MarineMax Inc (HZO) 2009 Q4 法說會逐字稿

Good day, everyone, and welcome to the MarineMax, Incorporated, Fourth 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.

Thank you, Operator. Good morning, everyone, and thank you for joining this discussion of MarineMax's 2009 Fiscal Fourth Quarter and Year-End Results. 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.

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'd like to tell you that certain of our comments are forward-looking statements as defined in the Private Securities Litigation Reform Act. 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 capitalize on opportunities or grow its market share; 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. As you saw in our press release this morning, we made substantial progress executing our planned strategy of reducing inventory levels during the September quarter. I am very proud of our team's accomplishment. We believe better alignment with supply and demand, as well as improved aging of our inventory, will be key factors in helping to restore profitability to MarineMax.

As such, we launched and executed on a planned strategy to finish 2009 with much lower inventory levels and better aging. While we believe that our inventory reduction and related sales undoubtedly led the industry, we also believe that inventory levels have come down substantially for all dealers and manufacturers, which is an important step towards improving the health of the marine industry and the overall pricing environment.

During the quarter, we drove inventory down almost 40%, or $134 million from the June quarter. This is the largest sequential reduction to date, and this resulted in a very large year-over-year reduction of $263 million, or about 56%. The reduction of inventory allowed us to generate substantial cash flows from operations and drive a 41% increase in same-store sales. This is the first same-store increase we have reported in more than two years.

We generated this increase in sales at a time when industry data is still suggesting decreased sales overall. As such, we believe we have taken market share during this challenged time period which ultimately will yield future sales for MarineMax, as the incremental customers we have now added trade into larger and newer products.

As planned, we adopted an aggressive pricing strategy to drive sales and improve our inventory position as we took advantage of the enhanced flexibility under our amended credit agreement, which we discussed in our June quarter call. While this aggressive selling greatly impacted our gross margin for the quarter and our net loss, we believe it was the right strategy.

Additionally, it is important to note that the pricing actions we took were largely on our older inventory, our inventory from brands that we no longer carry. We believe that fresher, current products will lead to improved margins, going forward.

As an example, the 2009 Sea Rays that we sold during the September quarter had comparable margins to the 2008s that we sold in the September quarter of last year. This implies that we can earn solid margins with fresh, current product even in this environment by focusing on the MarineMax lifestyle of boating and less on price.

I don't want to overstate our same-store sales growth, because we are very aware that our pricing strategy, which is not sustainable, drove the increase. But it is an encouraging sign. Don't lose sight of the fact that our average unit selling price typically exceeds $110,000. The fact that we were able to generate such an increase in same-store sales speaks to the willingness of customers to spend and perhaps to some initial signs of easing in this very tough environment that we have been operating in for the past two years.

Our second main goal as we close fiscal 2009 was to get our operating costs in line with a reduced level of business. Accordingly, we closed an additional 11 stores during the quarter, bringing us to a total of 55, which is down from 93 stores at peak.

By and large, a high percentage of the stores that we closed were smaller locations where we have other stores in the general market area. We did, however, close our Northern California and Utah stores and are no longer in those markets. In both of these cases, the markets have been so extremely hit by the economic softness, we felt it was prudent to focus our efforts and resources in markets that would have a greater potential for upside.

In the future we will evaluate these markets and consider reentering them if the long-term potential warrants. We believe that for the foreseeable future, the industry will be more focused on inventory aging than improving inventory turns. As our sales gradually improve from an inventory capacity perspective, we may not need the same-store count as we had before.

The actions we have taken to significantly lower our inventory and expense levels have allowed us to improve our cash flow generation and reduce our outstanding borrowings. We have generated over $200 million in cash from operations during the year, which, in turn, along with the $20 million in equity we raised in September, allowed us to reduce our outstanding borrowings by $230 million on a year-over-year basis.

As a reminder, the only debt we have in the inventory financing is through our line of credit. We have no long-term debt, and our own properties are free and clear.

I would like to point out how supportive our manufacturers have been as we reduced our inventories. Over the years, we've made careful decisions as it relates to which brands we should represent, and the support to us through this challenging environment affirms our decisions were correct.

As I alluded to earlier, we, in our industry, have learned a harsh lesson from this downturn. The historical model of slow turns has to change. So we and our manufacturers are working on ideas and ways to change the low turns the industry has historically achieved. Going forward, we will be even more focused on inventory turns and, obviously, maximizing profitability from each of our stores.

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

Thank you, Bill, and good morning again, everyone. For the three months ended September 30, 2009, our fourth quarter revenue increased 25% to $207 million compared to $166 million last year. Our same-store sales increased approximately 41%, or about $57 million compared with a 45% decrease in the same quarter last year.

Revenue declined approximately $15 million from store closures that are no longer eligible for inclusion in the same-store sales base. I will note that this is the first September quarter where revenue exceeded the June quarter. We generally feel that where we have consolidated stores within a market, our remaining stores in that market will capture the bulk of the sales from the closed stores.

The market share data we have seen, to date, as well as the results from this quarter, would seem to support this belief.

Gross profit as a percentage of revenue decreased to approximately 6% in the fourth quarter from approximately 25% in the prior year. The decrease in our overall gross profit margin was largely due to our planned efforts to aggressively move boats through pricing to drive inventory reductions of aged product.

A few items also contributed to the dramatic drop from last year. First we incurred losses and increased reserves $6.6 million related to brands we no longer carry. Second, because of the dramatic reduction and cancellation of orders during 2009, we consciously chose not to qualify for certain manufacturing performance incentives that typically are earned and paid in the September quarter. Absent these two items, gross margins would have been closer to 11%. We do expect to achieve such performance monies in fiscal 2010 subject to our ultimate purchase levels, which are dependent on retail activity. I will note that, in general, we made money at the gross profit line on boat sales.

Our selling, general, and administrative expenses decreased approximately 19%, or $10.6 million during the quarter. However, the current quarter includes $2.8 million of store closing costs. Likewise, the September 2008 quarter had about $1.6 million of store closing costs. When factoring in these items, we actually reduced our expenses by about 22% on a comparable basis. This 22% reduction was achieved in a quarter that had an absolute revenue increase of 25%. It's nice to see the results of our cost-reduction efforts during an up-revenue quarter.

As we head into fiscal 2010 with our store count at 55 locations and our inventory in much better alignment with current retail levels, we are targeting our overall expense structure to be in line with prior years when we had similar revenue and store count.

Interest expense decreased approximately 20% to $2.8 million as a result of reduction in our average borrowings on our line of credit.

Regarding income taxes, as we have noted in the past, our loss carryback is limited by the current tax law. As such, the tax benefit we recorded during the quarter was minimal. This significantly increased our reported losses. If the tax loss carryback law is changed, we would be able to increase our benefit by about $17 million under the currently proposed legislation.

Finally, our reported net loss for the fourth quarter of fiscal 2009 was $33 million, or $1.72 per share compared to a reported net loss of $11 million, or $0.60 per share for the comparable quarter last year.

I will now provide just a brief overview of our full-year results. For the 12 months ended September 30, 2009, same-store sales declined 29% compared with a 28% decrease in the comparable period last year. Our gross margins declined from 23% in fiscal 2008 to 15% in 2009. When you remove the losses and the reserves for brands we no longer carry, and the loss performance incentives, this results in a gross margin of approximately 18% for the year.

Finally, we reduced expenses by approximately $65 million, or 30% on a comparable basis when factoring out the unusual items in both periods.

Turning to our balance sheet, at quarter-end we had approximately $25 million in cash. As we have said before, our cash is ultimately a function of how much we leverage inventory. Our inventory at quarter-end was $206 million, which is down more than $260 million, or 56%, from the comparable period last year.

There is an even greater reduction on a unit basis, as our total units in inventory as of September 30th were down almost 65% on a year-over-year basis from the prior year. We also made really great progress on the aging of our inventory. For example, we have 70% fewer new boats and 84% fewer used boats aged over one year old than we did this time last year. The percentage of our total aged boats over one year old has dropped substantially as well, which is impressive given that we bought very few new boats this year.

We continue to tightly manage our inventory levels and believe that we are close to where we would like to be in total inventory given our current level of sales. Accordingly, we would not expect the same degree of margin pressure in the future that we experienced during this quarter.

An additional note about inventory that we have mentioned in the past is the expiration of our dealer agreement with the Ferretti Group, which legally requires them to repurchase our remaining inventory at essentially our purchase price less cost to repair and refurbish the products. Through our sales, or their repurchases, we are down to about $18 million in Ferretti Group product. This is a substantial reduction from this time last year.

We are also continuing to aggressively market these boats. We remain optimistic that we will continue to make progress converting the Ferretti Group inventory into cash either through their repurchases or by us selling the product.

Turning to our liabilities, the cash we have generated through reducing our inventory combined with lower purchases and the $20 million in equity raised in September has allowed us to reduce our related inventory financing by $230 million on a year-over-year basis bringing the line down to $142 million at September 30th.

As Bill noted, the only debt we have is the debt that finances a portion of our inventory.

We are in compliance with the terms of our financing facility, which provided that we could lose $40 million of adjusted EBITDA as defined through the end of September. Recall that for fiscal 2009, we could add back store closing costs and losses on specific brands no longer carried by the Company as defined in the agreement.

For 2010, the operating covenant of our facility provides maximum cumulative EBITDA losses that we can recognize throughout the year. It also requires that our EBITDA for the full fiscal year must cover our interest expense. The definition of EBITDA allows an add-back for equity compensation charges as well as an adjustment equal to about $10 million, which represents approximately 50% of the equity offering we completed in September.

For 2010, the maximum adjusted allowable cumulative EBITDA losses are now $22 million through December 2009; $22 million through March 2010; and $15 million through June 2010. For the year-end calculation, EBITDA as increased by the $10 million adjustment must equal our interest expense.

Based on the substantial progress we made right-sizing our inventory, our footprint and our related cost structure, compliance with this covenant is not expected to be an issue in 2010.

As noted a few times during the quarter, we issued approximately 2.9 million shares of stock through a secondary offering for net proceeds of about $20 million. Combined with the stock sale we secured an amendment to our credit agreement, which provided the additional EBITDA flexibility that I just outlined.

Our tangible net worth now stands at approximately $197 million. We ended the quarter with a current ratio of 1.51 and a total liabilities to tangible net worth ratio of below 1. Both of these are among the best we have ever reported. We own 33 of our locations, which have no outstanding mortgages.

For the fiscal year, we generated more than $200 million of cash from operations driven primarily by the substantial inventory reductions we have made. While we feel pretty good about where we have driven our inventory, if sales in 2010 are comparable to 2009, we would expect to end next year with less inventory on hand, which will yield incrementally more cash from operations as well.

However, we also believe we are well positioned for cash flow generation in the future as conditions start to improve and we benefit from our lower cost structure.

Before I turn the call back over to Bill, I'd like to add a few details about the quarter and current trends.

The increase in sales we experienced in the September quarter was across all segments and all areas of the country. However, we did see stronger activity from Florida and, to a lesser degree, the Northeast. This is encouraging since these two markets make up well over half of our sales.

Retail financing, which is still more challenging than it was last year, has incrementally improved, and new banks have entered the market on a regional or on a market basis. I would add, as you would expect, that our wholesale lenders are pleased with our performance.

With that said, I will now turn the call back over to Bill for closing comments.

Thank you, Mike. Our successful inventory and expense reduction strategies allow us to sit here today as one of the strongest companies in our industry. Our leaner cost structure should position us for operating margin expansion as conditions improve.

As many other retailers struggle or fail through these challenging fall and winter months ahead, we are exploring strategic opportunities, including expanding into new markets. Inventories in the channel are dropping, but dealer failures are likely to continue as cash constraints and access to dealer financing continues to challenge them.

Hope is not a strategy, but the most encouraging indicator of the future opportunities is that our customers' passion for boating remains strong and is creating pentup demand, which we may have seen signs of this quarter. Our customers are still out boating with their families and, more than ever today, are demanding that we provide them with what we do best -- which is to teach them, service them, and show them how to have fun.

As a result of these factors, we believe that we will emerge from this period in an even stronger competitive position as the industry-leading boating retailer, well positioned with the right team and right strategies for market share gains and long-term growth.

And, with that, Operator, we'll open the call up for questions.

Thank you. (Operator Instructions) Greg McKinley, Dougherty.

I wanted to understand where you are in your process of inventory reductions. Obviously, you made significant strides in the September quarter largely due to aggressive clearance activity. I know you indicated your plans would be to have further reductions in inventory levels in 2010, but are you still behaving similarly from a promotional standpoint and clearance standpoint here to start the beginning of your new fiscal year? Or should we expect to see a fairly quick end to some of that real aggressive promotional activity?

Well, Greg, if you look at our mix of inventory, we still have some models -- as an example, in the Ferretti Group -- that we will continue to discount heavily, and there are some other product that we did not move that we will continue to be aggressive on. But, all in all, most of the inventory is fresh, as we mentioned, and it's newer inventory, and so we should be able to get back to the higher margins. And we just finished up the Ft. Lauderdale Boat Show, and it was a good show, especially for some larger boats and, as we mentioned, the margins seem to be holding up very well on the '09 products. And most of what we have now is '09. So we are encouraged by the show. We are also encouraged by what looks like October to make a quarter, but it looks like October same-store sales are up also. So -- we've got a little mix issue that we're still working through with some of the products, but it's very low, and I think we exceeded even our greatest expectations on what we did this quarter.

Greg, I'd tell you the pockets of challenges that we still have are very manageable, and from a total dollar level, we are pretty darn close to where we need to be on inventory. The team did a great job getting it to where we are now.

Yes, absolutely. I've looked back historically. Typically, we see a seasonal increase in inventory levels per store in operation from the September to December quarters. I would imagine your inventory management behaviors through this cycle are not typical. So are we going to see that surface again? Or is this a new approach to inventory behavior, and we are going to be much more cautious about building inventories on a store basis to start the beginning of the year?

I think, long term, the industry, because of its seasonality, it's going to be hard to get away from some level of buildup in the wintertime. But I think this time period that we've all just lived through has been so painful that, be it from the manufacturer to the dealer, we are all trying to figure out how to build more from -- I'll call it just in time -- but how to build more to demand and to retail than to the way we've done it historically.

The answer is going to be a little bit of both. I think you'll probably see, long term, some seasonal build in the winter, but it will be less exaggerated than it had been in the past.

Okay, and then two quick follow-ups -- Mike, could you again go through the EBITDA provisions of your debt covenants and explain the adjustments -- the $10 million, and I think you mentioned stock comp. I just want to make sure I understand how that works, again, and if, indeed, you are saying you have to be flip-positive on a cumulative basis equal to your interest expense on an adjusted basis for the full fiscal year in Q4? Can you go through that again? And then maybe comment on October -- you said it's still showing some signs of strength -- just how strong of a follow-through have you seen since the September quarter?

For the EBITDA, the amendment that we did in September, is you take the allowable lost EBITDA that was in the previous agreement, and you add $10 million to it, basically, to increase EBITDA. So, for the December quarter, our maximum allowable EBITDA loss -- and EBITDA is the regular definition that you would think about, but then you add back stock compensation, then you also add $10 million on top of that. And we're allowed to have up to a $20 million adjusted EBITDA loss basically through the December quarter --

Okay, so your as-reported EBITDA loss could be something into the mid-$30 million range?

Correct, correct. And then if you look at the six months through June, it's the same $22 million. So the six months through June, we need to be below that --

Through March.

I'm sorry, through March, yes. And then for the nine months through June, it's $15 million. And just so everybody understands, if you actually take those numbers and apply them and calculate an adjusted EBITDA number without the $10 million for 2009, we'd basically be in compliance with these numbers, anyhow, in 2009.

And then if you look at the full year, we've got to cover our EBITDA as adjusted as increased by the $10 million has to cover our interest. And we believe that based on the cost initiatives that we've done in terms of getting the stores down to the right level and number of team members and inventory levels and all that, we believe that we have -- that complying with that number should not be a problem for 2010.

And so on an as-adjusted basis, it must be positive for the full fiscal year?

That's correct.

And then what is that $10 million again?

It's the amendment we did in September as we were going out to raise equity, we decided to tie the amendment back where we got additional flexibility in our EBITDA covenant within our facility where we took 50% of our net proceeds, and we added it to the EBITDA. So it was a structured process to deal with additional flexibility in 2010.

Yes. And then, finally, just some comments on the follow-through of strength in October?

October, as Bill alluded to, would be the fourth month that we've actually seen positive same-store sales growth. We have an absolute growth in revenue, and with the stores that we've closed, by default, you're going to have decent same-store sales number. It's not near as strong as it was in the September quarter, but also the margins are obviously returning back to where we'd like to see them be. And they're not all the way back to where they need to be yet, but they're coming back up to those levels.

So we're pleased that we're able to get refocused on what we need to be focused on, which is selling products for a good margin and getting the business aligned towards putting us in the best position to be profitable.

Yes. And just a clarification -- absolute growth in revenue -- so you're saying you're tracking to do more revenues on 55 stores than you did on 75 stores in the year-ago period?

Yes, I think the number is something like 80 stores in the year-ago period, and we have more revenue today, in October, than we did last year with much more stores, that's correct. I need to, obviously, add the cautionary statement that Bill added -- one month (inaudible). We don't know. We've got to close all the deals from October, or from the Ft. Lauderdale Boat Show and so forth, but I'd rather be able to tell you that we're up than we're down. So take that for what it's worth as we're looking for incremental signs of improvement here.

Ed Aaron, RBC Capital Markets.

I wanted you to maybe delve in a little bit deeper on the process for restoring the price integrity in the business. It's one of those things that's hard to get back once you lose, and as I've thought about your company in the past, it's hard to make the model work unless you have gross margins that are north of 20. Could you just maybe talk a little bit about the path to getting back to that level if you do think that those are attainable margins to get back to?

I would tell you, Ed, that the -- what we see in October, we would tell you that that's realistic for 2010.

Well, plus the fact, Ed, that we mentioned that in the quarter that the sale of 2009 Sea Rays, the margins were comparable with a year ago. So, at the end of the day, people are buying a lifestyle and even though we put out the message that let's make a deal because we have too much inventory, and we're adjusting to this market. And so there were deals there but, at the end of the day, people are buying a lifestyle, and it isn't as much about price even though we had to make it that way.

But most of our -- probably "most" is a big word -- but a lot of our sales that we made during the September quarter were not to our customers. And so that's encouraging. So our customers are still out there and, of course, they're sitting on the edge of their boat seat saying that "Honey, we need the next one that's larger and more innovative and better," but they're still in this wait-and-see mode, Ed, because of the uncertainty that's out there with consumer confidence.

Right. And historically I think your revenue per store has trended, roughly, $13 million, plus or minus. And I'm just curious to know what you think that number is going to look like, over time, because presumably the market is going to be smaller. But, at the same time, you've shed your smaller stores. So would you look out to what you consider to be a more normalized sales environment -- what do you think a typical store will contribute revenue on an annual basis?

Ed, I think you're 100% right. I think, mathematically, our revenue per store will go up, over time, even above what it's been historically. Because we have -- obviously, we've shrunk our footprint. We've planned to tightly control that footprint also as business begins to return, so we're going to push more volume through the stores. Part of that is going to be achieved through the intense focus that the industry has on improving inventory turns.

And, Ed, the necessity to have 90-plus stores, some of it was because there was a lot more competitors out there than there are today. And we're seeing a lot of fallout in the markets even in the selling seasons that we just finished. And we believe there will even be more. And so the willingness of a customer to travel a little bit further to go on to our main store is not complicated by the fact that there is a dealer down the street that's a little easier for him to get to. So we think that will help leverage the 55 stores that we have even better.

There are no questions in queue. At this time, I would like to turn the call back over to Bill McGill for any closing remarks.

Well, thank you, everyone, for your continued interest and support in MarineMax. I would also like to thank our team members for their hard work and their passion for our business and upholding the high standards of customer service. They worked with us to transform our business during these difficult times, and position us for growth in the future.

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

This concludes today's presentation. Thank you for your participation.