MarineMax Inc (HZO) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to the MarineMax, Inc. second-quarter fiscal 2009 earnings conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Kate Messmer of ICR. Please go ahead, ma'am.

Thank you, operator. Good morning, everyone, and thank you for joining this discussion of MarineMax's 2009 fiscal second-quarter results. I'm sure you have 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 e-mail one to you.

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

Thank you, Kate. 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 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 reduce its inventory and related financing; 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, and good morning everyone. You know, despite our efforts to swim against the tide of bad news, the continued economic softness and low consumer confidence negatively impacted our business during the quarter. Specifically, our same-store sales were down 41% versus a 28% decline we experienced last year.

As disappointed as we are with our sales performance, we are pleased that we continue to make progress on a few key initiatives. First, we showed a substantial reduction in expenses, our largest year-over-year decline to date. It is worthy to note that while the March quarter produced over 29% more revenue than the December quarter, we actually reduced expenses by greater than 6%. These reductions are the result of many efforts we have made over the past 12 months to downsize our business in response to the weaker retail demand.

These expense reductions have come through reductions in team members, through store closings and scrutiny of every expense line item. The team member reductions have been the hardest, and accounted for many sleepless nights for many of us, as they impacted families and their lives.

Additionally, we made very good progress reducing our inventories. Despite our same-store sales being down 41%, we were able to produce another sequential quarterly decline in inventory. We did this during a quarter when, historically, inventory rises seasonally to the highest level of the fiscal year.

On a year-over-year basis, we finished the quarter down about $155 million. To ensure that we continue to drive out inventory, we did adopt a more aggressive stance on margins. But we believe the strategy of reducing inventory and the related borrowings is a correct course of action given the uncertainties that the industry faces.

The inventory reduction strategy has yielded modest improvements to both our new and used units aged over a year old as compared to the same aging at the end of the December quarter. Again, this is atypical during the seasonally slower quarter of March, especially given the same-store sales declines.

During this slower six months of the year, and despite the losses we have recognized, the reduction in inventory and expenses allowed us to produce about $64 million in cash from operations. The cash that we have generated has allowed us to reduce our financing by over $153 million on a year-over-year basis. Keep in mind that the only debt we have is the inventory financing to our line of credit with our seven banks. We expect to continue to drive down inventory as we move through the summer selling season.

Let me comment on gross margins. While our strategy was to get more aggressive on pricing and accomplished inventory goals that I outlined earlier, we also faced a few external obstacles. For one, retail financing became considerably more challenging during the quarter. This made it difficult to close deals, but it also made it challenging for us to bring our typical commissions on the finance and insurance side of our business, which we have discussed in the past -- you know, the F&I business produces significantly higher margins than boat sales.

We also had a greater percentage of customers simply opt to pay cash and not finance due to the new hassles that resulted from the retail lenders asking for additional borrowing information and details.

During the quarter, our fallout from customers contracted to those delivered was substantial due to the tightening of the retail financing environment. These families, who were not willing or able to proceed with their purchase, will return as conditions improve in the economy and banking. I can add that we did not lose any retail lenders during the quarter and in fact, we have increased the number of lenders that we use, albeit they are evaluating every deal more critically than before.

Our margins also experienced increased pressure from the repossession market. Although most of our buyers would generally not buy a repossessed boat, they have looked at the pricing that they perceive as available in the marketplace. What they initially do not realize that most of the boats require considerable works -- work and limited, if any, warranties, and come with no service support. To improve margins in the future, we have and will continue to train our team in both of these areas about the new requirements of the retail lenders and also about the realities of the repossessed products. Keeping potential buyers focused on buying a complete package from MarineMax as we teach them, service them, and show them how to have fun, is how we will mitigate these external factors.

Lastly, our dealer failures continue to escalate the dumping of product as interim margin pressure until the inventory is cleaned up or repurchased by the manufacturer or placed with another dealer. Because we have such large protected territories, the failure of dealers does not result in the dumping of the brands which we carry, but it creates a noise in the marketplace as other brands get sold at low prices.

It is important to note that our manufacturers have been very supportive of us during this process, including providing sales incentives to help both the Company and our customers. Additionally, they continue to support us with the best products available, including continuing to develop new models that excite our customers.

We thank our manufacturing partners for their marketing support, their financial assistance, and their understanding of the need to severely slow the flow of inventory into our stores.

I will now ask Mike to provide more detailed comments on the quarter. Mike?

Thank you, Bill, and good morning again, everyone. For the three months ended March 31, 2009, our second-quarter revenue was $129.6 million compared to $233.3 million last year. Our same-store sales declined approximately 41% or about $88 million compared to the 28% decrease in the same quarter last year. Additionally, revenue declined approximately $15 million from store closures that are no longer eligible for inclusion in the same-store sales base.

Generally, we experienced softness across all of our markets and segments that we participate. From a trend standpoint, while March showed less of a same-store sales declined than January and February, you would expect that, since March was the easiest comparison, given that last year, sales fell hard following the Bear Stearns collapse in early March of 2008.

Gross profit as a percentage of revenue decreased approximately 815 points to 15.2%. This decrease in our overall gross profit margin was due to several factors, most of which Bill outlined earlier. I will add that one of the larger drivers of our gross margin declined were losses incurred and increases to inventory reserves totaling about $4.1 million for brands that we no longer carry. Such losses and reserves were established primarily on the Ferretti group of products. The Ferretti Group has recently amended its debt facility, and appears to be in much better financial shape. Nonetheless, we thought it was prudent to increase our reserves. I will comment on the Ferretti Group in more detail later.

Our selling, general and administrative expenses decreased approximately 35% or about $20 million during the quarter, including over $900,000 associated with store closing costs. The dollar decrease in SG&A expenses is primarily due to decreases in personnel costs from downsizing our workforce, as well as reductions in sales commissions and manager bonuses, along with a decrease in marketing, T&E, and every other expense category.

We continue to look for areas to cut cost out of our business, including potential store closings. It is not our intention to vacate any market, but we need to be sure our footprint is appropriate for the lower rate of sales experienced by the industry.

Interest expense decreased about 37% to $3.8 million as a result of a reduction or average borrowings on our line of credit and the more favorable interest rate environment. As for income taxes, as we mentioned on the last call, our loss carryback is limited by the current tax law. As such, the tax benefit we recorded during the quarter was virtually zero. This significantly increased our reported losses. If the tax loss carryback laws change, we would be able to increase our benefit accordingly.

Finally, our reported net loss for the second quarter of fiscal 2009 was $20.3 million or $1.09 per share, compared to a reported net loss of $3.5 million or $0.19 per share for the comparable quarter last year.

For the six months through March I will comment on a few key items. First, our same-store sales have declined about 46% compared with a 20% decrease in the comparable period last year. Second, our margin decline on a year-over-year basis is primarily due to the items that Bill or I mentioned in the March quarter. Third, we reduced expenses by over $34 million, and will continue making sizable year-over-year reductions as 2009 progresses.

Turning to our balance sheet, at quarter end, we had approximately $15 million in cash. Keep in mind the amount of cash we have at any point in time is a function of how much we leverage our inventory. As I have stated before, we have approximately $105 million of cash in the form of unleveraged inventory.

We ended the quarter with $399 million in inventory which is down approximately $155 million for the comparable period last year. When this fiscal year started, our year-over-year inventory was essentially flat. In the first six months of the year through March, we've been able to reduce our year-over-year inventories by $155 million despite the very soft retail environment.

At March 31, our new units and inventory were down 49% on a year-over-year basis from the prior-year. This is a very significant unit reduction. We believe that we will continue to achieve reductions in inventory as we move through each month of this year. Obviously, we need to have a reasonable level of retail sales to help. We are prepared to continue our aggressive stance on margins as we feel the payoff is higher margins and profit when the industry recovers.

The extent of the margin pressure is hard to estimate, given the many variables that come into consideration and difficulty predicting demand. Additionally, as we mentioned in the past, our dealer agreement with the Ferretti group expired on August 31, requiring them to repurchase our remaining inventory at essentially our purchase price less cost to repair and refurbish the products.

While Ferretti repurchased approximately $27 million of this inventory through December 31, and we sold some products in the March quarter, we have approximately $32 million remaining in inventory that they are required to repurchase.

We are in ongoing discussions with their management about completing their contractual obligation to repurchase the remaining boats that we home. Now that they have solved their debt issues, we're optimistic that we will make further progress on the repurchase.

Turning to our liabilities, our total debt also decreased by over $153 million on a year-over-year basis. This was driven by the inventory reduction, which generates significant cash allowing us to reduce our financing facility. Keep in mind the only debt we have is the debt that finances our inventory. We are in compliance with the terms of our debt facility, which provided that the Company could lose $20 million of EBITDA as defined through the end of March. The agreement further allows the Company to lose a cumulative of $15 million through June 30 and a cumulative of $10 million through September 30. We were able to add back store closing costs and certain other items as defined in the agreement for the definition of EBITDA.

The Company's ability to remain in compliance with the facility is also a subject to the level of retail sales that we generate and related margins in our continued progress on the expense reductions.

Our tangible net worth now stands at approximately $217 million, which is considerably higher than our current market cap. We own 33 of our stores, which have no outstanding mortgages. IN what has proven to be a challenging first six months to the fiscal year, we were able to generate in excess of $64 million in cash from operations, largely due to the inventory reduction, and we believe the potential for sizable cash flows will continue as we manage the balance sheet.

Before I turn the call over to Bill, I will add that the month of April was another challenging month for Marine retailers. Our same-store sales were off approximately 38%, but preliminary indications are that margins have improved relative to the March quarter.

And finally, inventory expenses continue to drop. Of course, most of you know that the two biggest months of the quarter, May and June, are what really will drive our final quarterly results. With that said, I will now turn the call back over to Bill for some additional comments.

Thank you, Mike. As MarineMax works its way through these challenging industry conditions, our industry-leading position has and continues to offer opportunities for us to consider expanding into new markets and leveraging our existing brands. We will continue to evaluate the right timing and economics for both the short- and long-term benefits for our Company.

I want to take the opportunity to reiterate that MarineMax has amassed substantial tangible net worth over the years, which provides us with the financial strength to weather this economic storm and to capitalize as business returns.

Through this and the hard work of our team members, we are focused on capitalizing on the weaknesses that are confronting other dealers and manufacturers. We are continuing to make progress on making MarineMax a leaner organization through reducing our expenses, managing our inventory, and optimizing our store footprint to protect our financial strength. I am confident that these actions will put us in a position for even stronger growth when the economy begins to recover.

Keeping our team excited and motivated to stay focused on the lifestyle of boating and our customers with all of this negative news that's out there is a challenge. But the best ways are not to listen or watch the bad news and go boating with our customer. So that is our message to our team.

Our boating season is in full swing in all of our markets. We're happy to report that our customers are still out on the water boating. They continue to enjoy some of the many benefits of boating with their MarineMax family. You know, you've heard us say 100 times, boating provides a much-needed escape from the negative news reports and, more importantly, provides enjoyable quality time with our families. Boy, it's what we all need.

Our Getaway trips are busier than ever, which validates that our customers' passion for boating has not diminished, and their pent-up demand is growing, as many have delayed their decisions to trade up to their next MarineMax boat for the next MarineMax Getaway trip. And with that, I will turn the call back over to the operator for any questions. Operator?

(Operator Instructions). Hayley Wolff, Rockdale Securities.

Can you just give a little more color on the retail finance side in terms of the percentage of loans that are getting turned down and maybe some alternatives that you can look to (multiple speakers) --?

(multiple speakers) Historically, we get a fallout in the 15 to 20% range of people that we contract versus those that we actually deliver based on financing. And it is in the neighborhood of approaching 50% fallout right now, which is very frustrating to our team, because you do all the work; you know, you get people excited. In a lot of cases, you demo them. You get them to give you a deposit, sign a contract, and then you run into the hassles of the financing.

And some of it is not due to their credit. Some of it is just a lot of pressure. We don't want just historical financials; we also want to know what happened last month or this week, and where it's trending and they're looking forward -- they're looking even beyond today and saying, well, okay, you have got a home mortgage that has got a balloon in five years or seven years.

So, they are just being extremely critical. And I'm not saying they shouldn't be. But it gets frustrating to a lot of our customers, and they say, I will just wait. And in other cases, they're asking for larger down payments, etc.

What we're doing about it is -- in some cases, we're having to give up margin and we did that. So I'm going to give you a perfect example -- we have got many of them like this -- is, you have got a customer, and we're making 15 to 20% margin on it. And the bank wants 35%, 40% down. And the customer says, I only want to put 20% down. So we give up the margin in order to make the deal and move the inventory.

And we have done a few of those and that is part of the reason you saw our margins take a hit this quarter in a big way. And because we feel it is more important to move the inventory. We are out looking at more sources. We are doing more business with credit unions and with local banks. And the customers, in a lot of regard, are also getting their own financing from their sources.

But the big national banks and regional banks that have been in the industry -- they're still there. They haven't pulled out recently. There hasn't been anyone leave recently. They're just all being a little bit more critical -- which, as Bill said, some of that is certainly understandable. And then we just increased our financing sources, Hayley.

Now when you look at the 50% fallout rate, can I assume that the rate goes higher on the larger boats versus the smaller boats?

I've looked at some data like that. There isn't really -- it doesn't change dramatically from a smaller boat to a bigger boat. I think it is a little bit higher in the bigger boats, because they get more complicated and more financial statements and so forth.

And some of it is -- it's impacted daily by the trades. Trade values have decreased with the repossession market. And so that complicates it, because the equity is not in the trade, or the banks look and say, well, I don't know if the equity is in the trade with today's times.

And so it is just -- it's a very challenging time. And as I mentioned, that is our biggest efforts that we're doing right now is to keep everybody's spirits up, because when you do all the work and then you lose the deal or you get the deal delayed, I mean, it's frustrating as a team member.

Well, the whole notion of a guy being upside down as he takes the boat out on the water the first time -- that is changing with the lending community?

That is correct. At least in today's times.

Okay. And then, Mike, you talked a little bit about margins in the third quarter improving sequentially. Is that just a function of not having the Ferretti inventory writedown, or is that stripping that out?

Thanks for asking that. If you strip out Ferretti from the March quarter, our margins are something like 18.5%, and our margins are north of 20% in April. They're down from the previous April of last year some, but they have come back. The product margins have come back. But obviously, as we have talked about, May and June are the critical months of that quarter, more so than April. I think the goal we have of driving down inventory and improving the aging is the right overall goal.

But it's a balancing act, Hayley. On one hand, you say, we need to move inventory, bring every deal to us, don't let a deal walk. We need to move this inventory, which we are doing.

On the other hand, you say we want to hold onto margins, so you need to fill the balloon with everything boating does. Well, there are two different sides of the brain. One is the left side, which is price. And you need to buy a boat because it is a deal. And the emotional side is really what drives our business, which is -- what does it do for me and my family?

And so it is a real balancing act. We are working hard to keep our team focused on understanding, which they do, that what makes a sale is not the price. What makes a sale is what is it going to do for me and my family. And I mentioned they are out on the water more than we have ever seen them out. Our Getaway trips are more filled than the have ever been. And that is what drives our business.

And so we are trying to keep the balance there, but at the same time, we're not going to let any deals walk.

Now how are you able to move the margins up sequentially, given that it is the same dynamic going on now as you saw in March?

Honestly, I think part of it is the training of our team that we have done and just making sure that the team is better educated about really what's out there from a repo perspective, and also making sure that when the customer is on the front of the transaction, they are explaining the dichotomy that has changed in the retail financing side and is setting the stage better on the front end, which ultimately is going to ensure that we do better as we are closing the customers and getting higher-margin on the back end.

And we're pushing our team to go boating with our customers, so they keep filling the balloon with what boating does, not strictly price. The temptation is to go right to the price. The manufacturer is helping us, so we have a rebate; there is a national program, whatever, and we need to move the inventory. And that's an easier way to go down the road, but it is not the one that gets the job done without costing you a lot of margin, even if you get it done.

I will say, Hayley, seasonally, now that we are in the boating season, that's probably incrementally helping all of us, whereas in the March quarter, when it is still cold up north, someone is looking to just absolutely steal a boat -- isn't maybe as interested as coming up on price. When the season is staring at them in the face, you probably get a little bit more movement by the buyer as well.

And then last question, can you help me understand what the used market looks like in terms of inventory levels and how do we think about that in the context of new boat sales? And then, given that you have really got bottom feeders in right now buying boats, where does the next wave of customers come from that gives you the margin back on model year 2010 sales when you to try to write the business from this downturn?

To kind of go to your second question, I need to clarify something. Most of our customers and our sales are not bottom feeders. That's going on in the industry. But most of our customers are -- they expect a good deal today, but it is not really what's driving the purchase decision. It is because they want that new model or they want a larger boat or whatever the case may be, and --

Right, but they also realize that the price today is a once-in-a-lifetime buy.

Correct. But a lot of that is perception. And you know, if you're making a decision to buy a $100,000 boat, whether it's $95,000 or $105,000 is not going to make your decision to spend $100,000 or a little below or a little above it.

And it is the same thing with our customers. And so, what is going to really make the difference is -- we have got to get them convinced that a new boat has less maintenance to it. You don't have to repaint it or redo the bottom or redo engine work and that type of thing. And you can keep your family happy with this new boat and enjoy your family more and get out and get away from it.

What we're hearing from our customers on the Getaway trips is they need this thing called boating now more than they ever have in their lives. And so that has got to be where our focus is and where we're keeping it.

Now, the used inventory in the field from the best that we can see -- it is up some, but it's not at the levels that everybody would expect. But the repo boats that are out there are up substantially.

Yes, that's what's causing some pressure.

And that is what is causing a lot of the pressure. But a lot of people that are selling their boats through the used market, that type of thing, are not doing it because they are saying the values are down and depressed right now with the repo market and everything else. So they are not willing to take the loss. Or in some cases, maybe they owe more than it's worth on the market.

But the repo market is trading, as we mentioned in the script earlier on in the call -- it is training, because most of these boats come with nothing. You pay to have it demoed. You have no records of what the history on it is. And in a lot of cases, they haven't been properly maintained. And at the end of the day, the prices are down, but they are not that down that much.

It is our view that what the manufacturers are doing, Hayley, just so substantial reduction in manufacturing, that as we go through this season and start emerging at the end of the summer, September, October, the industry inventory levels really should be in really, really good shape from a new product perspective, which will begin to have the margins' potential to rise higher as you start looking at 2010. I'm not talking specific to MarineMax; I'm talking for all dealers.

And there is some good product that is coming out there that will help to also sway people away from the used market and repo market and so forth. But while dealers are still out there being aggressive on pricing, it kind of makes it for a messy pricing market.

Well, and it gets customers -- it makes them very cautious and get them concerned -- if they believe a dealer is in trouble or desperate, they get worried about, well, what am I getting here, because I'm buying a boat and I'm not going to have anything but my boat. They have got to figure out what I'm going to do for service and warranty and who is going to teach me and show me how to have fun with it too.

So most of our customers -- they don't want a boat, a distressed boat that's a repo. What they want is the total experience, which, as you know, is what they are buying.

All right. Thank you very much.

Greg McKinley, Dougherty & Co.

Thanks. I wonder if you guys could just comment briefly on how you expect your SG&A run rate to behave in the last two quarters of the year? I know those will be seasonally higher sales quarters, so there will be more sales commission earned. But you're obviously also in the midst of real aggressive cost cutting. So could you comment -- sort of we're at $38.9 million in the first quarter; $36.4 million here in the second quarter. On a dollar basis, where do you see that trending in the June and September quarters? Thank you.

Greg, so much of that is ultimately subject to what happens at the top line, because we do have somewhat of a variable expense structure. And we don't really give guidance anymore. But I would say that it is certainly the Company's goal to not have the expenses rise, even on a dollar basis, with the only caveat being what's happening at retail. Obviously, if retail is substantial, there's going to be additional commissions and additional expenses and so forth paid out. But it is our objective to not have the overall expenses rise for the next six months combined.

Okay, thank you.

And there are no additional questions at this time. I would like to turn the call back over to Mr. Bill McGill for any additional or closing remarks.

Thank you, everyone, for your continued interest in supporting MarineMax. I would also like to acknowledge our team, and express our sincere gratitude for their continued commitment to our customers during these challenging times. They continue to work very hard, make personal sacrifices, and remain passionate about our future and our continued success.

Mike and I are available today if you have any additional questions. Thank you, everyone.

That does conclude today's conference. Thank you for your participation.