterases and some of the other brands that we carry.

Okay. Thank you.

Laura Richardson, BB&T.

Thanks. Guys, I'm just trying to do my balance sheet model and wondering what, in terms of numbers, where do you think the inventory and the borrowing and the cash should be at the end of the year?

Well, I mean so much of what the end of the year number is going to be is what we are going to -- how we are going to feel about our 2008 orders. Keep in mind the model year changes in the summertime, so we meet with all of our manufacturers in June and July and kind of forecast our '08 purchases. So we haven't formulated that yet, but I would tell you certainly as we get to the end of June, you should see a reduction in our inventory from the previous year on a same-store basis. It should go negative, which means the borrowings obviously would also drop.

Cash, as it states on the balance sheet, is literally a function of how much we make at the end of the quarter. I think you guys all know that because we have so much excess cash in our inventory, it's just what is there at the end of the quarter. I think in general if you were to look at everything we know today, you would expect to see a reduction of inventory at 9/30 and a reduction on borrowings at 9/30 given everything we know today. The magnitude of that is uncertain until we kind of get into the summer selling season.

And when do you lap the Cabo introduction?

We lap it literally October 31.

Thanks, guys.

Tim Conder, A.G. Edwards.

Hey, Tim. He's one of these silent questioners.

(inaudible) from your perspective.

Hey, Tim, you cut out for your question.

We could only hear the last two words, Tim.

Okay. I'm sorry. Is that better?

Yes, we can hear you now.

Okay. Brunswick mentioned in their press release that they had good parts and accessories sales in the marine area. Just a comment from your perspective on that and then Mike, I think in a previous response to a previous question, you mentioned that you felt the industry was heaviest in the 40 to 50 foot segment. Just to clarify that and to make sure and then any commentary regarding Florida and the broad real estate market there and just maybe Florida and the nation in general and how it relates to a lot of places have seen higher real estate taxes. Any commentary as to how that is playing into the overall weakness in the industry?

Well, Tim, first of all, on P&A, we are seeing the same success that Brunswick is seeing and as you know, we have been growing that part of our business almost every year. So even at boat shows, you -- in a lot of our boat shows, you would've seen parts and accessories displays that we had set up, call them accessories. So we are very pleased with the progress that's going there. The 40 to 50 foot segment inventories, I think they are okay as far as just (multiple speakers).

Just softer.

It's just that the market is softer and the fact that we have reduced some purchases will help us in that regard, but it's -- we are not seeing a glut of inventory in the field out there. Florida real estate, there is all kind of articles out on what is going on in Florida and from our perspective it is that people are questioning when is the -- where is the bottom and are we recovering from -- in the real estate market and I think it truly has impacted our customers.

I hear it from customers that I know personally that I have sold boats to over the 34 years and I also hear about the taxes. Real estate taxes have become a major issue in Florida, not that they were insurmountable, but if you put on top of that flood insurance, which has gone through the roof as well, it is substantial.

Now the good news is our governor is really pushing and I think our legislature is working on getting it changed and I think that will be a real boost to our business and a lot of other businesses as well. Plus business owners that I know that our in other businesses in the marine give the same thoughts that I have there.

Okay. Thank you, gentlemen.

[John Harlow], [Merrill Handy].

Thank you. I am just curious about your business model compared to Brunswick. I always think of retailers as having a lower fixed cost, more variable cost than say their manufacturers, but you show almost or even maybe greater cyclicality than say Brunswick. Why is that?

I think part of what you're seeing this year is the fact that last year -- in the first six months of this year, John, we completed two large acquisitions, which increased our seasonality and increased our expected losses during the quarter. You couple that with the declines overall in the environment and you get the results that we had for the first six months.

And then with what our outlook is right now for the next six months and our ability to make drastic changes in our operating structure as we head into the summer selling season, which is admittedly kind of difficult, you get a significant earnings decline.

I would also point out that I know Brunswick and some of the other manufacturers started feeling this softness 18 months to 24 months ago and started taking actions accordingly then, bringing down production, doing whatever they were doing back then that the retailers really didn't feel like they needed to do and did not do until probably right now. And so some of the things that you're seeing where you are comparing Brunswick's numbers, they have already taken a lot of this stuff out of their earnings and other business starting 18 to 24 months ago.

What kind of flexibility do you have in terms of your expenses to flex them down? I mean we are all in it now. That's for sure.

Yes, I'd tell you that if you look at our expense structure, about one-third of our expense structure historically has been what I would call variable, which not necessarily variable -- it is kind of a combination of variable with sales and also variable with gross profits and then you get a third that is hard fixed and then you get a third that is what I call semi-fixed, which is when you start cutting into that, it is difficult, but you can make the cut.

I think on the last call, Bill talked about our efforts to go really store by store, line by line, person by person making sure that we have the best people in the right seats on the bus and then looking at every single category within our P&L on a detailed basis to see if it is something that we can do away with today.

The one challenge that we had, which I think was reiterated in the last call, was that right between now and May 15, we are going to be delivering thousands and thousands of boats for our customers and we have to do those deliveries proper, not just from a new boat sales perspective, but also boats that we have had in storage over the winter time and those take -- captains deliver the boats, team members to unshrinkwrap the boats, clean the boats up, put them in the water, teach the customers how to use it and you can't shortshift that process. If you do, you're going to irritate your customer, which will have a longer-term impact on us.

And then you still need the captains to deliver them and you still need to do getaway trips because they are all -- and we need to keep investing in our team, but at the same time, John, we are very cognizant of the SG&A and we have major efforts underway in our Company to make sure we are managing it to make sure there is no fat, but we have got to really make sure that we don't get down into the muscle and bone too much.

I understand. Thank you for your answer.

Thank you.

Thank you, John. Jeff Allen, Silvercrest Assessment (sic) Management.

Hi, guys. I was hoping you guys might readdress your strategy of moving downmarket a little bit into smaller, less expensive boats. You have tried to make a push into that market this year and obviously with the benefit of 20/20 hindsight, it has been a somewhat unpleasant experience for the shareholders. But how do you guys look at that? Is it sort of right strategy, wrong timing or how are you looking at that?

Well, we primarily sell premium products to premium customers and moving into the entry-level products for the blue-collar worker is not really our strategy. However, we do sell some smaller boats. Was that the question?

Jeff, I think --

Well, I mean aren't you -- Am I mistaken or are you not -- have you not tried this year to move incrementally somewhat downmarket from where you were? Obviously you are not marketing to the Budweiser and lunchpail crowd, but you are moving a little bit downmarket relative to where you were. Is that not correct?

What we did, Jeff, really -- I think I know what you are saying. Sea Ray and a lot of the manufacturers we start with, they have smaller product and they have larger product and last year, some of our manufacturers had difficulty getting us some of the smaller product, which we talked about a year ago where we had large dollar increases in same-store sales, but we had negative unit increases. So we said at the time we couldn't get the boats, so the units were down. And also we lost share last year because of that as did every Sea Ray dealer and people out there.

This year, we got the product, we've ordered the boats, we are selling them, we are taking back that share. That is a very solid and sound strategy because we have got a proven track record of getting our customers in their first boat, whether it is a small boat or a medium-size boat or a large boat, taking care of them and then having them trade it on their second, third or fourth boat.

So these gains that we are making in units, in a way, it is like we are sowing the seeds for our future trade-up business in '07, '08, '09 and as the industry recovers and we saw that -- we did the same thing in '01. We are actually doing it a little bit to a bigger degree this year. We did the same thing in '01 and then we definitely reaped the rewards as the industry began to recover in '03, 04, and '05. We had dramatic same-store sales gains if you guys remember in '04 at '05. Dramatic unit growth because those people who had bought in '01, '02 and '03 traded up into larger boats and then we had what always happens when the industry recovers is you get new people coming in, so we had that dual effect, which we think we will have again.

Okay. So just to paraphrase then, you are basically -- this year, you were trying to get back to the "normal" mix of larger and smaller boats.

That's correct.

Rather than moving down market.

Yes, we have not taken on -- we have not changed at all our brand strategy and our positioning strategy.

Okay. Okay, fair enough.

Justin Boisseau, Gates Capital Management.

Could you tell me what is the current spread on your revolver today? LIBOR plus what?

150.

You are at 150 right now?

Yes.

I want to make sure I understood your inventory. You said the same-store inventory would start to decline in the third quarter year over year, is that right?

Yes. It should with the reductions we are making in our purchases as we wind through this quarter. We ought to actually be negative from a same-store inventory perspective.

And what about on a dollar basis year-over-year for the end of 9/07 year? What would you expect the dollar basis of inventory to be? Will it be down or up?

I would expect it to be down as a comment I made in answer to a question. I don't know what the magnitude is going to be though.

All right. Thanks.

That concludes our question-and-answer session. I would like to turn it back over to management for any additional or closing remarks.

We'd like to thank everyone for participating in our second-quarter conference call this morning and the Web broadcast. Mike and I are available after this call if you have any questions. Thank you for your continued support and belief in MarineMax.

Once again ladies and gentlemen, this will conclude today's conference. We thank you for your participation. You may now disconnect.